Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Aon’s 20% cost cuts hit staff and suppliers
In a letter sent to employees late in April, Aon chief, Gregory Case, says 70 per cent of the firm’s staff around the world will take a reduction of approximately 20 per cent of salary, which will be implemented in accordance with local practices. But proposed merger partner, Willis Towers Watson, is not following suit.
Case said of Aon: “These actions, which will begin to take effect May 1, were developed in collaboration with the Aon Operating Committee…” But about 30 per cent of Aon lower-paid workers globally remain on full pay based on criteria such as cost-of-living that has “set a floor in each country”.
At the same time, Case and four other senior executives and the Aon board have all taken a 50 per cent salary cut. According to regulatory filings, the Aon chief executive earned a base salary of US$1.5 million in 2018 as part of a total remuneration package of more than $16 million. Case, who has an estimated net worth of US$354 million, has sold down over US$170 million of Aon stock since taking the CEO role in 2006.
The latest move could save Aon about US$200 million each quarter based on total employment costs of US$1.5 billion accrued in the first three months of 2020, ‘InsuranceAsia News’ reported.
As well as the company-wide pay reductions, Aon has already “substantially curtailed spending on contractors and third-party vendors”, he says in the letter. It is understood some Aon NZ external suppliers have been asked to cut fees as a result of the global corporate cost squeeze.
The Aon Business Services team is “mobilizing a monumental firm-wide effort to reduce all discretionary expense not related to client service”, Case says. In the wake of the crisis Aon also halted a long-running share buy-back program that saw it repurchase almost US$2 billion of stock last year alone.
However, the Aon quarterly report released early in May says: “Share repurchase has and continues to be our highest return opportunity based on our long-term FCF [free cash flow] outlook.” Share buy-backs have come under scrutiny of late with many of the US corporates currently seeking government assistance spending billions in stock repurchase programs over the last decade.
Regardless of the pressure on liquidity Aon confirmed it would maintain dividends through the COVID crisis including a March quarter payout of US$100 million (Case stands to pocket about US$380,000 as a result, according to ‘InsuranceAsia News’).
Furthermore, the firm remains on track to complete a planned merger with Willis Towers Watson (WTW) in the second half of next year, Aon says in the quarterly update.
“Our combination with Willis Towers Watson will be a positive catalyst that enables us to accelerate innovation on behalf of clients,” Case says. “This all-stock combination requires no financing and our intent to complete it creates no incremental financial burden.”
Both WTW and Aon reported earnings increases in the March quarter of 7 per cent and 2 per cent, respectively. ‘InsuranceAsia News’ reported WTW would cut “discretionary spending” and protect income rather than slash employee remuneration to cushion the impact of a coronavirus-related slump.
“The way we approach this is to say our first and foremost priority is the safety and well-being of our colleagues,” WTW chief, John Haley, told investors and media. “The second priority is then making sure we manage the financial health of our business, and that includes making sure we take care of our colleagues from a benefit and compensation standpoint, too.”
Dan Glaser, head of rival global insurance and consultancy firm, Marsh & McLennan (owner of Mercer), also slammed the Aon pay-cutting move as counter-productive, ‘InsuranceAsia News’ says.
“Solving that issue by reducing pay is an awfully blunt instrument,” Glaser said. “It can have lasting implications, starting with the notion of battering trust with your colleague base by challenging them when they’re in this difficult period.”
– David Chaplin, Investment News NZ
