Innovation. It continues to be a hot topic for all investing categories. OCIO is no different. Nor should it be. At Russell Investments, we live in the tension between fundamental investment principles and an understanding that constant, rigorous innovation helps give our clients the highest likelihood of reaching their goals.
And that should be the focus—the reaching goals part. As in any industry, there’s the great temptation to innovate for the sake of the shiny object—the attention–grabbing differentiator that grabs headlines and wins deals, but that, at the end of the day, may not give institutional investors any meaningful advantage.
We challenge our industry to hold themselves to a high bar—to set the shiny objects aside and to be true fiduciaries, working for the best interests of investors, even when it comes to innovation.
Here are four OCIO innovations that we believe hit that high bar:
- Dynamic portfolio management. Investing is largely about taking risks you expect to get paid for. This tradeoff varies over time and across asset classes. Periodically adjusting the portfolio in response to changes in the expected return–to–risk tradeoff isn’t market timing. It’s smart portfolio management. And now, here we are, nearing what we believe is the end of a legendary bull market. When we ask our clients about their single greatest concern it is this: Which risks do we take to get the returns we need while still protecting ourselves against an inevitable market correction? This is The Question. This is why we believe institutional clients should demand dynamic portfolio management—that moves at the same rate as the market. And they should demand an approach that has the dynamism to manage assets to the liability profile of the investment program.
- A total–portfolio perspective. Optimizing individual asset class silos can lead to a suboptimal portfolio in aggregate. For example, a primary source of excess return for many active fixed–income managers is underweighting Treasuries and overweighting credit. While this approach can be very effective for the specific asset–class silo, it can also mean an unintentional overweight to the equity factor at the total fund level. Why? Because we believe credit is often highly correlated with equity beta, particularly in market extremes. Asset managers that take a total–portfolio perspective can avoid these unintentional exposures and may find their portfolios to be more resilient during the inevitable left–tail events.
- A focus on efficient implementation. One basis point of certain savings is always more valuable than one basis point of potential return. With the right capabilities set, skilled portfolio managers can help make those savings more certain with ongoing implementation expertise, including currency management, execution and overlay services, and transition management. This approach can help reduce costs and thus increase the probability that an investment program achieves its objectives.
- The human innovation. When it comes to innovation, so much focus is on investable products. But when it comes to the success or failure of your investment program, we believe the relationship between the client and the provider—what we might call the human element—can be just as vital. Although it’s not easy to quantify, don’t underestimate the importance of the human element in the plan’s success. Few investors give their OCIO provider full discretion. So, while portfolio management may be outsourced, major asset allocation decisions may still happen on the inside. This sharing of duties creates a relationship dependency. An innovative provider will take a proactive approach to clients, with actionable market insights that could affect asset allocation decisions.
Innovation can be a good thing, and it must be a constant thing, because when it comes to asset management, every innovative strategy sows the seeds of its own destruction: Every inefficiency that a manager identifies is eventually erased simply by capitalizing on that inefficiency. So then, the best CIO providers—even the ones who win innovation awards—need to constantly strive on your behalf.
They need to work as true fiduciaries. They should be in the boat with you, the client. They should be accountable for their decisions. It should be simple to assess their failure or success against their stated goals.
This true fiduciary approach may be the ultimate innovation.
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