In part 2 of this InsuranceERM/bfinance roundtable, participants discuss their approaches to managing assets in-house and using external asset managers
Hugo Coelho, assistant editor, InsuranceERM
Anisha Gangwani, head of illiquid investments, Direct Line Group
Chris Jones, head of investment advisory, bfinance
James Kenney, investment and capital actuary, Novae
Alexandra Martinez, director, bfinance
Gareth Quantrill, group investment manager, RSA
Samit Shah, chief risk officer, Atrium
Achilles Sofroniou, senior portfolio strategist, Canopius
Rob Vetch, chief financial officer, W. R. Berkley Syndicate
Derek Williams, managing director, private markets, bfinance
Chaired by Christopher Cundy, contributing editor, InsuranceERM
Chris Cundy: What is your approach to outsourcing asset management? Do you outsource everything? What is not outsourced? How do you reach that decision?
James Kenney: We outsource everything below strategic decisions in order to make the most of the breadth and depth of the expertise of our asset manager. That is the background common to most general insurers of our size: they are not in the investment business, so outsourcing such a complex operation makes a lot of sense.
Achilles Sofroniou: Most of our assets are outsourced, but we are trying to bring in-house the decision of where to allocate in terms of very broad asset classes. This will help the communication and alignment of interest between the stakeholders: managers could do their job better if they understood their position within the overall portfolio.
Rob Vetch: We are in-sourced, because this is a fundamental principle and core activity within our group. The key expertise and decision making for investment management remains in-house at our group.
Chris Cundy: Do you have issues with external managers understanding their position within the overall portfolio?
Derek Williams: Everyone is learning through this process. If you allocate to a typical corporate direct lending manager in Europe, they will not necessarily fully understand where you are coming from. You have to build-in the information flow and transparency so that you are equipped to manage your portfolio.
Gareth Quantrill: For all the arguments that one could do many things more effectively in-house, there is the reverse argument that if you build in-house resources you continue to allocate to something just because you have got in-house expertise in an asset class, not because it is the optimal allocation. For most illiquids, it is about origination of the asset, not the access to the alpha. But I may not want the asset in two years' time, and therefore I do not want to be hiring and firing people.
Samit Shah: If you were to try and do it in-house, there are no guarantees that you will be able to do it better.
"Whether you are in-sourced or outsourced... you need trust, openness and effective communication lines"
Anisha Gangwani: We take the asset allocation decisions in-house, but then everything is managed externally except for liquidity, gilts and very-high-grade credit portfolios.
For core fixed-income portfolios, alpha is a key question. If an external manager is not able to add any alpha, then we could consider converting the mandates to passive with credit oversight and possibly even bring in-house.
Illiquid assets are a different ball game. They are a small part of the portfolio and it's better to outsource to somebody who has already got the expertise and infrastructure, and is well connected in the market to source these assets.
Hugo Coelho: Is there any asset class within the illiquid space where you would feel comfortable building up your skill set?
Anisha Gangwani: We might be able to manage them with additional resources, because we do have a good understanding of how they work. But to be able to source them is a different matter.
What to look for in an investment manager
Chris Cundy: If you have decided that you want to outsource your investments, what are the most important things that you require from your outsourced investment manager?
Rob Vetch: Whether you are in-sourced or outsourced, I believe that the same remains true: you need trust, openness and effective communication lines. You are entrusting your asset manager with a significant level of assets and responsibility, so you want someone you can work with as a true business partner to discuss with and chew ideas over, before taking opportunities to the board for review and consideration.
Achilles Sofroniou: It is critical for us to understand their investment process. They can be either bottom-up or top-down. A lot of people say they are bottom-up but, in reality, if something happens in the markets, they are all going to get wiped out at the same time. So understanding what the macro drivers are is critical, as is seeing how that macro is implemented in the portfolio.
Anisha Gangwani: We have had a couple of 'beauty parades'. It is a very detailed process, understanding the firm, how capable the people are, whether they are willing to work with you. If they have worked with other insurance firms, and accommodated all the requests insurers have around things like Solvency II reporting, it is a plus.
Chris Jones: Fit is important. People ask, 'What is the best manager?' That is just an ill-posed question, because if you ask 100 people, you will get 100 different answers. You need to ask 'which is the best manager for me?' From portfolio to portfolio, and from governance framework to governance framework, that could be a very different manager in each case.
Anisha Gangwani: Past performance is not a guarantee of future performance, but then again, a track record does help when you want to show the investment committee the manager has proven expertise.
"I always look for evidence that [asset managers] have experienced something going wrong"
Gareth Quantrill: We are not buying alpha, we just want beta, so the key thing for me is whether I can find good origination. Once I have the assets, we need to ensure that we mitigate manager risk; can I can get rid of them, if necessary and can I get someone else to service the assets if they are not there. If I have got those two bits and I have scored the origination, then I am done.
But you have to do your due diligence. Sometimes there are clauses where removal of the manager, with or without cause, requires an accelerated sale of the assets. That is exactly what we do not want.
Importance of track record
Chris Cundy: If past performance is no guide to the future, how important is it, when you are looking for an external asset manager, to consider their track record?
Derek Williams: Some asset classes are so young there is hardly any track record. For direct corporate lending in Europe, if you get three years track record you are doing well. So you have to get into the deals to understand what they are doing and consider their capabilities. The operational platform is not the most glamorous part of running a fund manager, but the risk controls, and hence the governance and the transparency with investors, depends on that operational setup.
Rob Vetch: Past performance allows a potential to get a foot in the door, and then it's down to the decision-makers on the board to adopt a balanced scorecard approach. Look at all the quantitative and non-quantitative factors about your selected shortlist of managers. That is why you eventually do the deal with the one that you think you trust and can work with – and ultimately can provide you with the best value outcome.
Gareth Quantrill: I always look for evidence that they have experienced something going wrong, because turning up with an unblemished credit record is not really very useful. Can they demonstrate they can manage the cradle-to-grave of a position? There are not many managers who can do that.
Derek Williams: Their personal track record is important. Workout experience, either at their current firm or at a prior firm, is a positive.
One or several managers?
Chris Cundy: We have discussed how it is useful for an asset manager to understand the context within which they are operating in the portfolio. Does that point to favouring just one external asset manager, or is it useful to have several?
Achilles Sofroniou: It depends on the asset class. For some, having exposure to several asset managers helps; others, not so much. There is the question of fees, as well. With more managers, the mandates will be smaller, but you might end up having more 'fee per pound', if you want to call it that.
James Kenney: We have a sole manager because our investment strategy is relatively straightforward and beta-focused. We get the benefits of scale through competitive fees and we get to build a partnership. Even if we had split across just two managers, we would not have been able to get as holistic a solution. For example, before, when we had four managers, we were holding more cash than we needed to, because the managers all needed to have a degree of cash in their portfolio. That said, if you are looking for more specialist expertise, one manager is not going to be able to do absolutely everything.
Samit Shah: It is also easier to build up trust when you only have one manager, and they understand a lot better what you are looking for in the overall scheme of things.
Anisha Gangwani: We are quite the opposite. We have a different manager for each asset class and several for fixed income, which is a large part of our portfolio. And while that could cost a bit more, there can be some benefit because it is good to see two different views.
Chris Cundy: Do you find asset managers generally understand what insurers want?
Anisha Gangwani: That is one of the key criteria when we evaluate them. They should be able to understand the quirks in the requirements of insurers.
Achilles Sofroniou: Solvency II has put a lot of pressure on managers to up their game in terms of operational reporting, especially with the securitisation issue. From my experience, some managers have the ability, and some do not.
Part 1 of this roundtable can be read here