Willis Towers Watson creeps towards funds management model

by Greg Bright

We haven’t seen this development in Australia as yet, but it looks like it’s finally coming. Willis Towers Watson is morphing into a fund manager, just as its main global competitors have done. And it is going to try to do it as a seamless offering along a spectrum of services for big super fund clients. Good luck with that.

The firm’s predecessor companies – Towers Perrin, Watson Wyatt and, more recently, the Willis insurance broking group – can speak to ‘implementation’ investment services dating back to 1998, which was the year of their first single-asset-class portfolio management mandate.

Subsequently, the big advisory firm has gone slowly down the funds management path, which has, inexorably, like competitors Russell Investments and Mercer Investment Consulting, as well as a range of US counterparts such as Callan and Ibbotson, become an increasingly important part of their business.

Aongus O’Gorman, Willis Towers Watson senior investment consultant in Sydney, told an audience of about 200 investment managers last week at the annual ‘Ideas Exchange’ seminar, that: “When we offer portfolio management it is part of our business… We are providing services as a spectrum. It is not a separate part of our business.”

In terms of a timeline, after first dipping it’s toe in the water in 1998 the firm was awarded its first entire portfolio management mandate in 2006. It launched its first pooled fund ‘solution’ in 2013 and this year, in the UK for starters, has launched an interesting new investment platform known as the Asset Management Exchange (AMX).

Willis Towers Watson currently has US$86.4 billion in funds “under management”, as well as US$3.0 trillion in its traditional funds under advice.

In its most up-front address about its funds management intentions to an Australian audience to date, the firm described how the AMX would work. It would complement, in a business sense, the ‘Outsourced CIO’ implemented funds management offering which has been successful in both Europe and the US in recent years. This is a form of implemented consulting business in line with the offerings of JANA Investment Advisers, Mercer, Russell and Ibbotson (a part of Morningstar) in Australia.

Leslie Mao, Willis Towers Watson senior investment consultant and head of Australian equities, said that AMX was a transparent and efficient platform for managers and client funds to participate such that they can both enjoy the benefits of scale in the use of various service providers – such as custody, broking, fund accounting and administration, as well as regulatory requirements and reporting.

A subsidiary of Willis Towers Watson becomes the RE to each underlying fund, while the managers become the sub-advisors. Investors who are not the consulting firm’s retainer-based clients can use the platform, for a fee, as can managers who are not currently rated by Willis Towers Watson. The managers participate for free, while the client funds pay the usual consulting and/or search fees.

One suspects the managers will be grilled over their fees, however, when negotiating any subsequent mandates with the consultant’s client funds.

Mao said that AMX had already started in the UK, using mainly hedge fund strategies to invest in, and the platform would be rolled out globally. It would also broaden its investment reach into other asset classes.

Martin Goss, Willis Towers Watson director of investments and chair of the firm’s investment committee, said the three key components to the firm’s offering were its clients, its people and its business. With its business, this had to be sustainable, he said. The firm was looking for ways to be more efficient and to have more coverage and to generate more ideas for clients. But an increasing proportion of its business would be portfolio management.

Meanwhile, the firm’s senior consultants told Australian fund managers that they would be continuing to recommend more alternative beta strategies, which Sean Hollins, who focuses on liquid alternatives research, said was a trend that funds used as an additional lever to reduce their exposures to equity beta.

He said that some funds did not like these strategies because of their complexity and because of what they saw as high fees – maybe up to 100bps which was above multi-asset fees but below those of hedge funds.

Hollins said that those funds which had embraced the strategy tended to do so by reducing their multi-asset allocations and re-evaluating their hedge funds exposure.

Tony Arnold, Melbourne-based senior investment consultant and head of Australian credit, said that there had been “a lot of money changing hands” in the fixed interest asset class in the last couple of years and a lot of fee compression. “A large part of the bond market it seems has been on life support,” he said.

Last year, Willis Towers Watson did Australian fixed income searches totalling $3.1 billion, “plus a lot of global searches”, he said. Searches this year had already reached last year’s levels – in just four months.

Three areas of focus this year were: active global sovereign bond strategies, less-directional (not reliant on duration bets) Australian fixed income and enhanced passive (smart beta) bond funds.

With respect to the possible business models for asset consulting firms, as Willis Towers Watson extends its portfolio management offerings to Australia, only Frontier Advisors in Australia has restrained itself from offering portfolio management services or fund products. Frontier is the only one that still does not sell ‘product’.

Mercer was the first to move down this path, with a range of successful trusts for smaller funds. The firm has hung on to a consulting business, although it has not kept pace with its bigger local rivals, JANA and Frontier, in the asset consulting space.

Russell aggressively pursued a retail funds management business but this was at the cost of its asset consulting arm, which it allowed to wither on the vine, if that’s not too melodramatic.

JANA has managed to hang on to the mantle as the largest consultant and also a provider of JANA implemented consulting strategies, as well as being a part of the NAB-owned MLC group. For how long, though, is an interesting question.

It is possible that given the changes among big super funds and other institutional clients, such as insourcing, all the asset consulting firms as we have known them for so long will slowly fade away, becoming something different.

Anything is possible in the new world of investments. But, increasingly, nothing is easy.