Are Insurance Funds the Next Leap for Asset Management?

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Defined benefit pension funds are on the wane, with many of them bringing their investment capability in–house. Sovereign wealth funds are notoriously hard nuts to crack. Endowments and foundations have plenty of their own ideas. So where are the next asset mandates going to come from?

This question is bouncing around the financial hubs of Europe and the United States and, increasingly, there seems to be just one answer: “Insurance companies. We are all after insurance company mandates,” said a friend who works for a large asset manager in London. “If you can talk to the guys who control these assets, you will get fund managers lining up to talk to you.” It seems he is right. Over the past year or so, there has been a secular shift towards the industry that has been mostly self-contained, at least as far as its investment management is concerned.

Just over a year ago, consulting firm Aon Hewitt, which already had strong ties to insurance, announced it was strengthening its insurance investment consulting practice and moving several of its pension professionals to work in it. Most other major consulting firms have followed suit.

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Asset managers, which had previously focused on pensions, private banking, and wealth management, have been beefing up their insurance teams. Time was that only the largest fund houses, BlackRock and Deutsche Bank for example, touted their wares to insurance clients. Now all the major firms in Europe have insurance delegations, if not outright dedicated departments. American firms are following suit.

It is not surprising, considering the numbers. Last year, global insurance assets hit $24.6 trillion, just behind mutual funds with $24.7 trillion and pension assets with $29.9 trillion, according to data monitor TheCityUK. Of course, they have not sprung up overnight—the insurance sector has had trillions in its coffers for decades—so why have asset managers only just started to catch on? Put simply: regulation.

There is a saying in the north of England: It is an ill wind that blows no one any good. In regular English, this means something must be really bad for no one to benefit—and Solvency II, the incoming strict set of rules for the insurance industry, may have dealt an ace to asset managers.

Robert Talbut, Chief Investment Officer at Royal London Asset Management and chairman of the Investment Committee of the Association of British Insurers (ABI), said, “Many people will observe that regulatory pressures on their capital position are getting greater and some insurers are going to have to look at asset management and decide whether it is core to their business or instead whether it could be done elsewhere.”

He continued, “Although it’s more talk than action at the moment, it is not going to go away. Taking a five-year view, there will be a number of insurers that exit partly or completely from the asset management business.” Royal London is an insurance company with an asset management company that manages its own, other insurers’, and other institutional client assets, totalling about £43 billion.

“We have positioned ourselves, through our systems and expertise, to be able to take on other insurers’ assets. Along with capital positions to consider, regulatory pressure is forcing insurers to consider whether their in-house set up is good enough,” Talbut said. “Rules from financial regulators on complex financial instruments and derivatives will also pile the pressure—and costs—on insurance companies,” he added. In this regard, asset managers are already set up to cope, or at least are on the way to getting there. It is their business to be up-to-speed on the latest in sophisticated rule-abiding. Managing assets for one set of liabilities is just like doing it for another, right?

Wrong.

Talbut said, “When asset managers look at insurance assets, they find these assests are much more complex than what they are used to. For example, reporting requirements are a lot more detailed; insurers need to report a lot more granular information to regulators and others, which other investors don’t have to do. The mandates are a lot more complex and demanding than they would get from a traditional client.” But that means they can charge more, right?

Wrong again.

Insurers are generally competitive in their pricing and already have the systems in place to process these assets—just as Royal London does. And these businesses are scalable. Asset management companies breaking into this market would have to compete as well and as cheaply as those already there, and it seems this money is sticky. Traditional asset managers should also be careful that the trend stops there. If insurance companies can cope with technical investment mandates, a pension or SWF mandate should be no problem. Friends Life announced last November that it was creating an in-house asset manager, Friends Life Investments, which is set to launch in July. And it is likely it will not be the only one to do so. The industry needs only a few more of these and the poachers of insurance assets may soon turn into gamekeepers—forced to expend energy at just retaining what they already have.

—Elizabeth Pfeuti

From aiCIO Magazine's April Issue: The transition among chief investment officers from the corporate and public pension space into the endowment world are increasingly numerous as the strains within the pension arena intensify.

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It may be hyperbole, but it is common: outside commentators, media included, often perceive institutional investing as a variant of grade-school hierarchy. If public pensions are the shy, financially strapped high school student, corporate pensions are the overachieving nerd—always a step ahead of their public pension counterpart, slightly quicker in grasping concepts, more innovative and…funnier. Endowments and foundations are even more admired in this misguided analogy: they’d be considered the smart and driven jock, thriving both physically and mentally. Everything they do is filled with gusto and excitement, attracting contempt, jealousy, and awe among those who want to emulate them.

While this perception is far-fetched and superficial, it’s a perception that sheds light on some of the reasons that chief investment officers at public and private schemes are aiming to flee into the nonprofit world.

It’s also a trend that doesn’t come as much of a surprise, given the lure of compensation. “It is becoming more difficult for the public sector to compete for talent as the demand for investment professionals with multi-asset class experience continues to grow,” Lee Partridge, San Diego County Employees Retirement Association’s (SDCERA) outsourced portfolio strategist and CIO at Salient Partners, told aiCIO last year. In February, for example, Shawn Wischmeier, CIO of the $72 billion North Carolina Retirement System for just 19 months, resigned to become the CIO of the Margaret A. Cargill Philanthropies in Minnesota, nearly doubling his salary.

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Other examples of the transition from the corporate and public pension space into the endowment world are numerous.

In March, Eric Henry, CIO for the $55 billion UAW Retiree Medical Benefits Trust in Michigan, was hired as CEO and CIO of the Hershey Trust Company in Hershey, Pennsylvania, which invests about $8.5 billion of charitable capital. Henry’s 2010 salary in Michigan: $499,332. The Hershey job paid the previous CIO $948,424, and Henry’s salary was presumed to be similar to or more than that, according to Charles Skorina, a CIO search provider. Meanwhile, Peter Gilbert, who oversaw investments and policy for the Pennsylvania State Employees’ Retirement System for 14 years, was named CIO for Lehigh University’s Endowment Fund in 2007. In June 2009, the University of Chicago named Boeing’s CIO Mark Schmid as its new chief investment officer.

Besides the obvious attraction of a higher paycheck, another lure of the endowment and foundation arena is investing freedom. “When I was working at Wilshire managing $50 billion, it just wasn’t as much fun,” said Jim Dunn of Wake Forest University. “Managing an endowment is not a spectator sport. Endowments that are inactive are the ones that don’t do well. You don’t want to be complacent with strategies and managers. Within endowments, if you set ambitious goals and hire good people, you can do great things.” He added, “I’ll be at Wake Forest for as long as they’ll have me.”

Dunn’s comments help paint a more concrete picture of the factors driving the CIO exodus into the foundation and endowment space—largely attributable to the opportunity of managing a more diverse portfolio. “If you look at pure performance over the long-term, endowments have outperformed public and corporate plans. They have less of a need for immediate liquidity, so they can be more flexible,” said Pete Keliuotis, managing director of San Francisco-based consulting firm Strategic Investment Solutions.

“I’ve talked with so many CIOs, and this trend has become more obvious,” said Heather Myers, Managing Director, Non-Profits, at Russell Investments. Myers noted that as defined benefit plans continue to be shut down and public plan CIOs are limited by intense political pressure, investors may see “more opportunity to spread their wings in the endowment and foundation space.” Myers added that many corporate CIOs have increasingly felt restricted with the increased use of liability-driven investing dominating. On the other hand, according to Myers, the nonprofit world of endowments and foundations remains a relatively cloistered one. “It has become more challenging to become a nonprofit CIO without prior nonprofit investment management experience,” therefore making it more difficult to transition from the public and corporate spaces.

When asked about the reasons for CIO turnover, industry sources cited political pressure as a “big factor” for the perceived distaste for the public, and to a lesser extent corporate, pension space. The familiar reasoning is that in the nonprofit worlds, investment committees are generally more knowledgeable and there’s less bureaucracy. Example: “I got a call a couple of weeks ago from a public pension fund CIO,” Skorina said. “He gets a call once a week from a local state congressman demanding he steer public pension money into a specific investment.”

Perhaps, then, the metaphor needs to be altered: The shy high school student/public pension has all the skills of its nerdy and athletic peers, but its parents—political appointees and realities—are limiting their ability to show it. —Paula Vasan