Here in Europe, the joke says that British Airways is a pension scheme that owns a few planes. The US equivalent claims that General Motors is a social security fund with a sideline in building Buicks.
Anyone involved in managing a pension scheme whose liabilities dwarf its sponsor must be amused at trendy talk about ‘the importance of whole-scheme risk’. No kidding, right? This was daily life for Tony Kao, former CIO at General Motors Asset Management (GMAM). He was implementing LDI strategies to address GM’s liability risks as early as 2002.
Many people would be surprised to learn that, despite GM’s Chapter 11 bankruptcy in 2009, these kinds of whole-scheme risk mitigation strategies helped its pension plan outperform the average US plan by 15-20% during 2008. By the end of that year, despite drawing down TARP-related restructuring efforts on the plan’s assets, it was still only 12% under-funded. Kao left to form SECOR Asset Management in July 2010.
“GMAM was a wonderful place to be an investor,” he says. “We had great opportunities to actually implement whole-scheme investment strategies, particularly from 2002-03. But in the wake of the financial crisis, there were restrictions associated with working inside what was then a bankrupt company.”
The opportunity to take the whole-scheme philosophy of GMAM (rebranded as Promark Global Advisors) to a new set of third-party clients facing similar challenges to GM seemed to have waned. But when you listen to Kao describe what SECOR offers it is clear that he hopes it will stand out from the crowd in the same way GMAM did.
“Number one is fiduciary experience,” he says. “People will say that they bring a ‘fiduciary mindset’. But, for us, it’s beyond just a mindset. For 27 years I worked hands-on at one of the world’s most sophisticated and challenging pension plans. There is a limitation to what most LDI managers can know about the true risk of a pension plan - to take just one example: the range and type of liability-associated risks it runs, the liquidity, curve, duration and collateral-management risks associated with the matching assets. Then you have to pool all of that knowledge and communicate it to investment committees, trustees and members. We were very proud of developing that in-depth, hands-on management of total-plan risk with clients.”
The other driving force behind SECOR is co-founder, co-CEO and Kao’s long-time friend, Ray Iwanowski, formerly co-CIO of the Quantitative Investment Strategies (QIS) group at Goldman Sachs Asset Management. For years, Kao and Iwanowski had been discussing the peculiar challenges of managing pension schemes in an environment of low rates, volatile equity markets with no evidence of a positive risk premium, and mark-to-market accounting.
“From 2003 we’ve gone through three periods in which equity markets and interest rates have come down simultaneously - hitting the funding ratios of pension funds,” he says. “Over the same period, those funds have been exploring absolute return investing. This financial crisis has created a very challenging environment in which pension plans could really benefit from the GM model of managing assets and liabilities internally, in real-time, and Ray and I thought it would be great if we could combine our experience of in-house pension plan policy, risk mitigation and alpha.”
They combined not only their experience: eight of SECOR’s 27-strong team are ex-QIS staffers; six are ex-GMAM. Clearly this is a mixed legacy - there is a lot of wreckage associated with both QIS and GM. Nonetheless, SECOR came to market in response to genuine client demand: its first mandate is a full-service contract covering €5.5bn in assets held in seven different European pension schemes for a single US multinational corporate client.
SECOR will offer three business lines. SECOR Investment Advisors (investment advisory services) is a fiduciary management platform covering investment policy and research, asset allocation, manager selection (in both traditional and alternative strategies), risk budgeting and client reporting. SECOR Investment Management (portfolio solutions) offers quantitative services from tail-risk hedging, LDI and beta replication to passive currency management, liquidity management and transition management. SECOR Capital Advisors (alpha strategies) - due to launch in 2012 - will provide quantitative global macro multi-asset strategies which can be bought as a single flagship fund or as selections of the individual strategies; in addition, the quants can be used for GTAA overlays, portable alpha, exotic beta replication and hybrid exposures.
While most would see the argument for packaging ‘advisory’ and ‘solutions’ together, it might seem a bit random to bolt on a hedge fund boutique as well. Not so, argues Kao, if your ‘advisory’ services aim to be ‘real-time’.
“We are in contact with the market at all times,” he says. “Our relationships with broker-dealers as well as asset managers are long-running and extensive. You only offer good advice if you are on top of developments in markets and in products, and if you take the alpha side away you take away that deep understanding about where the value-added to the market is coming from. That should inform how you manage at the whole-portfolio level and how you manage a truly active hedging portfolio. Earlier today, for example, we were looking at how we might create an equity portfolio with credit-spread duration - an interesting solution to anyone looking to hedge their liability in a low-rate environment and one that depends upon expertise based in all three business lines.”
While Kao makes a lot of these synergies, SECOR sells them separately (it has had enquiries for individual sub-sets of each line, such as tail-risk hedging). Moreover, each has very different scalability: that of ‘Alpha Strategies’ and ‘Portfolio Solutions’ is virtually unlimited, but the aim is to retain the hands-on, customised feel of ‘Advisory Services’.
“It’s harder to pursue our model - let alone the creativity and the innovation - once you’ve decided to be a volume business,” as Kao puts it.
So it is fair to say that SECOR has started how it means to go on, with its single €5.5bn mandate. The multinational aspect is also seen as a key strength: it forms an important part of Kao’s background working with GM and, as that first mandate suggests, it is expected to play well across Europe’s varied pension jurisdictions. With help from a minority stake taken by asset manager Babson Capital, SECOR is growing a London office that opened in September 2011.
“Our USP is the combination of multinational expertise and the customised, hands-on approach,” says Jeroen Wilbrink, the ex-F&C LDI expert who heads the new four-person office alongside Thierry Bollier, co-founder of risk analytics firm Bollier-Hipes Research.”The European market will be very important to us and our multinational strength will play well here. Most of our competitors have mandates in one market, some have a few in both the UK and the Netherlands, perhaps Germany. We already work in eight different jurisdictions, including the US.”
That is a gap in the market suggested by the relative failure of attempts to provide multinational pension pooling vehicles in Europe, according to Wilbrink.
“Here in the UK people talk about the ‘flight path’ to full funding or buyout,” he says. “In Germany, for example, under-funding is tax-deductible. And there are cultural as well as regulatory differences: schemes in one country think very differently about whether to go for direct or listed real estate than schemes in another, for instance. Throwing that all in one big heap was never going to work.”
What will work, SECOR claims, is its combination of multi-jurisdictional expertise managed consistently from a central hub as a true, customised service. So will those clients come? Not easily: SECOR faces competition from a range of strong incumbents; it has to persuade the market that a boutique provider can meet the needs of big users; and while the two organisations whose legacies form the backbone of the firm boast formidable skills and experience, there can be no denying their baggage, either. Time will be the test of SECOR’s considerable ambitions.