Spring 2020 Issue
“We then assessed how developed these competences were and whether the coverage of the asset class was complete or partial.” For private markets and hedge funds, the operational due diligence is outsourced then reviewed in-house. To minimise risk, CERN decided to insource investment due diligence, and in the case of real estate letting policy, phased out all real estate external advisory roles. “We invest in core and value add properties across Europe. In these cases, external support is used for legal or construction-related matters.” TECHNOLOGY AND ARTIFICIAL INTELLIGENCE Digital disruption is likely to affect the way companies operate in the financial sector. Artificial Intelligence (or AI) does not make humans redundant, but boosts human creativity, feels Eyton-Jones. “There are lessons to be learned from this shift.” AI might have an advantage over a lone human, but the combination of AI and humans working together is a productive mix. “We believe this is the way to follow.”
“We have established an investment governance framework whereby the internal team at the CERN Pension Fund oversees all of the investments of the fund and manages the tactical asset allocation,” Eyton-Jones explains. “One of the key changes we introduced was to establish a portfolio management committee, which is chaired by our Chief Investment Officer and attended weekly by all the portfolio managers.” The result is a collaborative and transparent approach to investment decision-making. Decisions are taken on the best way to access macro-themes, resulting in optimal use of the team’s competences, cross-fertilisation of ideas, eliminating siloed thinking, accelerated and enhanced personal development. “It is rare in the industry that an equity portfolio manager gets the opportunity to discuss real estate deals, gets direct views of the real estate market, and brings fresh new perspectives to the discussion.. We think that this is one of our strengths as an employer to attract and retain talent.” Another cornerstone of the governance framework is a balance between insourcing and outsourcing, which appears to be intimately linked to market conditions. During previous decades, before the low/negative yield era, institutional investors were able to meet their actuarial return objectives even when paying large fees and forgoing the gains of most stages of a value chain of an investment. After the 2007-2008 financial crisis, and increasingly
over the recent years, “we started thinking that in a low-growth low interest rate environment with high market valuations … was no longer viable and needed to be reassessed”. Disruption is the order of the day in the 2020s , and it came late to the pensions fund sector, “partly because it’s more heavily regulated and more technical in certain areas”. “We changed the way we operated and started considering unexploited sources of yield usually harvested by other agents in the value chain of assets, as well as avoiding leveraging bad investments to increase their yield. “Our thinking was (and is) that each investor must find, given its size, governance constraint and availability of resources, its own sweet spot.” Chances are that if no strong competence in a specific asset class is available in-house, outsourcing would produce little or no benefit through the business cycle. At a minimum, in-house competence must be sufficiently developed to allow the investor to carry out serious value-added due diligence on external managers. “Our approach was to analyse the space of asset classes and identify those which, in our view, belong to the portfolio of an institutional investor of our size. For this subset of asset classes, we assessed for which ones we had internal competence and resources, which allowed us full direct implementation and control of the investment process. CFI.co | Capital Finance International
CERN Pension Fund believes that in every endeavour linked to systematic or algorithmic trading, if treated seriously, there is a need for thorough back-testing of the strategy. This does not guarantee future performance, but it is critical to achieving a thorough understanding of different aspects of a strategy, define confidence intervals and build the statistical profile of a strategy, which can be used in monitoring live results. “Many of these tools, which were developed over the years as independent elements, have been integrated into one self-contained platform,” says Eyton-Jones. CERN as an international organisation — and the largest particle physics laboratory in the world — it operates in a framework of collaboration and knowledge-sharing. These elements are of key importance for the CERN Pension Fund, which maintains collaborations with finance academia and is always open to new projects. Part of the Fund’s technology platform (named QF-Lib, or Quantitative Finance Library) developed at the fund has been made available as open source software so that other institutions, universities and researchers can benefit from it. The platform has modular architecture developed with best object-orientated programming principles, which makes it flexible and capable to address most of the challenges linked to quantitative investments. “Thanks to the open-source licence, QF-Lib has the chance to become a new standard of technology tools in the field of quantitative finance.” i 57