We held the first of a new series of Linchpin webinars focusing on innovation on 14th October. We have all had to adapt to new ways of working since the epidemic took hold and in this webinar we looked at some of the practical aspects of investing money in a world where meeting people is difficult. The panel was chaired by Aoifinn Devitt, and the four panellists were:
Edward Cartwright, CEO Arcus Investment Limited Arun R. Kelshiker, Senior Investment Professional with focus on Asset Allocation, Portfolio Strategy, Responsible Investing and Behavioural Finance Jim Leggate, Head UK Institutional EMEA, Russell Investments Trevor Castledine, Senior Director, bfinance
One point made forcefully during the discussion is that the financial business had a very different experience from manufacturing or construction where the lockdowns only lasted a few weeks and many businesses are back to something not far from normal.
We had three consultants from different style firms on the panel and they all agreed that institutional investors have been reaching out to them more during the crisis than ever. The need is largely down to the operational and governance challenges resulting from COVID-19 rather than the traditional business of manager selection.
The panel was clear that remote working makes it easier to ‘meet’ with distant people. Multi-office firms had already been operating virtually, so the lockdown made little difference in terms of internal processes. Regulators had indeed expected a response to COVID-19 in areas such as Business Continuity but any firm with good risk management should already have had that substantially in place. There was a view that the virtual world made it easier and even quicker to make decisions.
There was some divergence whether the new virtual world led to a more or less level playing field in manager selection. Overseas and smaller managers can now compete on the same terms as larger and better resourced ones. On the other hand institutional investors in particular are choosing to stay with their existing managers, using the impossibility of on-site due diligence as a reason. One panellist described this as ‘anti-progress’.
There was agreement more generally that virtual meetings conferred some advantages, but the lack of less formal interactions over a coffee or a beer was seen as a major drawback. In particular, on-line conferences tend to be too staged.
We also looked at innovations in fees. Here the holy grail remains alignment of manager and investor interests but the panellists thought that was unachievable because the time frame of pension funds is so much longer than that of the individuals running managers. A strong point was made that while the fee level matters, the length of relationship matters as much for both sides. There is a trend towards performance fees and we discussed the Texas Teachers ‘1% or 30%’ model. Some thought that over-complexity was as much a problem as under-alignment.
We discussed co-investments as a growing trend. Some said it was a way of obtaining access to the ‘best’ investments at a low or zero fee; others that investors inevitably skewed their portfolio when they bought co-investments and that the difficulty of doing their own due diligence meant that, while it might reduce fees, they tended to end with the ‘worst’.
We then turned to staff retention and recruitment. Here is an area where panellists thought substantial innovation is needed. In a remote world where socialising is difficult, mental health becomes a major priority and one participant pointed out that 20% of women have dropped out of work in the last six months because of the challenges of working from home and running a family. Leaders need to be team coaches and focus on engagement with their staff as much as financial rewards. Most felt that the virtual world made recruitment quicker and bosses should not be complacent about retaining staff.
The final comment at the webinar was the need for ‘serendipity’ moments over a coffee or a beer, which simply cannot happen virtually. It is ironic that in a webinar focusing on innovation, we concluded that the spark which so often precedes a new idea is what we are really lacking today.