What’s dominating CIO conversations with asset owners?
With a challenging backdrop to the current investment landscape, certain topics are continually resurfacing when chief investment officers speak with asset owners.
The conversation is dominated by the desire to get more out of manager relationships, increasing the amount of insight investors gain from them, said Neil Blundell, head of global client solutions at Invesco, in a webinar by the firm and hosted by TC Media last week.
“Today, CIOs are expected to be expert generalists across a diverse range of really complex areas, ranging from strategic asset allocation to manager selection. Whether it’s new investment approaches or regulatory change, it’s grown increasingly complex.”
Asset manager solutions are becoming increasingly tailored to each clients’ specific goals, said Blundell, noting this customization can be achieved by benchmarking investment results in a more useful way.
“If you think about liability-driven investing, instead of those manager level benchmarks, we convert the asset owner liabilities into the custom liability benchmark for the plan,” he said. “And then we begin managing the assets to that custom benchmark, and you can really think about determining what is that blend of liability-hedging assets to return-seeking assets based on someone’s funded status? If you’re reasonably funded, you could have more liability-hedging assets. And if you’re underfunded, you can really think about growth or return-seeking assets you can blend into your portfolio.”
Today, CIOs are walking a tricky tightrope in helping asset owners achieve the right balance of growth assets while preserving capital, added Blundell.
Another popular topic is the use of factors, he said. “The investment toolkit has increased over the past several years and it’s really helped to meaningfully expand portfolio diversification. Factors had been at the forefront of this innovation.”
Also speaking during the webinar, Nick Savoulides, head of solutions research and analytics at Invesco, said analyzing the portfolio through a factor lens allows managers to better understand what elements are being contributed by the different investments. “They allow us to take the behaviour of thousands of securities in the marketplace and explain their behaviour through a more finite set of components that are common to those securities and drive the vast majority of their return and risk behaviours.”
Savoulides noted factors can be categorized as either macro or style. Macro factors include rates, inflation and exposure to different asset classes, while style factors include qualities like size, growth and momentum.
“It’s important to recognize that, as we construct solutions which are really aimed to achieve specific outcomes for our clients, the vast majority of the solution is really going to be driven by the macro factor positioning,” he said.
Analyzing factors can also provide a clearer picture of the portfolio’s diversification, said Paisley Nardini, portfolio advisory specialist at Invesco, during the webinar. “This information allows you to see an additional level of diversification opportunity or risk concentration that would otherwise not be available. It further provides insights to exposures that can cut across asset classes and investment vehicles.”
Managers can apply what they learn from analyzing factors to make better informed allocations, noted Nardini. “So if we believe we need to, perhaps, pare back risk within an equity sleeve from where we are in the current business cycle, indiscriminately adding to equities isn’t going to be the most effective implementation. Looking for equities funds with perhaps a low volatility or quality bias may help us better meet our objectives, while still providing broader exposure to that asset class.”
Allocations to private assets is another topic proving popular with CIOs, said Savoulides.
To help investors better understand alternatives, it’s important to find ways to help them compare these to public asset classes, he noted. “Ultimately, as we create multi-asset proposals and solutions for our clients, we want to be able to put them on the same footing, have more of an apples-to-apples comparison with public assets.”
With real estate, one example is looking at the historic returns of private assets over time and comparing them to publicly traded real estate investment trusts, said Savoulides. “Basically, we adjust the risks which are embedded in these asset classes to more closely resemble the public space, while more closely preserving the better correlation characteristics that they have given their private nature.