Margaret Franklin
As an organization that sets principles and standards for the investment profession globally, the CFA Institute, which awards the Chartered Financial Analyst designation to those who pass a three-part exam, works to drive good stewardship and build trust in investible markets.
CIO recently spoke with CFA Institute President and CEO Margaret Franklin about the challenges and opportunities presented by the growing variety of alternative asset classes, the complexities they present as they occupy an increasing share of institutional portfolios, and the issues and topics investors should be considering when making decisions.
The interview that follows was edited for clarity and concision.
Margaret Franklin: I’m Marg Franklin, I’ve been in this role for five years, and prior to that, I had more than 25 years in the asset management business, always on the buy side and both institutional and private wealth.
CIO: I’m glad to have you here for this conversation.
What is the role for the CFA Institute to address governance through education and standard setting?
Franklin: I think we’ve always had that role, even where there’s been rules in place, and there are a couple things that we think about, principles around what we do.
First of all is: ‘Do you have competent qualified professionals who know what they’re doing in the marketplace?’ That makes for a better system, certainly as a baseline. So you’re right to point out that education is very important.
We have, as you well know, launched in our Level 3 [exam], people can take a pathway or specialization in private markets. We’ve launched several private market certificates. We’ve got our private equity certificate coming in. It’s got private markets and alternative investments.
We’ve got private equity and we’ll have a couple of other specializations that will come up, and that really reflects … the changing nature of the market and, specifically, with regards to private markets, that’s both increased allocations within portfolios and permanent allocations to those illiquid investments.
So I think education is one thing … and then the other is our thought leadership, which really, I think, has an effect on … really thinking about what are the complexities that the market system, the asset class and the asset structures present to investors?
So, providing that thought leadership and, where appropriate, start[ing] to think about policies, advocacy standards—some of those voluntary and some of those that we think the system should pick up—private markets have been a really light touch.
So the buyers are changing and the size of allocation is changing, and … that always draws more attention.
CIO: As they become a larger part of portfolios, are the types of investors changing?
Franklin: When you think about the levers … investors look at to make good decisions for portfolios, we will always be present in those things.
One is the basics: Do you know what you’re doing and how to do it?
Then there’s … what are the considerations that apply at this moment in time—and potentially going forward—that you need to think about?
Then what are standards that we think are appropriate, whether it’s performance or even the asset manager code, [Global Investment Performance Standards]?
I think it’s back to the essential principles on which all asset classes can run, to say, ‘Are we—as a purveyor of these sorts of these services and of these skills—doing it with the right approach or, ultimately, success to the end investor we serve?’
CIO: Is that communication just with CFA charter holders?
Franklin: We’re fairly active when it comes right into the process of what we do in comment letters; we regularly provide our views to the [U.S. Securities and Exchange Commission]. Our membership is 200,000 and covers all parts of the market, so we have a pretty broad reach there.
Then finally, we are considered an authority on many of these things. So you won’t be surprised the press will call on us, [and we] will be asked to comment and [participate in] broader public forums, conferences, those kinds of things.
CIO: Is there a way, from the CFA’s perspective, for investors to help enforce governance standards or discipline on the managers with whom they’re doing business?
Franklin: I think when you get to private markets, these tend to be very sophisticated investors, and so you afford them greater latitude because of that sophistication than you might, for instance, in the retail world. Regardless of whether they’re institutional or not, disclosures that allow for better assessment, evaluation and, ultimately, allocation are welcome, and we can see that in other bodies.
You know, most notably, if we look at [the Institutional Limited Partners Association], you see that in conversations with them and looking at their data, it correlates well with what we’re doing, and that identifies that that asymmetry of information between the GPs [general partners] and the LPs [limited partners] is significant.
The LPs would like [there] to be less of a gap between the two.
CIO: What is the most effective way for LPs to compel that kind of disclosure?
Franklin: I would say, historically, [there’s] very little in some of the best funds you really want to get into, right? You’re going to have very little opportunity to change the operations there when the markets are good.
So I think there are perhaps two factors that might present a condition for closing that gap, and [the first] is that the asset class starts to perform less than it has historically.
The second is if the client base starts to open up as a private market, funds are seeking more assets from a wider audience that might want more [disclosure.]
If [managers] really want to get at that market, and that market says, ‘Listen, we need more than this,’ I think you have an opportunity to perhaps close that gap, and that’s where I think organizations like CFA Institute, ILPA [the Institutional Limited Partners Association], Standards Board for Alternative Investments—all those kinds of groups start to [get] organized to want a better, fairer system, and … I think we are aligned that there is a standard of disclosure that is necessary to make proper decisions.
CIO: How would the CFA Institute define asset owner governance and its role in the investment market or in performance?
Franklin: Asset classes have been largely performing positively now the last 10 years. But you know what? I think what it really is, is just such common sense, which is understanding how the system works for you. What are your skills and capabilities? What resources do you have in place? What are your objectives? How do you execute that on a net-of-fees basis, and how do you build a system and measure it properly?
[The late] David Swenson, said, ‘But we can really look at these other asset classes that, for a variety of reasons, offer us a real premium.’ We know there’s a fear of missing out around private equity.
So it is caveat emptor, I think, for the investor to really understand that then you want to go back to your first principles, and that’s where Keith Ambachtsheer’s organizational alpha is critically important.
I might add, whoever that final authority is, I think it’s incredibly worthwhile to assess their skill and capability for a more complex portfolio or complex system.
CIO: What is the role of the CFA Institute?
Franklin: I think there are a number of areas where we’re really relevant and really credible.
Let me start with the credibility [to] neither extoll nor demonize private markets. We actually think they have a real role to play in the economy.
For private markets, private credit, private equity, I think the neutrality that we present from a sophisticated, but comprehensible, perspective and tapping into our members—I mean the real good comes from our ability to survey, essentially, a swath of professionals that are around the globe in all parts of the market. So we have GPs, LPs, consultants, and to be able to present those findings in a factual manner is really important.
I think, in particular, the way the private markets’ governance is so applicable and so practical and so relevant is that, first of all, the end-to-end value chain can look at that document with a common set of facts, a common understanding of how these things work.
Let’s imagine you [run a] pension plan, and you realize that you are going to be challenged for returns. You want to include private markets, so you evaluate your own resources and ‘Do we have proper due diligence capabilities? Do we have the adequate legal and investment capabilities to be able to do it in-house? Are we outsourcing it? How do we think about the disclosures, our ability to evaluate the performance?’
Let’s be honest: Private markets are not exempt from the forces that are affecting public markets: higher rates, higher inflation.
Everybody in the value chain who has some responsibility can take a look at a fact-based, structured approach to self-evaluation, appropriateness and expectation for certain asset classes within your allocation decisionmaking at a point in time and then across time.
CIO: What issues are important for institutional allocators and their boards to understand?
Franklin: Boards probably are going to need to know about [environmental, social and governance issues], climate, private markets, potentially [artificial intelligence], and they’re going to need to know that in a different way than they ever have before.
I think our rule is to say, ‘What is the unmet need where our credibility, our authority and our neutrality are valued in a system, where we’re not the exclusive place, but I think we’re a very important piece?’
The other thing I was going to say, where I think we are very important, is to use our voice on those platforms to shape the thinking policy and, where appropriate, regulatory frameworks.
CIO: What else is on your agenda for the next 12 months?
Franklin: We launched our research and policy center, and we’ve harnessed our resources and said, ‘What are the most important, most complex matters facing the industry for the profession and the institutions, whether they be regulators, firms or policymakers?’
So I’m really pleased with that, whether it’s sustainability, whether it’s the resilience of the capital markets. Then I think our AI and digital work is really interesting. We’re just launching a number of tools that investors can use to help incorporate AI into their workflows.
We’ll be doing, I think, a reasonable amount of research and thought leadership on ethics in AI. We’ve begun some of that work, where you see the nexus of merging tools and techniques or emerging asset classes and then emerging technology … the effect of AI from an ethics perspective, and maybe that’s what gets a bit to the heart of the governance conversation: You want to ensure that there is trust in the system.
I think that, [based on] the work we’ve done in private markets, one of the key principles that, I think, governs everything … is illiquidity has its own set of conditions that necessarily you have to trust more because you can’t make a decision quickly on it. You’re investing for the long term with very specific provisions that mean you are locked in.
So when you have to trust more, you think the governance should be better. And in our case, we think a lot of that has to do with disclosures on the fees, the expenses, conflicts of interest, performance, real performance and the kinds of things that can, on a net basis, be very different than what was billed.
From a policy perspective, I can certainly understand why the regulators are very concerned about the impact of private markets, and … the leverage of private credit, as it works its way into private equity, is not trivial at this.
Tags: Artificial Intelligence, CFA Institute, corporate governance, Global Investment Performance Standards, investment performance, Margaret Franklin, Private Markets