I started my career 1989 at Citicorp running a long/short Japanese equity derivative hedge fund before moving to the Japanese equity team at JP Morgan in 1996. In search of a better work life balance I moved to Mercer in 1998 and became the head of Manager Research for Europe in 2000. I really enjoyed the work and the people, but in 2003 when my daughter was born I decided to take a career break. Although I continued to monitor the markets I didn’t end up going back to work, until now. When the opportunity of the returnship at Redington arose, it provided a great chance to bring me fully up to date with the industry.
– Bridget Fuller
Towards the end of 2003 I left a successful investment consultancy for maternity leave. All quite straightforward, all unremarkable. I headed a Manager Research team of 15 full time dedicated researchers of UK and European domiciled products. I worked long hours but I had been a fund manager running a Japanese equity derivative hedge fund based in London. I was certainly familiar with what long hours and, in particular, early mornings meant. I had a great team. I was coming back. Three months turned to six and then I phoned my boss, the conversation went something like this:
“Any chance I could come back in a part-time role? I would love to be able to have some time during the week to spend with my daughter?”
“part-time?” he said incredulously.
“Weelll, I suppose we could arrange for you to leave early on Friday or maybe half a day”
I decided I was extremely fortunate to be able to make the conscious decision that the family could live off one salary for a while. And that ‘while’ turned into more than 10 years.
Let me fast forward to the end of 2016 to a conversation I had with another CEO.
“Would you be interested in our Return to Work programme?’
“weelll I , I am not sure how I could, I have a school run, I …”
“would you like to come back part-time?”
“part-time?”, I said incredulously
“Why don’t you tell me what hours would work for you and we will see if we can accommodate you?”
I’d like to think that this change is blanket across our industry, but I suspect not. I look around at the other returners. Women with experience, energy, ideas and humour to offer this business and I think how impressive it is to access this untapped, forgotten corner of the workforce.
So I accepted, I turned up and I looked around to see what I’d missed.
In 2003, the funding gap was around 25%, although LDI solutions were available, they were in their infancy and trustees were more focused on addressing the high weight to equity markets and in capturing alpha.
The industry had recently undergone a major shift away from the “big Five” asset managers offering balanced products towards specialism.
Balanced products in those days almost always had an allocation to equities of well over 60%, with the majority being UK, and UK fixed income accounting for most of the rest of the portfolio. Real estate did make an appearance but it was very small. In a Balanced or Multi-asset product, fund managers’ were given a small amount of freedom to do asset allocation across traditional equity and fixed income products (all in house). Target alpha, when specified, was usually low at around 1% and fees were likely to be around 60-70 bp. Actual alpha returns on these products proved disappointing and generated a lack of trust in asset managers’ ability to have the skills to do asset allocation. The consultant industry was busy unwinding these portfolios and rolling clients into specialist mandates, and as a natural consequence manager research teams were charged with the task of finding interesting high alpha specialist equity and fixed products in this never-ending search for alpha. Manager research subsequently moved from the back of the house to front and centre as a reflection of this importance.
To remind you, 10 year UK Gilt yields stood at 5.10%, the 30 year Gilt yielded a mouth-watering 4.95%, and the dividend yield on the all-share was 3.25%, following a huge sell off post the bursting of the tech bubble.
Since then, market returns have been more than surprising, and strongly positive, although admittedly not a smooth ride. Something I doubt anyone in 2003 would have predicted. At the end of 2016, 10 year bond yields stood at 1.20% and 30 year at 1.90%. Developed equity markets are now near an all time high. With both bond and equity markets experiencing these very strong returns surely this should have provided opportunities for pension funds to improve their deficits?
Well that seems not to be the case. Here we are in 2017 and the liability gap has remained largely the same as in 2003.
The investment landscape is more complex. The numbers of asset classes and individual products have expanded exponentially. Navigating their way through this landscape is made more difficult for the lay trustees, still common on pensions fund boards, increasing the overall governance burden. Many consultant practices have looked to help clients with this problem by expanding the size of their manager research team. Some now aim to cover the entire universe of products, asset classes and providers, looking to offer clients commentary on the whole of this increased set. In some cases this has resulted in research teams of more than 100 people in size – larger than some of the biggest asset managers own research departments.
Whilst their intentions are clearly well meant I wonder whether they have lost sight of the woods for the trees?
One is forced to ask if it will make a difference to schemes ability to pay the pension obligation? Does it really help clients meet their objectives if they spend large portions of their time deciding between 5 different global equity providers for example? Are trustees really any better at identifying a high calibre product from a set of slick presentations each made in 45mins? All of this effort and energy going into something the industry universally refers to as a “beauty parade”. (A phrase suggestive perhaps of the shallowness of the decision process and maybe even reflective of the usefulness of the entire exercise?)
Ultimately, we all know that the beta behind the asset allocation is far more important than whether your active managers return an aggregate alpha of 1%, 2%, or even -1%. Asset allocation skills, which we questioned, existed in 2003, now return as a source of alpha with a kaleidoscope of choices in the guise of Diversified Growth Funds (DGF). Is it possible that what is now a bewildering number of asset classes and asset managers will somehow make the information content of the active asset allocation decision better? Call me cynical, but it seems unlikely.
It is equally interesting to note that most investment consultants offer their own version of active asset allocation for clients. Had we only known all those years ago that it was the investment consultants that had been hiding all those asset allocation skills! In a similar vein, asset managers now outsource some of their DGF assets to other managers, via their own in-house manager research teams, mirroring consultant efforts. Not only has this business grown more complex it has blurred the lines between industry participants. These actions have been taken to broaden the revenue earning potential of both consultants and asset managers, but it is certainly unclear as to whether or not it ultimately serves the clients.
Has the primary role of the investment consultant really changed? It surely must still be to guide the plan sponsor in all aspects from policy development, modeling, measurement and evaluation. In short, to simplify the issues, provide transparency in costs and to educate and translate financial language. A successful relationship is one where trustees are provided with the confidence and information they need to make funding decisions.
The key focus will continue to be on closing the funding gap, with LDI, glide paths, buy-ins and buy-outs now dominating the dialogue. Let’s hope that the industry is more successful over the next decade than it has been in the last.
Eventually the bill will come due.