“Solutions” is a buzzword that just isn’t going away. Many investment managers claim to offer solutions. Recent fund manager surveys suggest that in order to survive, managers need to excel in at least one of three areas: passive investing and indexation, alternatives— and solutions.
In a recent report, “The Asset Management Industry: Outcomes Are the New Alpha,” consulting firm McKinsey & Co. wrote that institutional pension fund investors are “seeking outcome-orientated solutions as they attempt to cope with worsening plan deficits and funding volatility management.”
We know that pension funds are struggling to close their funding gap. These funds are also now acknowledging that tinkering around the edges of existing asset allocations isn’t having the desired effect. In our latest analysis, the J.P. Morgan Asset Management 2015 “Long-Term Capital Market Return Assumptions,” we show that the lowered current expected returns across capital markets is not a midcycle phenomenon. Rather, it is a structural change: Investors should expect a 6 percent rate of return from an equity-oriented traditional strategic asset allocation portfolio. This stands in sharp contrast to the magic 8 percent many investors have previously expected and experienced. Other investors, like insurers, are also grappling with this era of lower expected investment returns.
As a result, many institutional investors want their investment manager to look at the bigger picture. They are increasingly presenting their investment manager with the challenges they face, expressed in their own technical language, with an expectation that the manager is able to translate these challenges into investment solutions that straddle asset classes. To McKinsey & Co.’s point, this is where investment managers that are forward-thinking, intuitive and determined to make themselves a client’s first call will win. Ultimately, success in solutions is about deploying deep subject matter experts in key client segments such as insurance, pensions and retirement to engage with clients.
If that sounds simple, it’s not. There are many dimensions to any given client solution. These all need to be carefully calibrated and translated in the investment engine room. In any specific client segment, an investment manager needs to have a true understanding of, among other things, tolerance of multiple types of risk, the investor’s time frames, the factors driving the fund’s liabilities and the associated regulatory environment. In addition, a solutions manager must also understand how the interplay between these factors may change over time and through differing market conditions.
The solutions drama is being played out in a number of markets. It is no surprise that the U.S. defined contribution target-date fund market — the solutions market for defined contribution investors — has grown more than 100 percent in the five years leading to 2013. We are also starting to see this trend in the U.K., where a rapidly growing defined contribution market is turning to target-date funds as offering improved outcomes for default fund investors.
Aside from pensions, sovereign wealth funds and endowments are also finding that partnering with an investment manager that offers more than just products can afford access to a deep bench of investment experience and expertise. We expect this trend to persist in this part of the institutional market as these investors continue to grow in size and sophistication. Against a background of growing capital to put to work, increasingly in alternative asset classes, sovereign wealth funds are challenging the traditional investment routes and looking to develop closer partnerships with investment managers via coinvestment opportunities and access to direct investments.
One piece of feedback I regularly receive is that delivering solutions is going to be more expensive. I agree. But that’s the point. This type of virtuous relationship between investor and manager shouldn’t be about cost. I believe this is how asset managers now need to approach client relationships. Does that mean managers have to work harder for their lunch? Probably, but it means stronger and deeper relationships with clients, which in my book can only be a good thing.
“Solutions” appears to be a so-called fad that might be here to stay. Perhaps we therefore shouldn’t call it a buzzword anymore. Perhaps a more collaborative relationship with clients based around their needs and their outcomes is the new shape of investment management. About time!
Mike O’Brien is co-head of global solutions and CEO for EMEA at J.P. Morgan Asset Management in London.
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