Rosenberg applies the brakes on risk control12 Nov 2012
His view has improved a little over the past few months. But he adds: “The market road is quite dark. It is safer to watch out for the risks you are facing than anticipate returns.”
Rosenberg is on Financial News’ list of the 100 most influential people in Europe’s capital markets.
From a standing start in 2007 and through a period when stock markets have been the most volatile in a generation, he has built £9bn of UK fiduciary work and won £26bn of advisory business, including large clients such as British Coal and pharmaceuticals giant AstraZeneca.
Rosenberg said the terms of engagement for Cardano’s fiduciary mandates can vary: “One of our clients has the right to veto our decisions, though it hasn’t done so yet. Trafalgar House invites us to become part of their investment committee.”
Supermarket chain Asda has chosen to put Cardano to the test by getting it to handle one portfolio on a fiduciary basis and another as an adviser. Both have met their targets to date.
Markets have moved on from the credit crisis when they not only crashed but forced governments to rescue the global banking system. Rosenberg concedes parts of them might now offer fair value but adds that not all the risks are in the price.
This marks a contrast with 2009, when Cardano piled into bombed-out bonds and made a killing. In the three years to June 2011, it generated a net annualised return of 12% for fiduciary work, which it prefers to call “solvency management”. This compares with a 9.6% rise in liabilities for fiduciary clients; while the median return for UK pension schemes was 7%.
Over the four years to June 2012, fiduciary returns remained unchanged at 12%, against an 11% rise in liabilities and a 6% median for UK schemes. Rosenberg said: “We achieved returns with around one third the level of risk compared with the average.” Returns have a 4% tracking error compared with 12% for the average scheme. Cardano’s performance was subdued compared with soaring liabilities in the year to June – it achieved 19% returns against a 20% rise in liabilities. But the average pension scheme return was only 6%.
Rosenberg is in no hurry to make up ground by moving into a higher gear. He said: “Macro-economic considerations are driving the market, undermining the case for risk assets.”
His eyes were opened to the importance of liability-driven investment in 2001, a year after becoming the youngest partner at equity-devoted actuaries Bacon & Woodrow – having completed his actuarial course in a considerably better-than-average two and a half years.
As the newish partner, he was given the task of dealing with John Ralfe, corporate treasurer at Boots, who famously ditched equities and piled into bonds.
Rosenberg’s predecessor had not been too keen on Ralfe’s plan to de-risk his scheme. But Rosenberg saw it made sense for Boots to cover fast-maturing liabilities with a mixture of quality bonds, index-linked gilts and derivatives. Rosenberg said: “In the five years before the switch, the yield on index-linked gilts fell from 4.3% to 2.5%. You are now looking at zero, although if you look forward you can still end up with a positive 0.5%. They continue to serve a purpose.”
After advising Boots, Rosenberg decided Bacon & Woodrow was insufficiently devoted to risk management. He came to believe LDI was the way forward for pension schemes, rather than index benchmarks, which implied a mismatch between assets and liabilities. He decided his firm was too dependent on equity research and insufficiently schooled in alternatives. He quit in 2007 when Theo Kocken, founder of Cardano in the Netherlands in 2000, came a-calling. By then the firm was called Hewitt Bacon & Woodrow.
Kocken’s straightforward approach to risk management made wooing Rosenberg easy. They talked the same language. Kocken had been head of market risk at Dutch firms ING and Rabobank, and was looking for talent to lead Cardano in the UK.
Rosenberg has a low boredom threshold and a high-energy work ethic that allows for hardly any leisure interests outside family. He has five children, including a set of twins.
He was a willing buyer of Cardano’s mission statement: To make people’s lives more resilient through the removal of uncertainty.
Cardano is named after a 16th century mathematician and gambler, an originator of probability theory and inventor of the combination lock. The former activity measures risk: the latter guards your property against it.
More and more UK pension schemes are involved in de-risking exercises, often achieved with the help of derivatives.
The willingness of sponsors to overlook scheme deficits over the years is an example of wilful blindness, where people intentionally avoid contemplating painful realities.
In a recent research paper, Kocken pointed out that US state pension schemes are dangerously close to depletion after failing to reduce unfunded liabilities that now exceed $4 trillion. He argued that current pensioners are robbing the next generation, expressing the fear that Dutch collective defined-contribution plans are going the same way.
But de-risking pension funds is not all Kocken does. Rosenberg said: “The bit we don’t talk about so much is our work in frontier markets through Cardano Development.
“We are setting up weather insurance, for example, so indebted farmers don’t face heavy losses when crops fail. We are supporting setting up market exchanges in regions where banks are reluctant to trade cross-border,” he said.
Rosenberg always saw the importance of actuarial training and came to the UK in 1987 via Johannesburg, where he was born, and Israel. A popular individual on the pensions circuit, he is described by one rival as “a true client guy”.
Rosenberg said: “I took a job at Bacon & Woodrow because it was the only interview I didn’t sleep through. The firm was quintessentially eccentric. Mine was the first year they took in non-Oxbridge graduates.”
In the five years that followed Rosenberg’s departure, its US parent Hewitt Associates, subsequently bought by insurer Aon, has bankrolled an evolution in attitudes at his former employer.
Rosenberg said: “It had always seemed to me that it would take time for it to change, and it has done.”
But he is still rubbing shoulders with the eccentrics. To illustrate bizarre business behaviour, Cardano has financed videos put together by Terry Jones, the former Monty Python comedian. Kocken is a Monty Python fan and even appears in the videos, available on YouTube.
When considering expansion, Rosenberg said Cardano does not acquire businesses, preferring to recruit the right kind of leadership. He said the firm might well be interested in hiring a thought leader in the US. But they would have to see the point of the Python videos; circa 4,000 downloads and counting.
-- The Cardano way
In putting together investment strategies for its clients, Cardano uses scheme liabilities as its reference point, rather than market indices.
Rosenberg said: “We have recently been running 90% to 100% hedged. But we can only hedge the assets within the scheme – if we go further, we risk collateral running out.”
As well as index-linked bonds and swaps, Cardano explores ways of using derivatives to hedge against tail risks. Rosenberg says hedges can be a drag on performance if markets move the wrong way. A lot of clients tend not to bother.
Recently, however, it has set up a hybrid instrument with Rabobank pension scheme, which protects it against a poisonous mix of falling interest rates and equities. It has performed as planned. But it has yet to win broader support.
But Cardano founder Theo Kocken said: “Innovation determines our leadership in risk management.”
Rosenberg believes it is important to seek gains from a range of opportunities to cover future liabilities.
He likes to access macro hedge funds capable of trading their way through economic uncertainty.
He is less impressed with managed futures hedge funds that seek to benefit from market momentum, pointing out they can get their timing wrong.
Cardano uses a broad range of credit opportunities to pick up incremental gains, often saving on fees by investing passively. Cardano has worked with Barclays Capital to put together an index where riskier bank debt is screened out.
Rosenberg demands hefty compensation for locking client money into funds that are illiquid. He said: “I might be happy with a 9% return, if money is locked away for three years. If I am going to close out my options for 10 years, I might want 15%. For certain private equity situations, 20% might be right.”
Rosenberg is also interested in finding exposure to bank loans via managers. One of Cardano’s scheme involved backing a loan fund sponsored by manager Blue Mountain during the credit crisis. A rapid recovery meant the fund provided a five-year return four years early.
Rosenberg currently likes emerging market bonds and currency exposures which are not linked to the dollar. He said: “It is our basic belief that the strong will get stronger and the weak weaker.”
Equities are a low priority: “Selecting them can be 10th on our list of priorities. Choosing between active and passive styles can come 15th.”