New Mandate Assets Climb as Alternatives Take Hold

(April 30, 2014) — The amount placed by institutional investors with newly appointed asset managers has begun to climb as alternatives rise up the agenda, data from Mercer has shown.

Total assets placed by the consultant’s global clients rose 14% over 2013 to reach $60.6 billion, after hitting a 10-year low of $53 billion last year.

Placements of assets had reached almost $100 billion in 2008 and 2009, as investors hurried out of some classes amid the financial crisis.

In the US, UK, Canada, and Asia, placements all rose in 2013. In continental Europe, however, the decline in the amount of assets placed that began in 2011—after a spike upwards in 2010—continued.

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The investments chosen changed markedly last year, Mercer data showed, with international multi-asset products rocketing to second place behind the perennial favourite: global/international equity.

The number of searches for international multi-asset carried out by Mercer for its clients last year rose from 5% of the total to 7%. Emerging market equity, which took third place with 6.6% of the searches last year, remained in the same spot on the same level of activity. Emerging market debt, however, fell in popularity. The asset class accounted for just 3.3% of searches, down from 4% in 2012.

Private debt gained some fans in 2013; some 3% of searches were made to hunt out these managers, up from 1.7% in 2012. Private equity also picked up favour, with a rise from 3% of searches in 2012 to 3.7% last year.

One of the largest winners was infrastructure. Searches for managers of the asset class made up 3.6% of the 2012 total, but last year, this number grew to 5.1%, making it the sixth most demanded asset class.

A review of new book by David Iverson, head of asset allocation for New Zealand Super, on belief clarity, signs of bad governance, and uniting asset classes with risk factors.

(April 30, 2014) – If every CIO handed new trustees a copy of David Iverson’s Strategic Risk Management: A Practical Guide to Portfolio Risk Management at the door—and quizzed them on it later—the institutional universe would be a healthier place.

Another potential subtitle for the recently published work: All the Things You Should Be Watching Out For—and Probably Aren’t.

By day, Iverson serves as head of asset allocation at the NZ$25 billion (US$22 billion) New Zealand Superannuation Fund. He spent three years (two-and-half more than planned) writing the systematic 258-page primer on managing an institutional portfolio.

In his preface, Iverson suggests the book is for “a wide range of professionals, senior managers, board members, and even beneficiaries.” But it’s a stretch to imagine nearly any pensioner shelving the latest Michael Lewis—not to mention Fifty Shades of Grey—and reading into the wee hours to find out how Strategic Risk Management ends. (Spoiler alert: It’s with "Case Study Two – DC Member Investment Choice Fund.")

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Still, as any successful hedge fund or private equity manager knows, there’s plenty of market share available without pandering to the retail set. Even within the narrow world of institutional investing, Iverson’s book ought be pressed into enough hands to demand a second print run.

Risk serves as a useful frame for the ground-up guide to traditional institutional portfolio management, not as a model in itself. Readers expecting a deep dive into unadulterated risk-factor investing won’t find it here. Asset allocation models based purely on risk haven’t carried over from academia except in rare instances, largely because boards find them too abstract. Asset classes may be weak proxies of exposures, but they’re strong indexers for investments.

What’s truly new about Strategic Risk Management is Iverson’s deft overlay of risk onto the conventional asset class model. Portfolio strategies remain tangible, while conveying the mechanisms that make them work.

The book begins by detailing a hierarchy of seven risk categories acting on a fund: governance, asset allocation, timing, structural, manager, implementation, and finally monitoring risk. Iverson dedicates the next two chapters to rigorous treatments of governance risk and investment beliefs.

Perhaps drawn from the nearly four years he spent as Russell Investment’s head of consulting, the powerful section on signs of poor governance may hit close to home with some readers. Excessive reliance on consultants makes the list: “Consulting is a business. The best consultants have a reputation for looking out for the fund’s best interests, but some business models and advice lead funds to extensively diversify across many managers…requiring manager monitoring that will exceed the resources of even the largest funds… The need to periodically evaluate the consultant’s performance is a must.”

Manager selection policies mandating top-quartile performance are another red flag of poor governance, according to the book. Excessive home-country bias and avoiding indexes also make the list, receiving deeper attention in subsequent chapters.

Governance issues—as opposed to lip-service—are all too often glossed over in investment publications as authors speed to their area of expertise: investing. Strategic Risk Management demonstrates these specializations need not be exclusive.

Iverson has serious technical chops, including two finance degrees, published studies, and a stint as Goldman Sachs’ director of quantitative research in Auckland.

The book as a whole engages closely with existing literature—Iverson has certainly done his homework. He acknowledges points of contention among researchers as well as knowledge gaps, and adeptly weighs conflicting findings. The section on stock return anomalies, such as value and size effects, shows refreshing balance—a counterpoint to the majority of literature which either dismisses or avows the phenomena.

Strategic Risk Management’s fundamental conservatism steers readers towards a safety-first style of investing: funds-of-funds over direct alternatives allocations, cap-weighted indexes over smart beta, strategic asset allocation over tactical, etc. This is wise, of course, given that the book is essentially Institutional Investing 101. And as a textbook, Strategic Risk Management hits all the right notes. But as a primer for a new trustee, board member, or young hire entering an established investment operation, it could use a touch more ambition.

Iverson educates, but he doesn’t always empower.

The private equity chapter, for instance, warns, “investors can find it very difficult to access high-quality managers. Good private equity funds have no difficulty raising capital. These managers often pick their investors.” And access to these quality funds—which presumably many asset owners could only hope for—“is essential to ensuring an investor can participate in the skill of a manager.”

He’s right to caution against signing checks to second-string managers because Carlyle’s latest fund had reached its close.

But throughout the chapters on alternatives in particular, Iverson harkens back to a pre-financial crisis balance of power between general and limited partners. Top-tier managers love to laud the stable, sizeable, predictable investments made by their largest institutional clients. But even if you’re not Texas Teachers (or indeed NZ Super), they’ll probably still take your money. Furthermore, an asset owner primed to believe the big-name private equity shop has done them a favor by accepting their millions may be less inclined to negotiate fees.

It’s perhaps not surprising that the section on alternatives—just two chapters out of 18—represents the work's weakest point. Private equity accounts for only 3% of NZ Super’s portfolio, and much of that is invested with local funds. At an American institution with similar assets under management, someone in Iverson’s role would likely handle a portfolio at least five times as large.

Strategic Risk Management is a better book for the unique aspects of the author’s daytime role, however. Many funds of its size continue to struggle with legacy governance and portfolio structures. The architects of NZ Super had the opportunity to learn from history and design a second-generation institution in the early 2000s. Iverson has led its asset allocation strategy since 2010. Although direct mentions of NZ Super are conspicuously absent, its inspiration is all too clear: investment beliefs and purpose spelled out in the fund’s founding documents, a clear organizational structure, heavy reliance on indexing, and a catalogue of the risks inherent in it all.

Like the sovereign fund’s architects, Iverson had the chance to see what’s worked and pass it on, filtering out the features that haven’t. But there was one aspect of New Zealand Super that Iverson couldn’t replicate in Strategic Risk Management: The sovereign wealth fund only took two years to create.