We’re back with our “Big Ideas from BUC” series – we didn’t want anyone to miss out on the insights from BUC 2018 just because they couldn’t be physically present. Today, we’re sharing the big ideas that came out of our panel, “The Burning Issues Facing Pension Investment Professionals Today,” featuring portfolio executives from both public and corporate plan sponsors.
Pensions are investing differently today, so their technology needs to change as well.
Pensions have evolved greatly since the days in which they stuck to traditional allocations of 60/40 stocks/bonds. More and more pensions are looking at private or alternative investments, and more and more are bringing investment teams in-house. This means that the underlying technology used to manage research, support ongoing due diligence, and monitor mandates must also evolve.
In fact, our panelists felt that technology is a crucial element in effective management and fulfilling their responsibilities. “It’s absolutely critical for better oversight, portfolio construction, portfolio management, and reporting.”
Pensions need to be more like Wall Street, but they’re still not there. And likely will never be.
Our panel pointed out that the most effective managers were the ones who recognized that combining technology and big data would generate the best returns. “Wall Street in particular has always been like that – if there was an edge to be made, it would get done.” Why, then, didn’t corporate or public plan sponsors who have oversight over the same amounts of capital do the same thing, i.e., leverage technology to generate better investment returns?
Because, as one panelist stated, generating a great deal of uneasy laughter in the room, “Plan sponsors are the stupidest people in our industry.” What he meant was, plan sponsors own capital, but probably do the least to maximize the value of that capital. Most companies don’t view asset management as one of their primary responsibilities. For example, if you’re an oil company, your primary mission is to produce oil, refine oil into products, and then sell those products. Your primary mission is not to generate superior investment returns on the billions in assets you manage across multiple funds in the multiple countries in which you do business. According to him, most plan sponsors take an administrative approach, not an investment approach.
What needs to happen is that pensions need to start thinking of themselves as asset management firms, starting from the top. Then and only then will the right processes follow, supported by the right technology.
Pensions are getting inundated by technology vendors.
Perhaps because of the recognition that they’re increasingly in need of better portfolio tools to better manage their assets, pension investment professionals getting swarmed by tech vendors. “There’s increased traffic through our door about this or that thing that can help us.” Unfortunately, however, most vendors are taking a “sell first, ask questions later” approach. “They don’t understand what we do. There’s not enough listening and not enough research done ahead of time.” One public pension plan is not the same as another – not even if both are within the same state or even city.
Cross-team coordination and communication are critical.
As pensions bring more investment management in house, specialization in different asset classes is creating the need for better communication. For example, there are teams devoted to managing absolute return (hedge funds), real estate teams, and private equity teams. As the portfolio grows, there’s an increased need for the different teams to communicate with each other, especially if the possibility exists – which it does – that the overall portfolio’s true exposure to any underlying asset transcends team boundaries (for example, owning a particular stock outright and investing in a hedge fund that is also long that particular stock). “Once I marry the public and hedge fund sides, exposure to a particular security is bigger than we think. I’m fairly certain we’re underestimating the true risks in each trust plan.” Technology is a good vehicle for bringing this cross-team communication and desired look-through exposures to reality.
Build v. Buy has another “B:” Budget
When an audience member asked whether the panelists would recommend building vs. buying technology, the panel responded with: “Build versus buy has another ‘b’ in it, which is ‘budget.’” Most plan sponsors don’t have access to the budget to build, so they would look to buy first, especially if the technology to accomplish your goals is already available on the market. Building your own systems means having to keep up with technological and infrastructural changes, something public plan sponsors may not have the wherewithal to do effectively. Given that corporate plan sponsors really do not treat investment portfolios as part of their core business, it can be a struggle to get resource commitments (access to engineers and developers, for example).
Investment technology in 20-30 years will look like…Tony Stark?
The last question of the day had the panelists prognosticating about what investment technology in 20-30 years will look like. “Where’s my Tony Stark 3D holographic portfolio tech?” All joking about futuristic Marvel-movie based holographic holdings aside, our panelists pointed to the following elements:
- “Nothing will be non-transparent anymore. Nothing will be reported 30 days after the fact.”
- “We’ll be using AI at a machine learning and deep learning level.
- “Machines learn more quickly than humans do, and they do it with fewer mistakes. All of that is here – how will it replace the fund admins and custodians is what remains to be seen.”
Stay tuned for more “Big Ideas from BUC!” Next week, we’ll recap our “Fireside Chat with Hacker Chris Roberts” session, although it scared the you-know-what out of many of our audience members.
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