If you are responsible for the investment of a pool of assets on behalf of others, whether that be a pension fund, an insurance company, an endowment fund, a sovereign wealth fund or private assets, you will be all too aware that the job has become progressively more difficult over time.
Key issues for asset owners
The key issues, and the three main reasons why the job has become so much more difficult, are an increase in regulation, the globalisation of economies and capital markets, and the significant increase in the range of investment types now available in modern capital markets.
Each of these should be a real positive for investors, but their benefits have not reached many funds because of a shortage of resources to manage the increased complexity at the asset owner end of the investment process.
Resource shortage?
The fact that the ultimate owners of assets are short of resource stands in stark contrast to the rest of the investment industry where resources have increased dramatically over time.
The problem is not the total amount of resource, but rather what that resource is doing within the overall investment process.
Where are resources being deployed?
The majority of resources in the investment process are currently focused on security selection, whether they are employed within an asset manager or a broker. This is despite the fact that less than half of all asset managers fail to beat the index over time.
A small fraction of total resources are applied to setting strategy and asset allocation, building a diversified and well risk-managed portfolio and identifying new investment opportunities, despite these having far greater impact on overall results and having a better than 50% chance of success.
What should asset owners do?
One solution is for asset owners to recruit more investment professionals to work on the overall portfolio construction and, indeed, many very large funds do employ a chief investment officer (CIO) and an investment team for this purpose.
When this happens, the balance shifts towards finding new opportunities and managing risk, and away from simply hiring and firing managers for traditional mandates. But for most funds, hiring a high-quality team is not possible, which is why the industry is seeing such a growth in the demand for fiduciary management as an outsourcing solution.
For asset owners that cannot build internally, which generally requires very significant scale, outsourcing to a fiduciary manager is a means of addressing the gap that exists between the need for increasingly complex investment strategies with real-time decision making, and the typically constrained governance budget of many trustee or investment boards.
A fiduciary management, or delegated, solution is simply a way of employing a high-quality CIO and investment team, without having to employ them directly.
Historically, a ‘manager of manager’ approach may have been used to help bridge this governance gap. However, increasingly institutions are recognising the benefit of broader fiduciary management relationships.
Changing the status quo
Willis Towers Watson would select the best asset managers for components of the portfolio, and has a strong track record of creating value doing this.
But if that was all we did, then we would just be maintaining the status quo and that is simply not good enough. Instead, a large part of our resources are devoted to seeking out new investment opportunities and combining them into the best possible portfolio for your particular circumstances.
As a result, whether you ask us to help you with a single asset class such as bonds or hedge funds, or help with all of your assets, our proposed portfolio will look substantially different to the status quo.
But if our shared goal is to reduce risk, increase returns, improve transparency and reduce costs then we can’t afford to maintain the status quo.
That does not mean greater complexity for you but rather greater ability to manage the complexity inherent in the world.
In fact our clients’ experience is that, because we take on all the detailed aspects of managing the portfolio on a day-to-day basis, they can spend more time on the really important strategic issues.
We believe that institutional funds deserve more than the current status quo and we are committed to changing investment for the better. We hope you are too.
The contents of this article are for general interest. No action should be taken on the basis of this article without seeking specific advice.
