The job at the asset owner end of the investment process has become
progressively more difficult over time as there is so much change going on in an
investment world that is already complex. We as an industry cannot afford to
maintain the status quo. It is time for change.
Why we need to change
According to our experience and research, we identify the following major
problems with the current state of the investment industry.
- Lack of alignment
Portfolios are often more costly than can be justified in aggregate due to
inappropriate charging or fee structures.
The institutional investment industry as a whole expends too much effort
searching for alpha, where ‘alpha’ is a return above that of the general market
generated by asset manager skill.
By definition, alpha cannot be positive in aggregate. This is because the more
active managers are trying to beat the market, the greater the total cost burden
and the further behind the general market the average return of all asset owners
will fall.
Parts of the industry (hedge funds, for example) have been increasingly
criticised for not adding value after costs and not serving the end savers’ best
interests.
In general, the persistently high fee model adopted by the mature hedge fund
industry often leads investors to over-pay for what is largely market
performance, which is not reflective of the alpha that manager skill should
generate.
Although the investment industry has tens of thousands of investment products,
they are too often designed to meet the needs of the providers or the agents,
for example, bolstering the firm’s assets under management or profitability.
- Fragmentation of buyers
Ultimately investment is a competitive activity. Unlike the largest asset
owners, the majority of asset owners generally do not have the resource and
scale necessary to compete effectively for returns in an increasingly complex
market environment.
In many situations, best investment opportunities are missed due to scale
disadvantages and resource constraints. Many asset owners have been seeking a new
resourcing model that provides competitive skills throughout the value chain.
- Mis-allocation of resources
Almost all the resources in the industry are focused on short term security
selection with little focus on the broader range of betas (market returns),
overall portfolio construction and mandate design, all of which have greater
impact and can add value in aggregate.
As previously mentioned, at the portfolio level there is too much focus on
generating a return relative to an index. What the end-savers fundamentally need
is total or absolute return at a reasonable cost.
Also from a risk management perspective, we are not focusing on the right type
of risk as an industry because the resources are also spent on managing risk of
loss relative to an index, not total loss.
These issues lead us to conclude that industry mis-alignment comes from the
wrong definitions of success and the wrong fee structures, and leads to
intermediaries or agents doing the wrong things.
The change we bring for the better
These are major areas that underline the mission that we have for our Investment
business, which we describe as Changing Investment for the better. We believe
that our clients deserve more than the current status quo. This global
investment mission represents our commitment to improving the value proposition
of our investment business for our clients.
As an investment advisory firm with multi-asset capability and a fiduciary
mindset, we can help asset owners invest for the better based on their interests
and also transform the way we work with asset owners and other industry
participants.
We outline below some of the changes that have taken place within the industry
and Willis Towers Watson.
How the industry as a whole operates
- We have established our Thinking Ahead Institute since 1 January 2015 to work
with all industry participants who share our vision to change the investment
industry for the benefit of the end saver. The institute will operate as a forum
and use research and discussion collectively to:
- highlight and address problems in the investment industry, for example, the
lack of alignment issues.
- call for innovations that focus on value for the ultimate beneficiaries, for
example, pioneered in smart beta.
- To learn more about the
Thinking Ahead
Institute and the team behind the Institute.
How our clients invest their assets
- Asset owners desire efficient portfolio solutions that address their specific
needs in a cost effective manner. There is no single product or program that can
meet the needs of every possible client. We are flexible in using different
delivery models depending on client context so that each client can get the best
possible value from us.
- In our experience, the lack of a pooled fund solution has prevented smaller or
resource-constrained clients from accessing our best or more complex ideas
quickly and efficiently. Therefore, among our delivery models we developed
pooled fund solutions that best leverage our intellectual capital into areas
that are difficult to replicate in the broader asset management market place.
- One of our visions is to improve each client’s long-term outcomes through
creation of competitive advantage. By aggregating or pooling assets, we can
bring our scale advantages to all clients and address the issues we have
identified in the industry particularly total costs.
How we do things within our firm
- Investment consultants have traditionally assisted clients to model long term
asset allocation strategies and pick top-tier asset managers. But if this was
all we did, then we would just be maintaining the status quo and that is simply
not good enough.
- We will go beyond our traditional investment consulting roles and strive to
work more proactively as an advisory portfolio manager to look after a client’s
overall investment program by:
- getting best investment ideas into client portfolios (which can be improved by
less focusing on relative returns) and;
- importantly finding an appropriate implementation route.
- Our investment experts behave as if we are responsible for the entire
investment process with more attention on managing risks and complexity. We
evolved our investment process to focus on finding best investment ideas across
research, strategy and portfolio construction and combining them into as many of
our clients’ portfolios as they are appropriate for.
- A large part of Willis Towers Watson’s resources are devoted to seeking out
new or good investment opportunities. Then we work with stakeholders and other
participants in the industry to get them structured into the portfolio in a
cost-efficient way.
The contents of this article are for general interest. No action should be taken
on the basis of this article without seeking specific advice.
