Challenges and opportunities according to big asset consultants

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Most investment firms seem to have transitioned fairly smoothly to working from home compared with a lot of other industries, and that goes for big asset consulting firms around the world as well as managers. But the consultants, like managers, have new problems to try to solve. Frontier Advisors and its two global research partners talked through the issues last week (July 21).

In a session at the annual Frontier Advisors client conference, which is this year being held virtually and spread over three weeks, Wayne Sullivan, Frontier’s director of marketing and business development, introduced the firm’s Global Investment Research Alliance (GIRA) partners Segal Marco Consulting of the US and LCP of the UK, alongside Frontier’s Paul Newfield, director of sector research. Together with Frontier they spoke for about $1.5 trillion under advice, he said. From LCP Natalie Brain, a senior investment consultant, and from Segal Marco Consulting (which includes Rogers Casey, a better-known name in Australia) John Ross, a senior vice president, both offered their perspectives on the issues and opportunities.

LCP’s Natalie Brain said that while the transition happened relatively quickly and smoothly, the last few months had also been a busy period. “There was a real push for us to provide up-to-date market information,” she said “and support to clients to discuss their challenges and opportunities… We are having regular ‘elevenses’ coffee breaks with clients,” referring to what the rest of the world refers to as morning tea or coffee, in this case held virtually. She said that defined benefit schemes needed analysis and advice on how COVID was impacting on funding by the plan sponsor and defined contribution schemes needed extra support on their communications with members.

John Ross, from Segal Marco, said that his firm would remain “remote” until the end of the year. “We need to get as many touches with clients as possible with though pieces. “We’ve driven a couple of specific efforts. For example, we have a sub-group of our research team that is focusing on the drivers of investment returns in the current climate with a focus on down-side risks, not just top-tier risks.”

He said that the political and social uncertainties plus a low interest rate environment would probably remain for years. “We’re looking for other form of yield so clients can continue to make their benefit payments in a low-return environment. COVID has accelerated and deepened concerns we already had… I’ve been associated with this firm for 25 years and the last time we did an intra-year review of our capital market assumptions was in 2000. It all leads to managing the volatility for clients. We feel our clients need us more than ever.”

Frontier’s Paul Newfield said his firm also transitioned very quickly to working from home. “The IT department was fantastic, doing lots of things like writing out new licences for our tablets,” he said. “It got to be quite a trying time. What I saw in the feedback from many of our clients was that they appreciated our attitude of ‘what can we do to help?’ In the three months from the beginning of March we produced about 50 pieces of research.”

In Australia, in particular, with the controversial new early access scheme to super for fund members, which has currently leaked about $28 billion from the system and with the scheme last week being extended, liquidity pressure had become a major concern, Newfield said. “There are also questions over whether the mandated increase in the Superannuation Guarantee (scheduled to take place from July 1 next year) will go ahead. And every asset class has been affected,” he said.

In their worlds, both of which impact on the whole world, both John Ross in the US and Natalie Brain in the UK spoke of political and their broader issues – political uncertainty due to the coming presidential election in the US and continued uncertainties around Brexit in the UK. “It feels like we are setting the table again for an inflationary environment,” Ross said. “We are trying to stay ahead of client objectives, their expectations and their risk tolerances.”

Brain said that the UK government debt level was approaching 100 per cent of GDP and new risks, both in the UK and globally, were being played out. “Brexit for the UK still presents a risk which will effect companies differently… There are also sectoral shifts, such as in the retail sector and differences in how the property market will function in the future. We also think there is the potential risk of higher inflation,” she said.

Newfield said Australian funds should spend a lot of time looking at the real risks about where their organisation was headed. “This is the risk of self,” he said. They need clarity of mission and also to have a personal concern that people may be frozen with fear. On a calm sea, every ship has a good captain,” he said. “There is also the need for organisations to be nimble, especially when opportunities present themselves.”

One potential opportunity which could liven up the consulting fraternity in Australia and New Zealand especially, and probably in the US too, is the use of the consultants’ smarts to lend a hand in professional sport, such as football. LCP, which has a pedigree in actuarial, investment banking and insurance consulting, has developed an increasingly popular product which provides analytics for football teams. It currently has eight teams as clients, mainly high-profile UK Premier League (soccer) clubs. It’s a bit like the strategy made famous in Michael Lewis’s ‘Moneyball’ book and subsequent movie.

Newfield said the LCP product “worked”. Frontier took on board an LCP consultant as part of an exchange program for a few months, and he discussed the possibility of widening the football code’s algorithm base with his new Frontier friends. They spoke about the possibility of Australia licensing the LCP football analytics system during his time in Australia. It was unlikely to happen any time soon, though, Newfield said. Pity.

Meantime, there were opportunities in the credit markets and among distressed debt and distressed property. There were also opportunities in the ESG space, such as providing COVID-resistant power generation and renewables. There were emerging technologies presenting opportunities, especially in the middle markets, John Ross said.

Paul Newfield said that, with respect to renewable energy, Frontier recently rated the world’s largest renewable energy infrastructure project, which had provided a narrow window for investors to subscribe. “We have rated a large renewable global infrastructure opportunity (which includes Australia within its investment universe), he said. “This is expected to be one of the largest renewable funds today. They are starting to raise capital and it may take time to get to a soft or hard close given their size, however given the momentum behind renewables (pre Covid and accelerated in recent times both as an opportunity to invest plus by virtue of a greater focus, globally we sense, on renewables) this opportunity could close within the next six-12 months and we have encouraged clients, where they have sufficient liquidity capacity and it aligns with their asset allocation to consider this.”

Newfield said: “Renewables also have performed relatively well over the COVID period compared to other infrastructure assets – the main reason being that much of the revenue in this space is done on an availability basis and is not directly linked to GDP growth/decline or usage (noting that renewable energy is often used first anyway where this is available). Having certainty of revenue has held such investments in better stead than other infrastructure which may be volume dependent, such as with airports or toll roads…”

– G.B.

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