When the then Frank Russell Co opened its first Asia Pacific office in the mid 1980s the big fund managers of the day had a right to be nervous. On the back of its one Australian client at the time, MLC, Russell launched what became a tidal wave of specialist investment mandates which led to the creation of more than 150 specialist managers in Australia alone over the next 20-odd years.
It signaled the end of balanced management of pension fund assets, an era which had been dominated by the life offices AMP and National Mutual and the US-owned BT Group in Australia, and UK-backed life offices such as Prudential and Legal & General or family-owned Schroders in Hong Kong and Singapore.
It is possible to perceive, according to the global chief investment officer of Russell Investments, Peter Gunning, that the world has gone full circle. Gunning was in Australia last week, from his Seattle base, for the announcements concerning the new “partnership funds” the firm is rolling out and the first of an expected series of alliances with big investors and financial advisory groups.
The new approach is “outcomes oriented”, which Russell believes is a better reflection of what investors, large and small, are actually looking for.
Gunning joined the Sydney office of Russell in 1996 when specialist funds management was in full flight and BT was looking for a new owner, National Mutual had already found one (AXA), and AMP needed to de-mutualise to stay viable.
“It’s almost gone full circle,” he says. “But I wouldn’t call it ‘Balanced 2.0’. It’s certainly more holistic looking, though, looking at a whole portfolio.”
McKinsey & Co, the management consultancy which can write a pithy headline as well as any Fleet Street sub-editor, has dubbed “outcomes investing” as “the New Alpha”.
Gunning says that it was the shock of 2008 which has prompted the trend to outcomes investing.
“We were looking for alpha and real returns, not outcomes. In 2008 a person running investments at an average pension fund may have thought he had done a very good job, relative to peers or the markets, but the CEO or chairman didn’t. They were the people writing $100 million cheques to shore of the fund.”
Russell’s first alliance in Australia using the new model is with the dealer group Matrix Planning Solutions which launched last week a series of “Partnership” funds covering several balanced, debt and “income seeking” options. Other alliances are in discussion with both retail and institutional players.
Gunning describes it as a “paradigm shift” and, although more mature investors will recall the word being used before in funds management, he points out several differences from what we remembered of the old balanced days.
“For the big multi-asset mandates, this is not one manager or one strategy. It takes a lot of resources to have this sort of open architecture and to have the componentry to implement the strategies. For example, just in equities, there are domestic, small-caps, global, emerging, frontier, dynamic etc. etc…
“The sheer complexity and sophistication of today’s adaptive, outcome-oriented portfolios offers a new challenge for investors of all sizes. The approach requires a specialist toolkit of investment capabilities including customized asset exposures, adaptive asset allocation, holistic portfolio construction and tax-aware portfolio management.”
For the financial planning market there is little doubt that such an approach would probably be a lot better than many advisors have been delivering for much too long. Some advisory groups, such as iPac – now a part of AMP – have been looking to deliver outcomes-oriented strategies for years. Most, however, have followed the traditional path of multi-manager, multi-asset class, largely static asset allocation strategies.
But the world’s big pension funds, endowments and other fiduciaries represent a different story. Many have more resources than funds managers. Most employ panels of asset consultants and other advisers and have big in-house teams of hundreds of investment professionals.
Gunning says, though, that the discussion about outcomes-oriented investments is not about size. It’s not something more suited to smaller funds with fewer resources. It’s a new mindset which aims to better match expectations with a strategy to realize them.
The lingering doubt is over what the investor may be giving away in potential upside in return for greater certainty of a deliverable. History tells us that if you want greater certainty or some form of insurance about the future, then you are going to have to pay for it.
Nevertheless, Gunning says: this trend is not a fad; it’s here to stay.