Those wanting to achieve professional satisfaction as an asset allocator ought to head for establishment corporate America, according to II research.
Two camps emerged out of the hundreds of global allocators the Institutional Investor Network (IIN) polled in late 2016: Confident corporates, and everyone else. The land of frozen defined benefit plans, asset-liability matching, and long bonds is also home to, by IIN’s measures, the happiest group of asset owners working today. These leaders viewed positively the trajectory of their teams, managers, portfolios, and mission, and overall said they felt on track. Peers at endowments, foundations, and public pensions, in contrast, broadly saw their managers as overpaid and their goals as unreachable.
Respondents’ own projected rate of return versus their funds’ official outlook illustrated this divide perhaps the most strikingly. Corporate asset owners expected 5.5 percent annual gains over the medium-to-long term. Their institutions assumed precisely the same: 5.5 percent. Five corporate defined benefit fund CIOs and senior investment staffers told II that this alignment of performance expectation contributed greatly to their overall sense of confidence.
“My gut would tell me that corporate plans have probably reduced their return expectations more than those other two groups have, primarily because we have to look hard at it all the time,” said one longtime Fortune 500-company CIO. “There’s a rigorous process that corporates go through to forecast what their returns will be at year-end, and I don’t know if that goes on for other kinds of investors.
“The only thing I tell my CFO is that the number I give him is wrong. But we do know the risk-free rates, then build on a risk premium for corporate bonds, alternatives, and equities. When you start with that lower base, the final number is going to be lower.”
Among investors at public pensions and non-profits, their personal views diverged starkly with those of their employers. Public funds’ official rate averaged 6.1 percent, according to survey respondents, whereas their own staff foresaw 5.3 percent gains — a gap of 80 basis points. The anticipated shortfall among endowments and foundations was worse: institutions expected 6.2 percent, to respondents’ 5.2 percent.
The freedom to set their mission and execute on it proved another characteristic of satisfied allocators — ad one that in some cases helped these corporations reach their performance goals as well. As insurance CIO Aaron Diefenthaler (RLI Corp.) described, “2016 was an excellent year for us: We outperformed our benchmark by well over 100 basis points, which is pretty rare for a fixed income-dominant strategy. As a firm RLI is primarily focused on underwriting for a profit before taking into account gains from investments.”
It showed in Illinois-based RLI’s combined ratio — indicative of the margin per unit of revenue — which has been under 100 for the last 21 years. “This gives us tremendous flexibility on the asset side of our balance sheet,” Diefenthaler said.
Finally, peer-to-peer competition — or lack thereof — also makes the working life of a corporate CIO more pleasant than in other institutional branches, these sources speculated. Jonathan Glidden, Delta Air Lines’ managing director for pensions, spoke from experience.
“I spent time at Emory University’s endowment, and on that side, it’s all about what the absolute number looks like,” he said. “There is no doubt that there is more peer sensitivity. I’m generally in favor of competition, but I like the fact that at Delta our objectives are more independent, so we can do things with the portfolio that are a little bit different. Delta’s outcome-oriented approach requires a different kind of investment solution. If we trail peers who have meaningfully different objectives for a few years, it’s not going to cause the dismantling of an otherwise well thought-out plan.”
Nor will it cause the exit of an otherwise happy investment team.
