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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
Source: Citi/Principal/CREATE Survey 2011.3
In the Last Decade, Which Innovations in the Three Sub Sets Delivered Most Value to Defined Benefit Pensions and Which Delivered Least Value?
Source: Citi/Principal/CREATE Survey 2011.4
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
Source: Citi/Principal/CREATE Survey 2011.5
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
Source: Citi/Principal/CREATE Survey 2011.6
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
Source: Citi/Principal/CREATE Survey 2011.7
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
Source: Citi/Principal/CREATE Survey 2011.9
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
Source: Citi/Principal/CREATE Survey 2011.11
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
Source: Citi/Principal/CREATE Survey 2011.12
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?
Source: Citi/Principal/CREATE Survey 2011.13
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
Source: Citi/Principal/CREATE Survey 2011.14
2. Bottom Line
Which of the following fund product features will need to improve most over the next 3 years?
Source: Citi/Principal/CREATE Survey 2011.15
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
Source: Citi/Principal/CREATE Survey 2011.16
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
Source: Citi/Principal/CREATE Survey 2011.17
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
Source: Citi/Principal/CREATE Survey 2011.18
6. Asset Servicers as Innovation Partners
What will be different about asset servicers’ approaches to innovation over the next 3 years?
Source: Citi/Principal/CREATE Survey 2011.19
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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