Reassessing relationships with managers - the trick to getting outsourcing right
Ian Coulman, chief investment officer at Pool Re explores why a shift toward more esoteric asset classes might see insurers outsourcing more often
Insurance Investor Editorposted on Wednesday, January 01, 2020
Insurance Investor: Is there an increase in insurers outsourcing or are the majority of assets still being run in house?
Ian Coulman: It is difficult to say overall how it is, but my own view is that there has probably been an increase in outsourcing largely because of the shift towards more specialised asset classes.
Where there has been an increased appetite for less liquid markets including direct lending, trade finance, etc. With these more specialised areas, the majority of insurers would seek out specialised investment managers and, therefore, would look to outsource these assets because they might not have the level of expertise required in house.
II: What are the most popular asset classes that are usually outsourced?
Ian: It does vary from one insurer to the other. We outsource all of ours and believe that we can look for experts and specialists within their field across a broad range of assets and leverage off the capability of managers even in the more traditional markets of investment grade corporate bonds or equities.
"There has probably been an increase in outsourcing largely because of the shift towards more specialised asset classes"
It seems to be the more specialist areas that have grown in interest over the last few years such as direct lending, private equity or private debt. It is in these areas where there has traditionally been less liquidity and which have not been so popular for many insurance companies.
II: For the insurance companies who do have assets managed in house, what would these asset classes be?
Ian: In terms of conversations that I have had with some of my peers, a lot of the in-house management are in areas that are seen to be or considered more traditional whether it be government bond markets, investment grade, corporate bonds and equities. The other more specialised areas would then be outsourced.
II: What are the pros and cons of using a large asset manager versus a boutique, specialist firm?
Ian: The argument here would be resources and scale of ability to deploy assets.
What is important is that it is not actually looking at the size of a manager relative to a boutique manager but getting to know the manager, understanding their process and strategy to ensure that the resources are there.
"It is more important and critical that you get to know the team or manager who are investing in the more esoteric type of markets."
If you have a manager who seems to be relatively small in terms of assets under management but their area of focus and expertise is in one particular asset class, they could be in a better position than a large global manager that just has this asset class as simply another one within their broader mix of products.
I feel that it is more important and critical that you get to know the team or manager who are investing in the more esoteric type of markets so you can check to see that they know what they are doing and have the appropriate expertise and resources available.
II: Can managers’ high fees for outsourcing be justified?
Ian: We would look to ensure that they are generating sufficient alpha to cover those fees. They would have to be competitive and fees would come into the assessment process.
If a manager was significantly uncompetitive, we would tell them and would expect them to either reduce their fees to be competitive or they would be excluded from the list. This is unless they could really demonstrate that their performance has generated sufficient alpha to cover those fees.
More than likely our first step would be to see whether they were competitive with the other managers in that field.
II: As an insurer would you be involved in the design of the investment strategy or the asset allocation with these outsourcing fund managers?
Ian: In most cases we would look to implement a segregated mandate and, therefore, whilst we would take on board advice, typically we would dictate the parameters around which we want the money managed and invested.
In certain areas where the allocation may be relatively small, we may outsource and use a fund structure that the manager is offering and, in this case, we can’t have direct control over how the manager deploys these assets as they have a strategy and we have made the decision that we feel a fund is a better option for us.
"In certain areas where the allocation may be relatively small, we may outsource and use a fund structure that the manager is offering"
It comes down to scale and size, if we feel that the allocation is too small to be managed in a segregated account, then we would most likely go down an investment fund route.
In such a case we appreciate that we can’t have a significant amount of input in how a particular fund is managed but we would be ensuring that the parameters around which a fund or strategy is deployed and how it manages the monies fits into our criteria.
II: Where do investment consultants come in in all this, in a relationship between an insurer and a fund manager?
Ian: I believe that they provide an introduction. Certainly, if you go through some of the typical processes around selecting a manager for a mandate, the consultants do offer a reasonable sounding board and research to help determine who the best managers are.
Typically, once the relationship has been established, we take over the relationship and don’t rely upon the consultants to feed us information.
"If there are issues or problems that arise, we will have a discussion with the consultant to see if they are aware of any changes that we should be made aware of."
We usually view our managers on a formal basis every five years and we keep in touch with them on a regular monthly basis.
We open up a general discussion and dialogue with our managers in order to get to know them but if there are issues or problems that arise, we will have a discussion with the consultant to see if they are aware of any changes that we should be made aware of.
II: Do you expect to see an increased uptake in insurers outsourcing to investment managers in the next 12-18 months?
Ian: If insurers do continue to move into more specialised and esoteric markets and asset classes then yes, there will be an increased uptake but I do feel it will be within these specialised fields. The actual amount of money going that way may not be that significant.
The general direction is that as insurers look to increase returns and try and diversify their mix of assets then they will increase their outsourcing.
Ian Coulman, chief investment officer at Pool Re, will be speaking at the Insurance Asset Management Summit in November. You can find out more about the event and book your place to attend here.