Ranji Nagaswami isn’t worried about the U.S. Department of Labor’s new fiduciary rule; in fact, she welcomes it. The recently appointed CEO of pioneering outsourced chief investment officer firm Hirtle, Callaghan & Co. thinks it’s high time that the asset management industry put clients’ needs first.
Nagaswami, 52, joined West Conshohocken, Pennsylvania–based Hirtle Callaghan in August, succeeding co-founder Jonathan Hirtle, who’s 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 York–based 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 York–headquartered asset management firm AllianceBernstein. From 2010 to 2012 she was New York City’s first chief investment adviser for pensions before working as a strategist for Westport, Connecticut–based hedge fund giant Bridgewater Associates.
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 shine.
You’ve 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 there’s a lower number of workers to retirees. Then on the cyclical side we are near an all-time low in interest rates, so it’s become very difficult to make money in markets. All of this is testing the industry’s prevalent business model.
I’m 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 industry’s 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. What’s really perverse about this is we all know that the best programs all have a great managing fiduciary. From our perspective at Hirtle Callaghan, there’s 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 City’s five pension plans. What were some takeaways from that experience?
I learned so much more about human nature than I ever thought I would. Mayor Bloomberg’s conversation in bringing me in was, “Look, we’ve had terrible recent investment returns, and the returns are the main culprit in the city’s public pension funding crisis.” What I realized quickly was that scant attention was being paid to investment risks, return assumptions and the investment decision–making processes that underpinned those results.
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 you’re 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 mayor’s office was to get governance right.
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 DoL’s 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 fee-based pay.
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 OCIO’s 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 — I’m 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 client’s 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 don’t 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 60–40 capital allocation process has 90 percent of its risk allocation to growth assets. The 60–40 portfolio is not dead, but it’s 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. There’s 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.