Motives that spell added value for clients
It is relatively rare for a career ‘buy-side' professional to make the step into the asset management ‘sell side' in such a senior position. But with the advent of strategic advice groups at asset management firms - as well as consultants' move to multi-manager and implemented solutions, pension groups at what were once termed investment banks and the transformation of Dutch pension funds into fully-fledged investment management companies - the boundaries between ‘buy' and ‘sell' are clearly changing.
One of the investment solutions posited in recent years has been fiduciary management, in various guises in the Netherlands and now in the UK, as well as implemented consulting. The debate continues as to where the boundaries lie between implemented, fiduciary and other solutions, but they all point in the same general direction - allowing the investor greater access to the intellectual capital of other parties in the financial markets that may be better positioned than they to assist (or assume responsibility for) investment decision making.
Joseph McDonnell, (pictured right) head of Morgan Stanley Investment Management's global portfolio solutions (GPS) group since March 2008, is adamant that the solution is not fiduciary management by another name. "Everyone has a slightly different spin on that and [fiduciary management] is just a fraction of what we do," he says.
So what is GPS? Essentially there are two legs - one being the provision of asset allocation advice without a strong Morgan Stanley product push. The other is the creation of portfolios for smaller or medium-sized institutions, although McDonnell says that this has so far been restricted to the area of alternative investments as an ‘implemented' service that could be compared with a fiduciary solution. For advice, however, the target is larger pension funds, insurance companies, sovereign funds and endowments - in Europe and Asia.
The GPS teams themselves are small - around five in the US and five in Europe under McDonnell - although there are plans to recruit in Asia. Members have experience in areas such as portfolio management or financial engineering, often with a PhD qualification. However, McDonnell emphasises that the groups have access to the wider resources of MSIM. So when putting together an alternatives portfolio, for example, he says up to 130 people would be involved in the project, from areas including commodities, currencies and hedge funds.
The GPS team in Europe is also not new, having spent 10 years or so working on asset allocation and global tactical asset allocation. "In my first six months I focused on creating a formalised analytical framework that is well disciplined and quick, so we are able to assess plans in a matter of days," says McDonnell. "We have also sharpened our delivery for clients and prospects so they understand that this is a Morgan Stanley branded service."
To emphasise his independence, McDonnell points out that he reports directly to James Dilworth - who was appointed in March 2007 as EMEA CEO of MSIM from Goldman Sachs Asset Management - rather than to the head of sales or any product group. Fees for the group's asset allocation advice are calculated on a cost basis and GPS does not have its own P&L.
"I do not have an internal agenda focused on selling," claims McDonnell. "But this is probably the reason why not every asset manager has a GPS group. There could be huge conflicts if you try to make the function a revenue generator. Independence is crucial. If they didn't want independence then they shouldn't have hired me. That's the way I operate. I'm not here to promote the 60 asset management products in MSIM. If they fit, then that's fine. If they don't, then we find ones that do."
A fair claim, but the proof is in the proverbial pudding. McDonnell says that when the GPS group undertook a strategic review for a UK local authority, it recommended a diversified portfolio where eight mandates were to be awarded. MSIM won only three of those. "I look at things from the client's perspective. The portfolio manager looks at things from a market perspective. The financial engineer looks at things from a risk perspective and I think that combination makes for a very good solutions group."
If strategic asset allocation is the group's main activity, McDonnell also claims this does not conflict with the activities of consultants. "We are not here to supplant consultants," he says.
However, he does point to the widely cited power imbalance between investment managers, investors and consultants - at least in the UK. Asset managers often complain that the large consulting firms ‘own' the relationship with the investor. The managers are invited to pitch for their respective mandates, but without a comprehensive understanding of the investor's situation.
"Consultants have a massive advantage - they get more access, they have more meetings and they understand the different types of decision makers in the plan," he comments. "Asset managers like us have considerable resources but for us to be put into a little pigeonhole, such as an emerging markets manager, is not particularly productive, especially in the environment we are in now."
More specifically, McDonnell sees a gap in the market for medium-term asset allocation - decisions focused on the next two to three years. He describes this as his "number one conversation right now". Investors know that there are undervalued opportunities in the market at the moment - just about every asset manager is pushing one or other of them. "That's great, but most clients will struggle to put that into their asset allocation and decide what is a good opportunity," he says. "Because of our proximity to the market we are be able to see things early and in this market it is worth getting in at the right time, understanding valuations."
This is the crux of the GPS group - the pension fund will conduct the implementation itself, but is likely to need advice on combining various elements of an opportunity into their overall portfolio.
"We exist because we are a broad based asset management organisation and the world is a complex place. We want to add value across the entire investment decision-making cycle and if we are able to do that we build a deep relationship with our clients we may become a manager of choice."
Or as McDonnell concludes: "The reason why investment solutions groups like ours exist, looking at strategic asset allocation, structuring, implementation and risk management, is for perfectly selfish reasons. It's because we get to understand the clients well."
Joe McDonnell started his multi-national pensions career at IBM, where he was head of fixed income, and was instrumental in creating the first global asset pooling structure for fixed income investments. However, he was latterly at Shell, from where he joined MSIM as head of its EMEA global portfolio solutions group in March last year.
"They dig a hole, oil comes out of the ground and on day two they decide to open a defined benefit scheme," says McDonnell, referring to oil majors in general. "But that creates a lot of complexity because each of those countries has its own regulatory environment, its own trustee board and its own way of doing things. So I have spent time talking to pension funds from Argentina to Uganda, as well as to the larger pension funds in the UK, the Netherlands and Germany.
"In 2002 I had 60 to 70 manager relationships. I had a team, obviously, but did we really understand the 60 to 70 different institutions we were working with? We understood probably the basic strategies but we didn't have any greater appreciation and these managers were not bringing anything more to the table than managing a mandate.
"So I migrated that over the course of five or six years to doing 90% of my business with about seven managers and I had a much greater understanding of those seven managers. First, I looked at firms that had skill and an investment process that would work across two to three different types of strategy. The second thing I looked for was those who really understood risk.
"The other development we have seen in the last four or five years is investment banks. When I was pension fund manager at Shell I spent more and more time talking to banks - they understood things well and I became agnostic towards banking and asset management solutions. So if I was offered emerging markets with a swap that paid 200 basis points over the MSCI Emerging Markets benchmark I would have to look at that versus finding the best emerging market manager. That was a real added advantage - I did not fear banks."