CFA Society New York hosted the 2nd Annual Institutional Investment Consulting Roundtable on March 15th 2018 which featured a high-level discussion among senior institutional investment consultants.  Institutional investment consultants provide investment advice to institutions such as public and private companies, foundations, and endowments.  Speakers included CFANY Board member Tom Brigandi; Tim Barron, SVP and CIO of Segal Marco Advisors; Joe McDonald, CFA, Senior Partner at Aon Hewitt; Jeffrey Blazek, CFA, Managing Director at Cambridge Associates; Marcia Peters, CFA, CIO at Portfolio Evaluations; Rich Nuzum, CFA, President – Wealth at Mercer; and Winston Ma, Managing Director at China Investment Corporation.

See Takeaways and Overview Below

Advice and Thoughts

  • Fees are too high in asset management.  Expect continued fee compression, especially on the hedge fund side.
  • Plan Sponsors are very different and far from being homogenous.  Peer rankings are not appropriate given the level of differentiating plan characteristics.
  • Board diversity helps improve results.  Governance is highly important with an emphasis on more diversity and women.
  • Need to return to long term investing, short termism has become more common resulting in excess trading, noise, and lower long term returns.  However, there is opportunity to tactically outperform over the shorter 1-3yr period.  It is appropriate to think both long and short term without being wed to one or the other.
  • People need to be more knowledgeable on retirement savings and investing in order to minimize allocation to high cost investments.
  • There has been high growth in OCIO business.  Over the next 5 years, expect many to fail and underperform.
  • Be skeptical of new strategies.  Globalization of equity portfolios happened in the 80’s.  Brokers pushed for it considering US equity trading became cheap, so brokers were incentivized to add international for higher fees.  Be sure to fully understand the added value from new positions and weigh the costs.
  • Robo Advisors are not expected to take over the institutional space in the next decade.  However, the retail space is already in the works.
  • While absolute returns have come down across the board, illiquid investments have become attractive.  However, as a greater amount of private capital chases less and less opportunities, you can expect downside pressure on returns.

Biggest Trends

  • OCIO

    • Given the lower expected returns in traditional asset classes, expect higher demand for an Outsourced Chief Investment Office.
    • Plan sponsors of Defined Benefit plans which are heavily focused on asset liability management present a real need for OCIO.
    • Fees have come down, making OCIO more attractive.
    • OCIO was coined about only a decade ago, though the service actually goes back to at least the 1980’s.
    • While it is more common to have discretionary authority, OCIO management can also be non-discretionary.  For clients that are not quite ready to give up all discretion, a balanced approach of investment advice, internal plan sponsor authority, and discretion is appropriate.
    • Sourcing emerging managers is on the rise.  Both minority owned firms and new managers are attractive to many clients.
  • Defined Benefit Pension Plans

    • Most plan sponsors are spending less time on manager performance, asset allocation, and more time on how to allocate the capital whether its pension distributions, pension contributions, or how to better manage the liabilities.
    • An internal actuary provides a competitive advantage for managing pension plans, though not a deal breaker.
    • In general, as rates go up, you will see pensions de-risk, and move to long duration fixed income, primarily credit.  Most clients are on glide-path, and as rates go up, funded status tends to go up as projected liabilities fall resulting in de-risking of the portfolio.  However, a more accelerated pace of rate hikes may disrupt the funded status as Fed hikes at a faster pace to offset inflation or an overheated economy could result in lower equity returns leading to lower assets on both the equity and fixed income part of the portfolio despite the liabilities falling.  This could negatively impact the funded status.
    • There has been a lot more emphasis on plan contributions to mitigate the required large PBGC premiums.  Considering the variable rate PBGC premium is around 4%, borrowing to fund at a 3% has been attractive for plan sponsors in this lower rate environment.
    • Lump sum distributions are attractive given the costs of PBGC premiums.
    • Paying an insurer to take a pension plan off the books is attractive in some cases.  And very often, it’s only a portion of the plan and not the entire plan.
    • On the public pension side, in order to improve the health of the portfolio, states need to contribute more capital or change the liability structure.  Plan returns are not expected to be enough to improve the funded status.  The tax base needs to be more supportive as well.
  • China’s Mobile Economy

    • The most popular day in China is not the new year, it is Singles Day!  Singles Day is the largest ecommerce day in the world by far.
    • Many Chinese skipped the desktop computer and went straight to the mobile phone.
    • Mobile payment is high and growing in remote areas and especially popular with farmers.
    • Inventions, new ideas, and trends tied to the mobile phone are high in demand.  For example, online novels, Uber, and others mobile applications have shown accelerated growth versus more traditional businesses.
    • Of the 1.4B people in China, only half is currently a mobile internet user which still makes China the largest market in the world for mobile users.  This suggests even more growth in the future.