Investment Innovations: Raising the Bar November 2011

Transcription

1 Investment Innovations: Raising the Bar November 2011 Jervis Smith Managing Director, Global Head of Client Executive Global Transaction Services, Citi Amin Rajan CEO, CREATE-Research November 2011

2 Executive Summary This presentation summarises the results of the 2011 Create Research annual global survey that took place in April / May 2011 Sponsored by Citi and Principal Global Investors Create is an independent research firm we have worked with for six years. Headed by Professor Amin Rajan. Focusing on the last decade, the report assessed the impact of Innovation on the basis of two global surveys One involved 108 pension plans The other involved 396 asset managers, pension consultants, third party administrators and distributors from 30 countries Together, the surveyed firms represent a combined AUM of around US$29 trillion Survey and one-on-one interviews Four key yquestions: What innovations worked/ did not work, and why? What improvements are essential? What should the main thrust for innovations be over the next three years? What specific actions do they call for? 1

3 Three Themes 1.The Scorecard: Clients have an Open Mind about Innovation 2. Challenges: Fit-for-purpose innovations requires rigorous processes and robust reality checks 3. Actions: Innovations should seek to deliver best endeavour outcomes There is at least one point in the history of any company when you have to change dramatically to rise to the next performance level. l Miss the moment and you start t to decline Andrew Grove, Former Chairman, Intel 2

4 Which Innovations Were Widely Adopted in the 2000s and who were the early pioneers? set Allocation Techniq ues Asset Class ses and As New Asset Classes Global equities Emerging market equities Convertible bonds High yield bonds Emerging market bonds Commodity funds Currency funds Risk parity portfolios Real assets US, UK, Holland, Australia, Singapore New Asset Techniques LDI Distressed debt GTAA Age-based retirement funds Risk-based retirement funds Unconstrained mandates US, UK, Holland, Switzerland New business models Outsourcing of back office Outsourcing of distribution Fiduciary management Multi-boutique models Client service models Innovation models US, EU, Switzerland New enhancing tools Derivatives for hedging unrewarded risks ETFs Hedge funds Portable alpha Leverage Shorting US, Canada, UK, Switzerland New product themes SRI Environment Water Renewable energy Shari ah Capital protection Tax efficiency i US, EU, Malaysia, Canada, Singapore Hedging & Returns- -enhancing Tools and Product The emes 3

5 In the Last Decade, Which Innovations in the Three Sub Sets Delivered Most Value to Defined Benefit Pensions and Which Delivered Least Value? 4

6 Factors Influencing the Impact of Innovations Positives Strong beliefs that t guided d the investment choices A disciplined approach to to buying and selling Skills and governance to to secure early mover advantage Over-reliance on financial engineering to extract value Herd instinct that prevented buying on the dips Low engagement with their asset managers Negatives 5

7 Seeing What s Next: Likely Innovations in This Decade Disruptive New enhancing tools Morphing of DC products New asset classes Abolition of commissions Risk-return trade off Adoption of high watermark fees Risk overlays Data warehouses Multi boutique model Alliances 6

8 Theme 2 1.The Scorecard: Clients have an Open Mind about Innovation 2. Challenges: Fit-for-purpose innovations requires rigorous processes and robust reality checks 3. Actions: Innovations should seek to deliver best endeavour outcomes Which asset managers can claim Apple s historic run of successes? An Interview Quote 7

9 Overall, Do You Think That Further Product Innovation Will Deliver Genuine Value To End-clients Over the Next 3 Years? Asset Manager s Responses Pension Plan s Responses 9

10 Global Exemplar The Shell approach: Picking the stars and weeding out the dogs fair and fast. Entrepreneurial Directive Deliver Portfolio of Products Managem ent Style Evaluate Portfolio of Experiments Design Portfolio of Prototypes Light Touch Explore Portfolio of Ideas High: Numerous ideas Risk of Failure Low: Proof of Concept 10

11 Lesson 1 Choose the right tools to deliver a culture of innovation. Customer-driven Nature of Innovation Culture-driven Provoked Creativity Breaking the current boundaries on new products, geographies & customers Metrics on new boundaries Customer engagement 25% Systems-driven Challenges framed for virtual teams Fast track process Dedicated resource Deliver value to clients Alignment of interests Incremental changes Step changes R&D-driven Ring fenced innovation unit White space for free thinkers Fund incubators Strong business values on innovation Innovation linked to business strategy and PBS Ideas bank 40% Talent-driven Virtual boutiques Thought leadership Individual accountability Unstructure ed Creativity 15% 5% 70% Eureka Creativity 11

12 Theme 3 1. The Scorecard: Clients have an Open Mind about Innovation 2. Challenges: Fit-for-purpose innovations requires rigorous processes and robust reality checks 3. Actions: Innovations should seek to deliver best endeavour outcomes For most of the last decade, asset managers spent a lot of time worrying about almost everything but their customers. An Interview Quote 12

13 What Innovations do Clients Want in the 2010s? Trade Offs Product In nnovation Risk Overlay Do we know how to mobilise our intellectual capital to generate insights and foresight? Investment Focus Do we use our core capabilities and eschew bells & whistles overlays? Retirement Solutions How do we capitalise on ageing demographics? How can our products deliver more returns for less risk? Best endeavour outcomes via: Product integrity Process integrity Business resilience Operational excellence Alignment of interest Innovation Tools How do we capture, evaluate and implement new ideas? Emerging Markets Do we have a clear strategy to exploit their investment dynamism and market opportunities? Service Models Do we know our clients dreams and nightmares? Operational Excellence Do we use our third party administrators as innovation partners? Bu siness Mod del Innovation 13

14 1. Engagement How often have your asset managers involved you when innovating the products that you buy from them? Pension Plans Responses Alpha Seekers Want Strategic Partnership Returns Seekers Want Arms Length Vendors Advice Seekers Want Expert Hand-holders 14

15 2. Bottom Line Which of the following fund product features will need to improve most over the next 3 years? 15

16 3. Retirement Products What kind of retirement solutions do clients need in the DC market? Pre-retirement Phase A pragmatic risk profile with periodic switches between equities and bonds in both directions Some investment in deferred annuity Protection against big market events Accumulated gains ring-fenced over time to permit liability matching Post-retirement Phase Part of the accumulated pension pot to be used to buy an annuity Remaining pot to be reinvested to deliver an income draw down Life insurance Health insurance Residual wealth transfer on death 16

17 4. Core Capability In the next wave of innovation, how do clients in different jurisdictions want their asset managers to focus on their core capabilities? Alpha (Uncorrelated Absolute Returns) Leveraged Funds (e.g. Hedge Funds) US UK Netherlands Scandinavia Japan Business Model: Alternatives exc. Hedge Funds US Canada EU Australia Absolute Returns Over Cash Benchmarks US EU Canada Japan China India South Korea Malaysia Total Returns Over Market Benchmarks US EU Japan Australia Latam India China Singapore Key Focus: High Returns Modest Excess Returns Market Returns Key Driver: Best Talent Utilisation Client Needs Asset Gathering Fees: High Variable Low Returns: High Dispersion Low Dispersioni Zero Dispersion Scalability: Low Variable High Operating Model: Single Boutique Multi Boutiques Integrated Houses Complex Regulated Funds (e.g. Newcits) EU Asia Latam US EU Asia Latam Regulated Mutual Funds Passives; ETFs US Japan China EU Australia India Market Correlation: R 2 =1 17

18 5. Risk Overlay How risk models need an overlay of human judgement and individual incentives? You re fired, if you fail to hit your target Foresight Insights Explicit Knowledge A qualitative risk overlay provided by experienced professionals and advisors asking questions like Who will turn us into forced sellers? What s the risk that clients could lose capital? You re rewarded, if you exceed your target Information Risk models and quants Data 18

19 6. Asset Servicers as Innovation Partners What will be different about asset servicers approaches to innovation over the next 3 years? 19

20 Conclusions Client engagement and alignment is key Simplicity and value for money Best endeavours and focus on outcomes Risk is front and centre of investors thoughts Environment of Talent Avoid hobbies Any questions?

21 How Are YOU Tackling Innovation? Who leads innovation in your firm? How are the effects measured? How is innovation encouraged? What do you think is the area of your business which will be most impacted by innovation in next five years? Where will it come from: Clients, Products, or Operations? How will regulation affect the pace of innovation?

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