Investment Innovations: Raising the Bar€¦ · innovation Innovation linked to business strategy and PBS C reativity Unstructur e Step changes Customer engagement 25% Ideas ‘bank’

Investment Innovations: Raising the BarNovember 2011

Jervis SmithManaging Director, Global Head of Client Executive

Global Transaction Services, Citi,

Amin RajanCEO, CREATE-Research

November 2011

Executive SummaryThis presentation summarises the results of the 2011 Create Research annual global survey that

Sponsored by Citi and Principal Global Investors

This presentation summarises the results of the 2011 Create Research annual global survey that took place in April / May 2011

Create is an independent research firm we have worked with for six years. Headed by Professor Amin Rajan.

Focusing on the last decade, the report assessed the impact of Innovation on the basis of two global surveysOne involved 108 pension plans– One involved 108 pension plans

– The other involved 396 asset managers, pension consultants, third party administrators and distributors from 30 countries

Together the surveyed firms represent a combined AUM of around US$29 trillion Together, the surveyed firms represent a combined AUM of around US$29 trillion

Survey and one-on-one interviews

Four key questions:y q– What innovations worked/ did not work, and why?– What improvements are essential?– What should the main thrust for innovations be over the next three years?– What specific actions do they call for?

1

Three Themes

1.The Scorecard: Clients have an Open Mind about Innovation

2. Challenges: Fit-for-purpose innovations requires rigorous processes and robust reality checksprocesses and robust reality checks

3. Actions: Innovations should seek to deliver ‘best endeavour’ outcomes

“There is at least one point in the history of any company when you have to change dramatically to rise to the t f l l Mi th t d t t t d li ”next performance level. Miss the moment and you start to decline”

– Andrew Grove, Former Chairman, Intel

Source: Citi/Principal/CREATE Survey 2011.2

Which Innovations Were Widely Adopted in the 2000s and who were the early pioneers?

Global equities Emerging market equities Convertible bonds

New Asset Classes Derivatives for hedging

unrewarded risks ETFs

New enhancing tools

ues

Hedging

High yield bonds Emerging market bonds Commodity funds Currency funds

Hedge funds Portable alpha Leverage Shortingon

Tec

hniq

& R

eturns-

Risk parity portfolios Real assets

Outsourcing of back office Outsourcing of distribution

New business models

US, Canada, UK, Switzerland

set A

lloca

ti-enhancing

US, UK, Holland, Australia, Singapore

LDI Distressed debt

New Asset Techniques Fiduciary management Multi-boutique models Client service models Innovation models

SRI Environment

New product themes

ses

and

As Tools and P

GTAA Age-based retirement funds Risk-based retirement funds Unconstrained mandates

Water Renewable energy Shari’ah Capital protection

T ffi iAss

et C

lass

Product The

US, EU, Switzerland

Tax efficiency

US, EU, Malaysia, Canada, Singapore

emes

US, UK, Holland, Switzerland


In the Last Decade, Which Innovations in the Three Sub Sets Delivered Most Value to Defined Benefit Pensions and Which Delivered Least Value?


Factors Influencing the Impact of Innovations

▲ St b li f th t id d

Positives

▲ St b li f th t id d▲ Strong beliefs that guided the investment choices

▲ A disciplined approach to buying and selling

▼ Over-reliance on financial engineering to extract value

▼ Herd instinct that prevented

▲ Strong beliefs that guided the investment choices

▲ A disciplined approach to buying and sellingbuying and selling

▲ Skills and governance to secure early mover advantage

buying on the dips

▼ Low engagement with their asset managers

buying and selling

▲ Skills and governance to secure early mover advantageadvantage

Negatives

advantage


Seeing What’s Next: Likely Innovations in This Decade

M hi f DC d t N t l

Disruptive New enhancing tools

Morphing of DC products Abolition of commissions Adoption of high watermark fees Data warehouses

New asset classes Risk-return trade off Risk overlays Multi boutique model Alliances


Theme 2

1.The Scorecard: Clients have an Open Mind about Innovation

2. Challenges: Fit-for-purpose innovations requires rigorous processes and robust reality checksp y

3. Actions: Innovations should seek to deliver ‘best endeavour’ toutcomes

“Which asset managers can claim Apple’s historic run of successes?” A I t i Q t– An Interview Quote


Overall, Do You Think That Further Product Innovation Will Deliver Genuine Value To End-clients Over the Next 3 Years?

Asset Manager’s Responses Pension Plan’s Responses


Global Exemplar

The Shell approach: Picking the stars and weeding out the dogs fair and fast.

DeliverPortfolio of Products

Entre

pren

euria

l D

irect

ive

DesignPortfolio of Prototypes

Een

t

EvaluatePortfolio of ExperimentsM

anag

emS

tyle

ExplorePortfolio of Ideas

hM

High: Numerous ideas Low: Proof of ConceptRisk of Failure

Ligh

tTo

uch

Source: Citi/Principal/CREATE Survey 2011.

10

Lesson 1

Choose the right tools to deliver a culture of innovation.

Nature of InnovationCustomer-driven Culture-driven Deliver value to clients

Alignment of interests

Incremental changes

Step changes

Nature of Innovation Breaking the current

boundaries on new products,geographies & customers

Metrics on new boundaries

Customer driven Strong business values on

innovation

Innovation linked to business strategy and PBS

Culture driven

Cre

ativ

ityU

nstructure

Step changes Customer engagement

25%

Ideas ‘bank’

40%

Pro

voke

d C ed C

reativity Challenges framed for virtual t

Systems-driven Virtual boutiques

Talent-driven Ring fenced innovation

it

R&D-driven

yteams

Fast track process

Dedicated resource

Thought leadership

Individual accountability

unit

‘White space’ for free thinkers

Fund incubators

15% 70%5%

Eureka CreativityEureka Creativity


Theme 3

1. The Scorecard: Clients have an Open Mind about Innovation

2. Challenges: Fit-for-purpose innovations requires rigorous processes and robust reality checks

3. Actions: Innovations should seek to deliver ‘best endeavour’ outcomes

“For most of the last decade, asset managers spent a lot of time worrying about almost everything but th i t ”their customers.”

– An Interview Quote


What Innovations do Clients Want in the 2010s?

Trade Offs

How can our products deliver more returns forInvestment Emerging more returns for

less risk?Investment

FocusDo we use our core

capabilities and eschew bells &

whistles overlays?

MarketsDo we have a clear

strategy to exploit their investment dynamism

and market t iti ?

Bu

Best endeavouroutcomes via:

• Product integrity• Process integrity

y

Risk OverlayDo we know how to

Operational ExcellenceDo we use our

opportunities?

nnov

atio

nsiness M

od

• Process integrity• Business resilience• Operational excellence• Alignment of interest

mobilise our intellectual capital to

generate insights and foresight?

third party administrators as innovation

partners?

Pro

duct

Indel Innovati

Retirement Solutions

How do we capitalise on ageing

demographics?

Innovation Tools

Service Models

Do we know our clients’ dreams and

?

on

demographics?How do we

capture, evaluate and

implement new ideas?

nightmares?


1. Engagement

How often have your asset managers involved you when innovating the products that you buy from them?

Pension Plans’ ResponsesPension Plans Responses

Alpha Seekers Want Strategic Partnership

Returns Seekers Want Arms Length Vendors

Advice Seekers Want Expert Hand-holders


2. Bottom Line

Which of the following fund product features will need to improve most over the next 3 years?


3. Retirement Products

What kind of retirement solutions do clients need in the DC market?

Pre-retirement Phase

A pragmatic risk profile with periodic switches between equities and bonds

Post-retirement Phase

Part of the accumulated pension pot to be used to buy an annuity

in both directions

Some investment in deferred annuity

Protection against big market events

Remaining pot to be reinvested to deliver an income draw down

Life insurance

Accumulated gains ring-fenced over time to permit liability matching

Health insurance

Residual wealth transfer on death


4. Core CapabilityIn the next wave of innovation how do clients in different jurisdictions want their asset managers to focus on theirIn the next wave of innovation, how do clients in different jurisdictions want their asset managers to focus on their core capabilities?

Leveraged Funds (e.g. Hedge Funds) Alternatives

exc. Hedge Funds Absolute

Returns Over Cash Benchmarks

Alpha(Uncorrelated

Absolute Returns)

US

USUKNetherlands Benchmarks

Total ReturnsOver Market Benchmarks

Complex Regulated F d ( N i )

USEU

CanadaEUAustralia US

EUCanadaJapanChinaI di

NetherlandsScandinaviaJapan

Funds (e.g. Newcits)

Regulated Mutual Funds

JapanAustraliaLatamIndiaChinaSingapore

EUAsiaLatam

IndiaSouth KoreaMalaysia

Passives; ETFs

USJ

USEUAsiaLatamKey Driver: Best Talent Utilisation Asset Gathering

Fees: High Low

R t

Key Focus: High Returns Market Returns

Client Needs

VariableL Di i

Modest Excess Returns

Business Model:

Market Correlation: R2=1

JapanChinaEUAustraliaIndia

Returns: High Dispersion Zero Dispersion

Scalability: Low High

Operating Model: Single Boutique Integrated Houses

Low Dispersion

Variable

Multi Boutiques


5. Risk Overlay

How risk models need an overlay of human judgement and individual incentives?

Foresight“You’re fired, if you fail

to hit your target”• A qualitative risk overlay provided

by experienced professionals and d i ki ti lik

Insightsadvisors asking questions like– Who will turn us into

forced sellers?– What’s the risk that clients

could lose capital?

Explicit Knowledge

“You’re rewarded, if you

Informationexceed your target”

Risk models and quants

Data


6. Asset Servicers as Innovation Partners

What will be different about asset servicers’ approaches to innovation over the next 3 years?


Conclusions

Client engagement and alignment is keyClient engagement and alignment is key

Simplicity and value for money

Best endeavours and focus on outcomes

Risk is front and centre of investors’ thoughts

Environment of TalentEnvironment of Talent

Avoid ‘hobbies’

Any questions?

How Are YOU Tackling Innovation?

Who leads innovation in your firm? Who leads innovation in your firm?

How are the effects measured?

How is innovation encouraged?

What do you think is the area of your y ybusiness which will be most impacted by innovation in next five years?

Where will it come from: Clients, Products, or Operations?

How will regulation affect the pace of innovation?

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Investment Innovations: Raising the Bar€¦ · innovation Innovation linked to business strategy and PBS C reativity Unstructur e Step changes Customer engagement 25% Ideas ‘bank’