Recent socio-political events and instability on a global scale as well as the unprecedented speed at which information is reaching our fingertips are fundamentally changing the rules of engagement in the investment landscape.

Investors will continue to seek reward for taking on uncertainty to their capital, and it’s clear that they will be kept on their toes as they become confronted by risks that may not have been fully considered in the past, or are pushed to challenge their status quo for managing money. 

 These factors have also increased pressure to protect capital while creating real returns. Suboptimal investment arrangements can lead to eroded returns and the failure to capture market opportunities. By keeping these challenges in mind, investment committees can put themselves in an optimal position to generate returns even in a low-yield environment.  Getting to that ideal position is part of the success of your approach to governing your investment processes.

A journey rather than a single project, investment governance and its framework should be built around several aspects, including:

  • Clearly articulating the asset owner’s beliefs and objectives
  • Objectively reviewing the skills and strength of the decision-making committee and comparing those to governance requirements
  • Ensuring a sensible balance between asset class (which is more strategic) and product (which is about execution) discussions
  • Building a framework to ensure speed of investment execution is appropriate
  • Committing to ongoing oversight to independently reassess the operating framework
  • Identifying improvements along the way

Until relatively recently, simply being invested in the “market” was sufficient to earn a decent investment return, with the attractiveness of cash dwindling from cuts in interest rates.  But, looking ahead, the consensus on returns for most assets is significantly lower than it has been for the last 10 years.   

 Improvement to expectations of current investment returns can be achieved in a number of ways, including additional asset classes, more dynamic portfolio management and active management in less efficient segments of the market.

Increased Complexity of Investment Options

In an increasingly volatile market, and with the two significant Western political events of 2016 (Brexit and Donald Trump’s presidential victory) moving markets in a manner that is difficult to predict, there has been an increased focus on and acceptance of more complex investment solutions to address the challenges of the low-yield environment.
Allocations to alternatives, both liquid (such as hedge funds) and less liquid (such as private equity and private debt), have materially increased, both globally and amongst Asia’s investors. Although these allocations are appropriate for some institutional investors, they have their own unique challenges, including the need for more in-depth investment and operational due diligence, as well as administrative implications (such as dealing with capital calls and distributions for private market investments). Those who take on this exposure find that their portfolios benefit from this diversification over a number of funds and vintages. 

Hooman Kaveh, global chief investment officer for Mercer (pictured above), said: “We are seeing investors turning to private market investments such as private equity, private debt, infrastructure and real estate more and more to improve the returns on their portfolios as well as diversifying market volatility. Outsourcing the additional pressures through an OCIO approach provides an efficient and cost-effective way of implementing private market investments in their portfolios.”

Reassessment of Internal Versus External Implementation

In an environment of low expected returns, cost and expense management is an increasing focus for many of our clients. A thorough review considers the cost and time expense of internal resources, such as legal and compliance; investment reporting and operational resources; investment and risk; and third-party expenses, such as investment manager fees.

Co-mingling assets provides much greater purchasing power, although it must be weighed against internal guidelines and requirements around control.  Combined with an efficient implementation solution, investors can significantly reduce costs, lower volatility and improve the overall investment outcome.

By distributing the burden of investment activities to third parties, investors can tap into specialist expertise around implementation of new ideas or investment philosophies, more notably around ESG integration. Over time, we expect that investors will govern their investments to involve more delegation to gain advantages in an increasingly competitive environment.