Portfolio design

Asset management and the fiduciary industry

Sion Cole |10-Jun-2019

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.


Why I joined BlackRock

Since I joined BlackRock, I’ve been asked one question more than any other: “Why did you join an asset manager when the fiduciary industry is dominated by consultants?” Firstly, I didn’t join just any asset manager. I was careful in my selection when I joined BlackRock – the world’s largest asset manager (BlackRock, as of 31 March 2019). This is an important point. Secondly, I think the days of consultants dominating the fiduciary space are about to change.

I hear fiduciary management being described as a governance solution. I disagree. Fiduciary management is an investment solution. Of course, good governance and good investment are not mutually exclusive – to achieve success, they need to go hand in hand. However, the idea that fiduciary management is about how you organise your decisions is nonsense. Without a doubt, you can throw more time and resources at under-funded schemes. Will this improve funding levels? Unlikely. Instead, if you put proper investments with well-managed risks in place, then you might have a winning formula.

So what do you need for a good investment solution for pension schemes? Here are five key steps:

1. Understand pension scheme liabilities.

BlackRock is one of the leading liability driven investment managers in the UK. We manage in excess £200bn in LDI solutions on behalf of more than 200 clients (BlackRock, as of 31 Mach 2019). Leading consultants often ask us to design LDI portfolios for their clients. So, we have a team of actuaries who are advising actuaries. This team is necessary to stabilise funding levels.

The next three ingredients are needed to return underfunded schemes back to full funding.

2. Build and manage portfolios across a range of asset classes.

Ask your consultant what drives results. They will tell you the No. 1 decision is asset allocation. This can drive as much as 80% of returns (BlackRock, as of 31 March 2019). Get this wrong and you are dead in the water. Asset managers have been managing multi-asset portfolios long before fiduciary management even existed. It’s this experience that’s needed during harsh markets.

3. Be nimble.

Asset allocation drives results. However, being nimble enough to reflect current market environments means you can capture incremental returns. At BlackRock, we sit around the campfire that is the investment market. We place an eye-watering 67,000 trades each day. We can feel the heat from the fire and know immediately when the wind changes direction. In fact, those who are a little further away regularly ask us, “How hot is it right now?”

4. Take advantage of your long-term time horizon.

Pension schemes have a long-term horizon – longer than almost any other investor. I think pension schemes should take full advantage of this. Building an illiquid element into your portfolio can really reap rewards for both risk and return. BlackRock designs illiquid portfolios specifically for its fiduciary clients. Not many people know that BlackRock invests £160bn in illiquid assets (BlackRock, as of 31 March 2019). We get to see potential investment before others. And when we find something we like, we make sure it’s fit for pension schemes.

5. Combine steps 1-4.

Proper investment portfolios need proper risk management capability. We use Aladdin. This is our market-leading risk management system. It’s where BlackRock started. Such is the power of Aladdin: It’s used by 25,000 investment professionals around the world outside of BlackRock (BlackRock, as of May 2019). Teams of investors use BlackRock’s Aladdin to manage their portfolios. It’s quite possible one of your existing fund managers uses Aladdin.

So why did I join an asset manager, and specifically BlackRock? Do you still need to ask? In my second blog I’ll discuss why consultants will no longer dominate fiduciary management.

Sion Cole
Managing Director
Sion Cole is well known for helping UK pension scheme trustees and their corporate sponsors meet their liabilities and funding goals.
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