Keith Guthrie is chief investment officer at Cardano, where he heads the investment team responsible for investment strategy, portfolio construction, and manager selection for pension fund clients. From 2002 to 2007 he worked as an investment manager at GAM, responsible for US$6 billion in arbitrage related fund-of-hedge fund strategies and US$500 million in multiasset-class portfolios. He started his career in the corporate actuarial department of the First Rand group. In 1999 he became head of long-only manager research and an investment committee member at RMB International, a subsidiary of First Rand. He joined Cardano in January 2008. Guthrie graduated from the University of Witwatersrand with a BSc in statistics and actuarial science and BSc (hons) in actuarial science. He qualified as an actuary in 1997.
Cardano is risk advisor to the majority of Dutch pension funds, as well as providing asset management services. From your perspective, how do you evaluate the risks and opportunities associated with extraordinary levels of market volatility?
The last quarter of 2011 was an extraordinary period of market volatility. However, the standpoint for addressing this is the same as in more stable periods. You are always looking to see how you can improve the value of a pension fund’s assets relative to its liabilities. For many funds, the temptation is to look only at the impact of volatility on the assets, but you need to look constantly at both sides of the balance sheet. When you do this it naturally leads you to want to manage all dimensions of risk, including inflation, interest, currency, and equity risk.
The essence of solvency for a fund is to improve the asset to liability position, and this means hedging out any risks that you do not actively want to take while being practical about the costs—about the affordability of the risk-reduction exercises. If there are risks that you can hedge cost-effectively as the trustees of a fund, you should take that opportunity, targeting beneficial risk–reward opportunities wherever they may lie. This is not a single-dimensional play. It is multifaceted, particularly as no one knows how the economy is going to unfold. You have to devise strategies that prepare you for many different eventualities and outcomes. If we go into a happy world with strong growth, you want positions that do well in that environment, while if we go into a double-dip recession, you need strategies that perform there too. If you can achieve this even in a very modest way, the fund should outperform liabilities over the long term.