Ranji Nagaswami isnt worried about the U.S. Department
of Labors new fiduciary rule; in fact, she welcomes it.
The recently appointed CEO of pioneering outsourced chief
investment officer firm Hirtle, Callaghan & Co. thinks
its high time that the asset management industry put
clients needs first.
Nagaswami, 52, joined West Conshohocken,
Hirtle Callaghan in August, succeeding co-founder Jonathan
Hirtle, whos staying on as executive chair. The native of
Ahmedabad, India, who holds an MBA from the Yale School of
Management, came to Hirtle Callaghan from New Yorkbased
private equity firm Corsair Capital, where she served as
operating partner and senior adviser. Her previous positions
include co-head of U.S. fixed income for UBS Asset Management
and chief investment officer of the Blend Strategies team at
New Yorkheadquartered asset management firm
AllianceBernstein. From 2010 to 2012 she was
New York Citys first chief investment adviser for
pensions before working as a strategist for Westport,
Connecticutbased hedge fund giant Bridgewater
The fiduciary rule, which requires financial advisers to act
in investors best interest, takes effect next April.
Nagaswami sees this change as an opportunity for $23 billion
Hirtle Callaghan, which launched in 1988 with the aim of
providing conflict-free advice to wealthy clients, to
Youve been in asset management for 30 years.
How has the business evolved?
For starters, information flows easily and excessively. The
signal-to-noise ratio is really low. Demographic shifts mean
theres a lower number of workers to retirees. Then on the
cyclical side we are near an all-time low in interest rates, so
its become very difficult to make money in markets. All
of this is testing the industrys prevalent business
Im going to sound a bit harsh about some of my asset
management colleagues, but the industry has become more focused
on turning out products than meeting clients basic
investment needs. Meanwhile, fees have soared. The
industrys models and tools have evolved, though as a
whole the ability to make money for clients does not appear to
have improved commensurately.
Essentially, we have a fiduciary gap. Whats really
perverse about this is we all know that the best programs all
have a great managing fiduciary. From our perspective at Hirtle
Callaghan, theres a huge opportunity here to effect a sea
change in fiduciary governance, and we collectively want to
lead that charge.
In 2010, in the wake of the financial crisis,
then-mayor Michael Bloomberg appointed you CIO to New York
Citys five pension plans. What were some takeaways from
I learned so much more about human nature than I ever
thought I would. Mayor Bloombergs conversation in
bringing me in was, Look, weve had terrible recent
investment returns, and the returns are the main culprit in the
citys public pension funding crisis. What I
realized quickly was that scant attention was being paid to
investment risks, return assumptions and the investment
decisionmaking processes that underpinned those
Our office laid out a framework to address three investment
challenges we faced. First, we created a new starting point for
investment planning, based on understanding risks: What are
your objectives? What are the risks youre willing to take
in the capital markets? Second, we outlined and agreed to an
investment policy road map with clear steps to get to a
long-term balanced policy portfolio. That was not a time to be
selling or reducing equities. The third part of what we tried
to do in the mayors office was to get governance
Candidly, we made more progress on the first two than the
last. We had to change our investment policies, including the
actuary investment rate used to discount our liabilities, which
raised the pension contribution for the city even though I was
brought in to help reduce it. More than all of that, though,
changing governance proved to be far more difficult.
What I got from the experience was hands-on expertise in
handling much of the same issues facing clients at Hirtle
Callaghan: how to manage investment risks versus return
objectives and develop a portfolio accordingly.
How might the DoLs fiduciary rule shake up the
private wealth business?
The shift will be messy and expensive for the industry,
undoubtedly. But I daresay it will require the industry to step
up and serve the owners of capital. Compared with the current,
transactional model, there will be more transparency and more
More pressing than its economics, though, is that our
industry needs to change its culture. That process is much more
likely to be slower and uneven. A full change in firms
culture specifically, with establishing a fiduciary
mind-set is what will make these regulatory changes
stick, rather than just get flipped back when a more favorable
administration comes in politically.
How do you see the OCIOs role when it comes to
the fiduciary rule?
Since Jonathan Hirtle founded this business and created the
OCIO model nearly 30 years ago, Hirtle Callaghan has been
Im using this word carefully evangelizing
the need for a conflict-free financial advisory model. At the
time, no one agreed with us or saw the need. It completely
aligns our economic interest and our expertise with a
clients ambitions and outcomes.
Clients pay us a percentage-based fee on assets under
management. So far, so good. Much of the asset management
industry operates that way. But we do not make any more money
if we recommend that a client invest in private equity or in
fixed income. It moves us from being agents for our clients,
with all the potential for conflicts and short-termism that
implies, to being principals and a managing fiduciary.
How are risk management and portfolio construction
changing in this investment climate?
I just want to point out that client needs dont
change. Low returns put even more pressure on this idea of
investment mastery of our craft to be creative, to be
innovative and to be constantly bringing returns to our clients
in a very thoughtful, disciplined way.
We are not investing in commodities today and equities
tomorrow and fixed income the third day. We have to be very
balanced, take a long-term view and identify areas of the
market where clients still have a chance of making money. We
want to find sections of the market that are undervalued and
represent good entry points.
Markets are constantly throwing up opportunities. For
example, today international economies emerging markets
in particular represent far better value in our mind
than U.S. equities and certainly relative to fixed income,
although we have to adjust for the differences in risks between
those two asset classes.
The typical 6040 capital allocation process has 90
percent of its risk allocation to growth assets. The 6040
portfolio is not dead, but its just a starting point and
should be treated as such. Can you stop there? Absolutely not.
A 60 percent equities, 40 percent fixed-income portfolio serves
a simple purpose. It lets the clients always see their risks
and returns compared with a market context, if you will.
Theres a lot of clustering around that allocation, which
has led to some serious problems.
We think all clients need a disciplined process for
allocating capital. Clients must have a process that allows
them to manage the risk of losing money, as well as the risk of
underperformance relative to their spending-related benchmarks.
From our perspective that discipline entails keeping price
changes and valuations constantly at the forefront and, when
the market opportunity presents itself, shifting into assets
that look attractive from a price-to-cash-flow perspective.
Valuation matters. We go far beyond that, and investors must go
far beyond that.