In the wake of the global financial crisis, investment management companies are either trying to revive old ways of doing business, or pushing for a complete change.
At ING Investment Management, the belief is that as asset classes increasingly correlate, diversification strategies have become outdated and a new approach is required to provide extra performance, says Jan Straatman, chief investment officer based in the Hague, the Netherlands.
He was hired in 2008 to bring a more investment-led organisation, and his method is to give the firm’s portfolio-management teams more autonomy, more accountability and prospects for greater, performance-based rewards.
The global financial crisis has posed an existential problem for money-managers. The industry has grown over the past few decades on the concept of diversification as a means to enhance the overall risk/return profile for an investor. Yet in 2008 and 2009, all risk assets converged.
Straatman says globalisation had already made this trend apparent, but the crisis made it obvious. Portfolio management, therefore, has to react by focusing as much on the risk side as on the search for returns.
The pre-crisis period of the mid-2000s also saw the ‘retailisation’ of the institutional investment world, he argues. Worldwide, asset owners grew complacent and were just as swayed by fancy new products and glossy brochures as individual investors.
The crisis not only put a halt to this, but also eroded trust in fund providers. Long-only fund managers also face renewed threats from hedge funds, which in some cases are reacting to their own losses by offering cheaper, more beta-focused products, notably structured within the Ucits code.
Large long-only players, therefore, need to affirm their ability to actively manage funds without being perceived as hugging the benchmark, and to create an environment that pushes investment teams to perform, sometimes with an absolute-return mentality.
To this end, ING IM has set up a risk and analytical platform, with one hub now based in Hong Kong. This creates a common source of research and performance diagnostics, and a proprietary pool of investment ideas for all of the firm’s portfolio-management teams.
The portfolio managers, in turn, are free to pick and choose from this internal research to create their own portfolios, based on their philosophies, risk budgets and mandates. The idea is to give the PMs plenty of autonomy, with no top-down house view that must be followed, but with market analyses consistent across strategies, asset classes, sectors and countries.
Straatman says that the Hong Kong arm of the platform has been established recently, but work remains to be done. In particular, the IT challenge is formidable as it involves connecting 33 investment offices worldwide.
ING IM’s core asset classes are long-only liquid ones, including global and regional equities, US fundamental equities, global credit including high-yield, senior bank loans, quant and emerging-market equity and debt.
The firm is looking to expand its competencies in alternatives investing. Straatman says that, unlike some rivals, ING does not want to set up a separate unit or infrastructure for people who want to just run hedge funds and make more money. He says that would result in the firm’s best talent all wanting to migrate to a new department that would only comprise a small portion of the firm’s business.
Instead, teams that have a proven ability to generate consistent alpha can be given leeway to try absolute-return strategies, and be paid accordingly. So far, the firm has given this privilege to teams involved in tactical asset allocation, foreign exchange and Latin American equities.
ING IM is also beefing up its passive investment capabilities. The firm has no intention to market itself as a passive provider and go into direct competition with the likes of BlackRock or State Street Global Advisors. But clients often want a piece of their portfolio allocated passively, or run in a highly quantitative, low-risk way.
ING’s response is to rely more on fundamental or factor-weighted indices, rather than indices based on market capitalisation. The idea is to provide “smarter” index construction in conjunction with active strategies, says Straatman.