DDIY: Don’t Do It Yourself | Chief Investment Officer

CIO216-Article-Image-Nick-Reeves_ALT It pays to delegate.

Take my latest house move. (Yes, latest: that’s London property prices for you. A van-hire firm’s dream.)

I could have hired the van, driven, loaded, unloaded, unpacked, and arranged everything myself. Masculine pride and an intense dislike of spending money told me it was doable. A quick look in the mirror reminded me I’m not a bodybuilder.

Solution: Rope in father and younger sister. Two more sets of hands at no extra cost.

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But delegating also costs.

In my case, having younger sister unpack the kitchen meant several days of working out where everything ended up. Of course the table mats were in the fourth drawer to the right, under two empty drawers. Older siblings obviously know nothing of how these things should work.

For asset owners, choosing to delegate is a much less trivial decision. Handing mandates to asset managers is a part of everyday life for a CIO—and it involves giving up a degree of control. Even more so when selecting a fiduciary manager or outsourced-CIO. Why spend that extra money?

I’d imagine CIOs would hate the idea of delegating both asset selection and allocation to a third party. The overwhelming trend among the largest funds in the world has been to insource, to staff up, and to take complete control.

And yet… Multi-asset funds are on the rise. Some of the biggest managers in the world are pushing forms of multi-asset. Add in fiduciary management and risk parity, and the sector is massive.

In this edition we look at control. Our cover story asks if multi-asset providers can persuade the control freaks out there that these products can play a meaningful role in multi-billion euro portfolios. Or whether using it is the CIO’s equivalent of ‘phoning it in.’

Mark Thompson, CIO of HSBC’s UK pension, retains control in a different way, turning his £23 billion ($33 billion) defined benefit portfolio into effectively an in-house annuity provider. Sorry, insurers, but you ain’t getting any.

Finally, our columnist Gina Miller wants the industry to take control of the gender gap issue once and for all.

Whether you’re a control freak or a delegator, this issue should give you an idea or two to help (or challenge) this mindset. Just make sure you know where the table mats are.

Measuring returns relative to the risk taken may be inadequate and often misused in evaluating investments, asset classes, and managers, according to Aon Hewitt.

Risk-adjusted return metrics, including Sharpe ratios, “can only do so much and should be used along with other tools,” argued consultant Bob Penter.

While many risk-adjusted return measures aim to equate units of return to units of risk, this definition often goes against investment objectives of real return achieved by the investor, he continued.

“A high Sharpe ratio is inadequate if the returns are too low,” Penter wrote in a blog post. “Stated differently, you can’t ‘eat’ a Sharpe ratio.”

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Risk-adjusted returns also focus on annual or annualized returns, contrary to institutional investors’ long-term time horizons.

In addition, Penter wrote Sharpe ratios could lead to distorted comparisons of equities or hedge fund managers because they give credit to managers that reduce the portfolio’s market risk.

“An investor searching for a large cap US equity manager, for example, already has made an explicit choice to take on the risk associated with that asset class,” he said. “The investor has already allocated its risk budget to account for the market risk.”

The consultant also argued that while risk-adjusted returns for an asset or manager may look good on a standalone basis, the result is like to change in the context of a broader portfolio.

For example, a risk-oriented manager who has a Sharpe ratio of 0.32 may appear superior to the return-oriented manager with a Sharpe Ratio of 0.26. However, in a balanced portfolio with public equities and bonds, the return-oriented manager delivered a 0.4 Sharpe ratio, compared to the risk-oriented manager’s 0.37.

“The impact of two investments on the portfolio risk may be very different,” the consultant concluded, “depending on the other assets in the portfolio and the correlations of returns.”