Deb Brown on Piloting the CIO Career Path

From aiCIO's June issue: Brown, the asset management recruiting queen of Russell Reynolds, has an enviable track -record of recruiting CIOs to their positions over her 25-year career. Here’s what she’s learned—and what advice she has for you.

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“Don’t ever let your organization think it’s simply a stepping-stone. Of course, a lot of times clients will say, ‘We’re okay being used as a stopover for three to five years. We’d rather be a stop along the way for a great candidate than a final resting place for a mediocre one.’ But beyond that, CIOs and people wanting to become CIOs need to be seen to be focused on helping the institution they’re at, not just their own careers. I have seen investment professionals spending a lot of time promoting themselves, or looking to start a new business at the expense of their current employer—outsourced-CIO businesses being the common example—and that’s not what I recommend. Of course, there are smart ways to highlight your abilities without being nakedly self-promotional: Being highlighted in publications, being helpful resources to recruiters in the space, receiving industry awards, writing thought pieces, authoring articles, and speaking on panels are all ways to get on the radar in an understated and sophisticated way.

Don’t be a job-hopper. I wouldn’t point to it as a hard rule, but I would say that while you probably don’t want to work for one employer your entire career, you also don’t want to move every three years. Too much movement will scare prospective employers; they may wonder why you’d ever stay with their organization. Over the course of a 20-year career, three or four roles seem fine. You want to stay long enough to be able to show you’ve had an impact; you want to really put down some roots and demonstrate success. Of course, measured success can take years to unfold, and sometimes it is hard to point to a performance record and say, ‘That’s mine, I did that’—especially if you’re not yet the CIO. One way to overcome this, especially for younger professionals, is to also focus on the qualitative. Make up for your CIOs drawbacks, put processes in place, bridge silos, plug holes.

Be a specialist and a generalist. This is really important: The most appealing CIO candidate has a holistic view, and isn’t just focused on one area or asset class. Aspiring CIOs should get this generalist experience, whether by getting involved in an asset-allocation study, participating in board meetings, or serving as the CIO’s sidekick. They shouldn’t just become the private equity guy or gal. With the increasing creation of roles with titles like ‘Head of Asset Allocation and Risk Management’, the pendulum might be swinging back towards favoring generalists, but I don’t know whether the pendulum has swung enough yet.

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The public sphere is interesting, yet there are cautionary tales. Serving a public pension is a phenomenal thing to do—almost a tour of duty—but there is a danger of spending too long in the public domain without getting some private sector experience. With few exceptions—especially if you’re not the CIO—there is a risk associated with spending too long in public pensions, especially ones that are heavily bureaucratic and don’t pay all that well.

This idea of public service also applies to those wanting to move from the for-profit asset management side. I hesitate to call it a lifestyle choice, because that implies that CIOs at asset owners don’t work as hard or travel as much—and they do. It’s more appropriate to label it a ‘calling’ to go work for your alma mater or an appealing institution with a mission. Also, the asset-owning world is incredibly interesting. Some asset management roles that are multi-asset class—for example, many ‘Solutions Groups’—are similar, but there are really few places where you get to look holistically at a portfolio over the long term without being judged by one quarter.

Like so many things in life, it’s all about balance—in this case, balancing a number of competing factors, pinpointing tensions, and finding the right place along the spectrum. You want to be known, but not known for self-promotion. You want to have a specific area of expertise, but you need to know asset allocation and risk management. You want to demonstrate near-term impact, yet focus on long-term results. You want a mix of public and private experience, although the former doesn’t necessarily mean working within a public pension. But always, always stay focused on your current organization.”

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A “perfect number” exists in mathematical theory. In liability-driven investment (LDI), it does not. On one side of the Atlantic, investors are suffering an embarrassment of riches; on the other, it’s slim pickings. This uneven spread is failing both sets of investors—but it might be about to change.

In the UK, the market that arguably led the LDI charge, there are 14 providers offering services to pension funds, according to KPMG’s calculations. But with rates continuing to edge downwards, many investors are loathe to lock in and instead avoid these strategies. Does that mean there are too many providers? And how many are “me too” brands rather than real innovators?

The UK market has traditionally been dominated by three players: Legal & General Investment Management (LGIM), Insight Investment, and BlackRock. But there has been a flurry of new entrants who are themselves fund management heavyweights: Schroders, AXA Investment Managers, and F&C Investments.

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There might be even more pretenders to the throne, except for a controversial barrier: the consultant market. TC Jefferson, senior consultant at London-based executive search specialists Plenum Group, tells aiCIO some consultants only give airtime to providers with a sizable and dedicated LDI solutions team. This means less-established players who want to grow organically can find it a tough market to penetrate.

“There is a serious catch-22 in that consultants, while wanting more choice for their clients, stand accused of exacerbating the problem in reinforcing barriers to entry for new and smaller LDI providers,” he says. “This capacity issue is made worse by the conservative nature of trustees themselves, many of whom may lean towards a household name. The current LDI landscape is a reflection of the fact that, as a relatively low-margin business, the success of LDI can be a question of scale.”
The state of the LDI market is seen completely differently on either side of the Atlantic, however. Russell Investments told aiCIO that demand is outstripping supply in the US, while the UK market is ripe for consolidation.

Marty Jaugietis, Russell’s head of LDI for the Americas, notes that there is a huge appetite for the strategy that has yet to be sated stateside. “The average allocation to LDI fixed income of our US consulting client base has risen from 25% to 43% over the past six years,” he says. “However, this is still regarded as the relatively early innings in terms of the amount of interest-rate risk being hedged, which results in material differentiation in solutions.”

Some feel there still isn’t enough variety on offer in the US. Dave Wilson, managing director at Cutwater Asset Management, says there’s plenty of room for more entrants into the US LDI space because there are too few providers offering bespoke products. “While there are many investment managers in the US that offer LDI, there are very few that are truly committed to providing customized, solutions-based investment programs for their clients,” he explains. “Too often, US plan sponsors are presented with a one-size-fits-all recommendation of extending duration, which may not be appropriate for some or precise enough for others.”

Kimberlee Lisella, senior client portfolio manager at LGIM America (and formerly of Cutwater) agrees; she says the US LDI market is split into fixed-income providers who “do LDI” and what she calls true LDI providers.

Most managers offer LDI in terms of managing a single, long-duration strategy benchmarked against a standardized market index. The exciting ones might also offer blends of standard market benchmark long-duration strategies, but there aren’t many who offer a tailored experience for pension plans and their liability benchmarks, she claims.

But are those bespoke tailors worth the extra money? Lisella argues (perhaps unsurprisingly, given her employer) that they are, as they manage credit and develop LDI strategies while understanding that pension liabilities are un-investable and do not have default risk. “Essentially, these LDI managers recognize that outperforming a market benchmark does not necessarily mean the client has achieved success relative to their custom liability benchmark,” she says. “A customized liability benchmark holds the LDI provider accountable for performance against the client’s actual liabilities, and provides a detailed attribution which quantifies ‘un-investability’ and how the manager has added value.”

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Meanwhile, back across the pond, David Rae, the head of LDI solutions for EMEA at Russell Investments, believes we’ll see the number of providers shrink. Any future flows to LDI will to go to a concentrated number of providers, he says. “In recent years, a number of providers have entered this market to challenge the dominance of the small number of players at the top, but it is unlikely that the market can sustain all of the new entrants. The success of these new entrants will depend on their ability to offer a differentiated product and attract scale to compete with the early movers in the marketplace.”
Howard Kearns, head of LDI for EMEA at State Street Global Advisors (SSgA), also says 14 players in the market was “clearly too many.”

Predictable statement warning: The UK’s big guns believe there’s enough capacity in the LDI market, and that the need for new entrants is slim. But there may be more to their claims than just self-preservation. Mike Walsh, head of solutions distribution and management at LGIM in the UK, says pension funds need to align themselves to a manager who is in the LDI game for the long term—and that having more managers offering products could actually be detrimental for pension funds. “In addition, clients are looking to access inflation protection, and the inflation market is very much driven by supply.

Merely having more managers chasing the same inflation supply will not provide a better outcome for clients,” he adds.
Steve Aukett, director of financial solutions at Insight Investment, also believes there are enough players in the market, although he did welcome the recent influx of managers into the LDI space. Established managers have been challenged to justify their value propositions by the new competition, he says.

“A broader range of providers gives clients greater choice and a better means to assess the quality, risk, and value of different offerings,” Aukett continues. “However, new players should not underestimate the investment and level of commitment required to meet client objectives. “The effective management of operational risk, counterparty exposures, and representing clients’ interests in the move towards central clearing are just some examples of the many areas that require significant investment in both people and operational infrastructure.”

Not everyone is convinced by the less-is-more argument though. SSgA believes the market will grow, and has invested heavily in its LDI offering. Many of the smaller LDI managers also tell us that new entrants would be a welcome development to shake up the status quo.

AXA IM is one of the newest players in this space: After winning a UK public-sector client, it suffered a setback in the loss of its head of LDI to his homeland of South Africa—but a replacement is on the horizon. In the meantime, the firm is planning on expanding its LDI team in direct response to interest from its clients. “We see significant demand both in terms of the number of schemes as well as the assets under management,” said Madeline Forrester, head of UK institutional business development at the fund manager. “There is a need for new entrants and competition in the marketplace to ensure that providers offer the training, support and bespoke approach that schemes require.”

Other than dastardly consultants, what other barriers to entry are there for new providers? The fixed costs of setting up a suitably staffed derivatives trading desk, the operational infrastructure to support a derivatives business, and the necessary deal flow in the market to ensure best pricing from banks, to name but a few. Julian Lyne, head of global consultants at F&C, explains: “Entry into the LDI market will require a sustained investment for several years, partly explaining why several providers have failed in recent years to sustain their commitment to the LDI.”

Maybe there is no “perfect number” for LDI providers, but it is clear there are some additions and subtractions to come—and soon. —CT