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March 2020 NEWS INVESTMENT EXECUTIVE
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NEWSMAKER
“The behavioural, rather than the quantitative, aspects of investing tend to create the biggest problems for investors,” says Kendra Kaake, director of investment strategy, Canada, for Toronto-based SEI Investments Canada Co. Kaake, who works in SEI’s Vancouver office, joined the company in December 2019.
More than just math
Kendra Kaake has learned that understanding investor behaviour is as important as knowing the numbers
Even when economic data sug- gest that the global economy is on relatively sound footing, Kaake says, those numbers alone may not be enough to counteract the human instinct to believe good times can’t last forever — par- ticularly when investors are con- cerned about trade uncertainty, political uncertainty and Brexit.
“Despite an awful lot of liter- ature that says expansions don’t just die of old age, many people still believe that they do,” Kaake says. “There’s certainly some- thing to be said for people getting nervous when expansions last a long time. The natural human tendency is to think they just can’t last forever.”
That tendency, Kaake adds, can lead some people to miss out on investment opportunities because they’re too focused on avoiding downside risk.
“We always think of risk as downside risk,” Kaake says. “One of the cognitive biases that we all tend to have is that we don’t necessarily look as much at the risk of missing out on [invest- ment] gains.”
One risk faced by Kaake’s pension plan clients is longev- ity risk. Ensuring the income security of retirees has become increasingly difficult, particu- larly for defined-benefit (DB) plan sponsors, amid low interest rates and a challenging regula- tory environment.
“It’s just really expensive to have these plans in place these days,” Kaake says, adding that there’s an “increased trend” of DB plans closing or freezing.
Kaake expects to see more plan sponsors of frozen plans managing longevity risk through risk-transfer transactions, which typically involve an insurance
BY GREG DALGETTY
kendra kaake didn’t always
spend as much time thinking about the behavioural aspects of investing as she does now. In the early days of her career, Kaake, a math whiz, was busy crunching numbers as a pension actuary.
“My whole ethos is about quantitative measurement,” says Kaake, who was appointed dir- ector of investment strategy for Toronto-based SEI Investments Canada Co.’s institutional group for Canada in December 2019. “I love the elegance of the math- ematics and trying to figure things out.”
One thing Kaake has fig- ured out over the years is that math is only part of the invest- ment-management puzzle. Understanding the cognitive biases that affect investors’ deci- sion-making is just as important.
Kaake, a chartered financial analyst who holds an undergradu- ate degree in statistics, began to develop a deeper understanding of the behavioural factors that influ- ence investment decisions after she left her job as a pension actu- ary and moved to Seattle to join Russell Investments Group LLC.
While at Russell, Kaake served in a variety of roles — most recently as director of non-profit outsourced chief investment offi- cer solutions — and worked with institutional clients throughout the U.S. and Canada.
“One of the biggest things I’ve learned throughout my career
is that the behavioural, rather than the quantitative, aspects of investing tend to create the big- gest problems for investors,” says Kaake, who has now been in the investment industry for more than 20 years. Quantitative analysis, she adds, is an essential part of helping clients achieve their goals, but it’s “not the complete picture.”
Kaake, now based in SEI’s Vancouver office, works with insti- tutional clients across Canada, including pension plan sponsors, charitable organizations, foun- dations and endowments. These days, she blends her math skills with high-level strategic analysis to help clients avoid what she calls “behavioural pitfalls.”
“Often those [pitfalls] are things that aren’t obvious to us,” Kaake says. “It’s the decisions that are made in extreme mar- kets that can leave permanent scars on an organization.”
However, Kaake adds, mar- kets don’t have to be extreme for people to think irrationally. North American stock markets hit record highs in early February, extending what is already the longest bull market in history — but that lengthy winning streak had some investors thinking we’re due for a downturn, she says.
“I think there’s general nerv- ousness and market uncertainty, and that’s simply because we’ve reached this 10-year mark on what’s become the longest expan- sion in history,” Kaake says.
company taking on some of a pension’s liabilities — usually in the form of annuity buyouts.
“Insurance companies will typically take on the risk from defined-benefit plan sponsors that is the easiest for [the insur- ance companies] to manage,” Kaake says. “They’ll take on retiree risk that doesn’t neces- sarily have cost-of-living adjust- ments associated with it.”
Low interest rates pose obvious challenges for pension plans. As for whether low rates are here to stay, Kaake says, that’s “the $64-billion question. We’ve been in this environment, globally, where central banks have had this almost co-ordinated approach to keeping rates lower for longer. It’s really tough for central banks around the world to break that pattern and go the other way.”
Kaake says investors are beginning to realize that inter- est rates may never return to pre- vious levels. Her research has revealed that markets typically expect rates to rise faster — and to greater heights — than they eventually do.
“More than 90% of the time, we overestimate that rates will rise faster and by more than they actually do,” Kaake says. “If you look at the forward interest rate curves, we’re typically almost always wrong.”
Regardless of whether rates rise — or the economy nose- dives — Kaake is steadfast in her
resolve to help her clients achieve their goals.
Institutional investors such as charitable organizations and pension pans “have this respons- ibility to sustain their mission and fulfil their contractual obliga- tions,” Kaake says. Those obliga- tions must be fulfilled regardless of whether a recession strikes or an investment portfolio takes a hit. “If that occurs, we can’t just say to ourselves, ‘We had a good run, so maybe it’s time to close our doors.’ That’s fine, but what about the hundreds of children out there who are at risk of being mistreated tonight? Or the thou- sands of retirees who are at risk of losing their income security in old age because we’ve decided that we’ve had a good run?”
Even with the weight of those responsibilities on Kaake’s shoul- ders, she enjoys working with her clients. “I love the people,” she says. “I love the relation- ship-building. [That’s] fun for me.”
Work isn’t Kaake’s only source of fun. The mother of two lives near Vancouver’s Stanley Park and she takes full advantage of her downtime in what she calls “the best outdoor city in the world.” Kaake is an avid cyclist and runner and also regularly hikes Grouse Mountain in North Vancouver.
“I love my kids, I have very good friends and I’m a bit of a social kid, for sure,” Kaake says. “I like to work hard and play hard.” IE
“It’s the decisions that are made
in extreme markets that can leave permanent scars on an organization”
PAUL LAWRENCE