Atanas Christev will be speaking at the Insurance Asset Management Summit in London on the 14th November 2019. To find out more about the Summit, or to register to attend click here.
Atanas Christev: Traditionally, the majority of our assets have been outsourced.
Three years ago we assessed the benefits from using external managers compared to the associated costs and concluded that given our limited risk appetite, for some of the more commoditised asset classes such as domestic investment-grade bonds, it would be advantageous to run the mandates in house.
"I would expect that the majority of insurance assets are still
outsourced, particularly more specialist asset classes."
Once we implemented this and subsequently increased our assets under management, we have not been looking to bring new asset classes in house.
I would expect that the majority of insurance assets are still outsourced, particularly more specialist asset classes.
Atanas: Logically these should be asset classes with the highest risk of default, complex deal structures or need for specific knowledge and market access.
Examples would be high yield or emerging market bonds, equities, structured finance, and illiquid investments.
Atanas: A large manager could use scale to offer more competitive fees. They should also have better access to certain markets, particularly ones where the size of the participation matters.
In both cases I would associate a large asset manager with the more mainstream asset classes.
We use smaller managers with specific knowledge or regional focus for the less commoditised asset classes.
Using a large asset manager offers access to their global views across markets and in many cases very valuable research into non-portfolio related topics, such as the Libor transition, ESG developments, or regulatory changes.
Atanas: In some cases, yes. The problem is that to justify the fees the manager needs to produce alpha, and to do this they need a commensurate degree of freedom to deviate from a benchmark and take risk.
The lower the risk appetite of the institutional investor, the bigger the conflict between fees and performance expectations becomes.
That is why it is easier to justify outsourcing more esoteric asset classes with a generally higher expected return. The client is paying the fee for specific knowledge not available in house, and it gains access to a level of yield which otherwise would have been out of bounds.
Atanas: It probably varies a lot from company to company, with some historical factors at play. We have tended not to use consultants, opting for a straightforward request for proposal (RFP) process when we have looked to add a new asset class. But other insurers or pension providers may well be using consultants more widely.
"The other area, of course, is ESG investing, whose importance will
only grow and where timely insight and advice would be valued."
I believe one area where consultants could add value for insurers is in exploring the impact of investments of their solvency capital requirement and offering tailored strategies. It is a complex area, particularly with internal capital models, but one where sophisticated know-how could make the difference.
The other area, of course, is ESG investing, whose importance will only grow and where timely insight and advice would be valued.
Atanas: Judging from our experience, I don’t expect a material increase in outsourcing in the near future but it is a difficult call as there are conflicting factors at play.
On the one hand, continuing cost pressures are likely to dampen desires for outsourcing of classes which could relatively uncontroversially be managed in house, such as high-grade corporates.
On the other, the continuing extremely low yields will push institutional investors to seek other sources of income.
Two logical directions are the illiquidity premium and assets with low correlation to the bulk of the portfolio which is usually corporate credit. In both cases it is more likely than not that the investor will seek the services of a specialist portfolio manager.
