Comment by Greg Bright
There are three big themes playing out this year which can all be blamed on the babyboomers: outcome-orientated investing, smart beta and DIY-style institutional platforms. Forget the MySuper and other regulatory rubbish, this is how it’s going to play out.
Russell Investments’ restructure in Australia, announced last week, provides an informative view of how the world of institutional investing is trending. Russell started life, under the late Frank Russell, succeeded by his son George, as a pure asset consulting firm, in the 1930s. George’s wife, so the story goes, designed the company’s head office in Tacoma, near Seattle in California. Russell was the biggest employer in the town, but with global aspirations.
These days, the head office is in Seattle proper, the company is majority owned by an insurance company and Russell is a global multi-manager, consulting and investment implementation firm. Most of the money comes from the multi-manager bit.
Around the world Russell has embraced, at first “lifestyle investing” and, more recently, “outcome-orientated investing”. Not coincidentally, this is fitting in nicely with the other strong trends of “smart beta” and babyboomer-inspired do-it-yourself investing.
The investment demographic trend is this: the babyboomers approaching retirement represent a long-running increase in well-being coupled with an unprecedented sense of self-control over their lives. They want to take control of everything and they have the power to do so.
At the same time, they, along with other investors, are disenchanted with the traditional benchmark-aware performance of their professional managers. They want results which are clearly targeted.
Lifestyle investing, as espoused by Jeremy Cooper, the former head of the Australian Government’s 2010 inquiry into superannuation, is the crude adoption of formula-adjusted asset allocations according to age. In its more refined forms, it also takes into account the member’s sex and income. With the MySuper obligation, following the Cooper Inquiry’s recommendation, the Government has emphasized a “low-cost” default option, which some have assumed, as an easy solution, to involve a high proportion of indexed funds.
More thoughtful fiduciaries have therefore sought to add some value around the low-cost option through new-style “smart beta” strategies and products. These are either index funds tilted in a certain direction, such as “fundamental investing”, “low-volatility investing” or “value investing”, or in some cases also involve some qualitative stock-=picking input.
Index funds, through their retail equivalent of exchange-traded funds (ETFs) have proved very popular to self-managed super funds (SMSFs) – DIY funds – as a core component of their portfolios. Typically, they’ll buy one or two ETFs, hold a dozen or so blue-chip stocks, maybe hold a little property, and then have a lot of cash and bank term deposits.
Which leads us to the third trend: babyboomers have demonstrated they want control over everything, including their retirement savings. The SMSF market, at just over AUD$500 billion, is the largest single component of the Australian retirement savings system. Furthermore, the average account balance for an SMSF is close to $1 million, versus less than $150,000 for all other super fund accounts.
The recent evidence is that these investors want “outcomes”, rather than allowing their managers the freedom to go out and beat a traditional index any which way they can.
Big super funds are now introducing SMSF-style freedom in new “member directed” platforms within the comfort and trusteeship of their funds in order to retain their high-balance members as they get closer to retirement.
So, in Russell’s restructure, as the Asia Pacific chief executive, Alan Schoenheimer, says: “”Our clients are telling us they want investment solutions that start with the individual needs of their end investors, and one big theme getting these clients excited is the idea of solutions that provide equity like returns but without the volatility of the sharemarket…
“This holy grail of returns with less risk is now possible due to exciting new product innovations in the multi-asset space.”
Next month Russell plans to launch the first in a series of new multi-asset investment products. The first is specifically designed for institutional investors that want competitive returns but can’t stomach traditional market volatility. It aims to provide equity-like returns at about two-thirds the volatility of equity portfolios.
Russell says it has already had strong interest in the concept from insurance companies, defined benefit funds, not-for-profit funds and super funds seeking a retirement solution for members.
“We are evolving our product offering and will be working with key clients to build customized solutions from the ground up to meet their needs. Very few asset managers have the depth and breadth of capabilities to build and actively manage outcome oriented multi-asset portfolios in the way that Russell can,” Schoenheimer said last week.
From a management point of view, the restructure involves folding the firm’s consulting and actuarial businesses together, under the planned recruitment of a new “managing director, institutional”. A search is underway.
Michael Clarke, who effectively had a similar role under the previous structure, has left Russell to take a job as general manager of institutional business development and strategic alliances at Challenger International.
This will include Challenger’s annuities business, which recruited Jeremy Cooper as a consulting strategist after he left the Government’s super inquiry. Cooper is now a regular on the conference circuit.
Russell now has three main divisions in Australia: Institutional; Private Client Services; and Investment Division, which includes the well-regarded implementation services business.