How the relationship between investment management consultants and clients changed in recent years:
Investment managers provide information that is easier to use and faster to deliver and they are more interested in having clients of different types as being concentrated with one type hurt during the recession. Rising allocations to private equity a few years ago mean private equity firm generational transfers have begun. They represent some risk as, classically, they have not gone well.
Defined contribution clients’ priorities have shifted from choosing investments to the impacts of their choices on beneficiaries. Fees and investment structures are also more important now. Going forward we expect the number of investments a plan offers to decline – some substantially.
Endowments and foundations professionals have access to much more information, lowering the time managers need to educate. Managers can ask more complex questions like, “Why have fixed income in a portfolio that’s around in perpetuity? What interest rate sensitivities need to be managed?”
How do investment management consultants think about ESG?
There is a big difference between an ESG fund and a fund with ESG integration. ESG integration does not mean that you will leave out a company that has a low ESG rating, but you will consider it.
ESG is an additional factor in the investment process but it must be managed carefully. It can introduce risk at the individual issue level and asset allocation level.
ESG application in the alternatives sector has been very slow. Many hedge funds are short-term oriented, making ESG difficult. As private equity portfolios are concentrated and long term, ESG screens are possible but take time to implement. European private equity firms are further along than US.
How do you handle risk mitigation?
Attributing risks to the appropriate assets is very important. The vast majority of growth assets are highly valued. Rates are low but they may not feel very low in two years.
The challenge for endowment and foundations is their equity risk (as they are heavily allocated to equities). Many are looking for some protection on the downside.
One panel member suggested reading: Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment by David Swensen to understand risk.
Overall, risk is focused on failing quickly. There’s little focus on failing slowly over the long term. That would mean not meeting spending objectives or needing to spend principle.
Question—managing through retirement: how has retirement income changed?
Most target funds offer through retirement. It really just depends on the goals the manager is trying to achieve.
We think modeling target dates are a critical step. We put them through our capital market assumptions and then share with our clients. We need to solve that retirement income problem.
Where do you and your clients see value now?
One venture fund asked my firm to carve out of the fund to invest in crypto and some block chain.
Some portions of biotech attractive – even at 12x multiples.
The demographics and innovation that effect the 20- or 40-year plans. A lot of innovation is on the private side while demographic value is in the public markets
We like being exposed to consumers rather than corporates. Consumers are less leveraged than corporates.