Last month saw the Institutional Investor Committee (IIC), chaired by Douglas Ferrans, announce the creation of a newly formed Advisory Council. The nine-member board will meet on an ad hoc basis to discuss pertinent issues affecting the institutional investor community. In the first of a series of interviews with the Advisory Council, Hedgeweek spoke last week to Alan Brown (pictured), Group Chief Investment Officer at Schroders.
“I’ve had some 37 years or so working in the institutional space, over which time I’ve been working for both American and UK companies so I think I’ve got fairly broad experience to bring to the IIC Advisory Council,” says Brown. “The IIC is all about making sure that the various strands of institutional management – the NAPF, ABI and IMA – come together when there’s a need to form a common view. I hope to be contributing to that.”
As well as being on the board of the IMA, Brown also serves as its alternate member on the take-over panel, and will be able to offer some continuity on the Advisory Council should these issues come into play.
Giving a voice to the institutional investors they represent is one of the reasons behind creating the council. Compared to other interest groups like the investment banks, the asset management industry hasn’t been particularly effective at lobbying and in Brown’s view, needs to raise its game. Especially when one considers the wholesale regulatory change being rolled out across the funds industry. Whilst Brown believes this should be embraced, he stresses: “We need to make sure that the voice of the end asset owner is heard so that we don’t end up with adverse unintended consequences.”
Brown expands on this by referring to the issue of centralised clearing under Dodd-Frank. Although he supports it in principal, what worries him is that centralised clearing needs to recognise and acknowledge the different “riskiness” of different participants. A pension fund trying to hedge out risk broadly on an unleveraged basis is hardly the same, in risk terms, as a market speculator (e.g. hedge fund) or intermediary.
“There’s a danger then that the effective cost of operating centralised clearing will make hedging activities prohibitively expensive. What will then happen is we’ll have pension funds taking on risks in areas they previously avoided,” comments Brown.
Schroders has a fairly large alternatives business, primarily focusing on commodities and property, so the AIFMD provisions are less of a concern than for single-managed hedge funds. The firm, generally, uses the FoHFs model, which Brown is broadly happy with, although he points out that one specific area of significant challenge is in fixed income, given today’s low nominal yields. “It’s quite hard to see how you can run any kind of government bond fund and deliver any kind of value proposition to the end client because TERs are just too high a proportion of the gross level of return,” explains Brown.
One product area that Schroders is actively looking at for its institutional clients, and which started some years ago in an attempt to move away from benchmark relative strategies, is what Brown calls “outcome-based strategies”. The premise being that success or failure is judged not on whether you outperformed some market index, but on whether you delivered some real world outcome.
“This could be anything from an LDI hedging portfolio, it could be an income product to help retirees in the asset de-cumulation phase or it could be a real asset fund where you’re trying to provide an inflation plus return. These non-market based strategies form about 14% of our business and I suspect in another few years they’ll be a quarter of our business,” says Brown.
To finish, Brown re-iterates that over the next two years, the way the voice of institutional investors is being heard through the IMA, the ABI and the NAPF coming together on important issues is the metric by which the Advisory Council should be judged. “It would seem to me that the critical issue over the next two years is to ensure that we end up with reasonable outcomes as we go through regulatory change. It’s less about us as firms and more about speaking up for our institutional clients. That’s really what this is about.”
