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Practical Insights from Today’s CIO

Lower returns. Greater complexity. Fewer resources. The challenges chief investment officers (CIOs) face today have never been more demanding.

Neil Blundell, Global Head of Client Solutions at Invesco, and Duy Nguyen, CIO and Head of Global Advisory Solutions, recently sat down with Institutional Investor to talk about the solutions CIOs from some of the world’s largest institutions are using to help navigate the current investment climate.

Neil Blundell and Duy Nguyen
Left: Neil Blundell Right: Duy Nguyen

II: You work with some of the world’s largest asset owners. What are the top trends you are seeing?

Neil Blundell: One of the most frequent topics of discussion we hear is how CIOs might better optimize portfolio exposures in the current market regime. We’re entering an investment environment that is full of uncertainty, one that in many ways is increasingly uncharted territory for many investors. Global interest rates are poised to rise, credit spreads offer little room for tightening, and U.S. equities have experienced their second-longest expansion in history. Additionally, volatility is on the rise as monetary policies are in flux, geopolitical tensions and protectionism escalate, and synchronized growth has transitioned into global divergence.

Fortunately, the investment tool kit investors have to choose from has also increased over the past several years to help meaningfully expand and refine portfolio diversification. This includes utilizing factor-return analysis, accessing private markets, and tapping into the potential offered by multi-asset, outcome-oriented solutions. Greater fee and resource pressures have also resulted in intensifying portfolio and manager scrutiny. There is simply a need to get more from investment managers — more insights, more value, more support — and all for lower costs. The good news is that these challenges continue to drive new areas of opportunity and innovation, both in investment strategies and in the relationships between institutional investors and asset managers. 

II: Where are CIOs finding ways to add real value to their portfolios?

Duy Nguyen: It’s certainly a challenge.High correlations across traditional assets point to the increasing difficulty of finding strategies that can help diversify risks while maintaining higher-return objectives. It’s also no surprise that fees remain at the forefront of many strategy discussions. The core issue is really about how to generate greater overall portfolio value at a more attractive cost. As return expectations have come down across the board, fees naturally become increasingly relevant. In this landscape, it is critical to understand what you are paying for in percentage terms relevant to performance. This is where solutions such as factor-return analysis can be extremely useful.

As the understanding of the role that factors can play in investment returns has grown, it has provided investors with another effective risk management tool by offering deeper insights into portfolio and manager performance. This type of evaluation can reveal if an active manager is adding value or merely employing static factor bets, which can be captured more cost efficiently through passive or factor strategies. These insights can be extremely useful in manager selection, and their role in driving allocation decisions is reshaping the industry. CIOs are also evaluating ways to tap into positively rewarded style premiums in order to outperform traditional market-cap weight indexes. While factor strategies first emerged in equities, new multi-factor strategies are increasingly available across fixed income, currencies, and commodities, as well as long/short premia. These innovations continue to expand the factor opportunity set across both traditional and alternative strategies.

Key CIO Challenges

  • Expectation to “know it all,” i.e. markets, technology, regulatory issues.
  • Navigating market “regimes”
  • Access to expertise in private markets
  • Insights into factor use and implementation
  • Managing to specific outcomes

II: Has this focus on adding value changed how CIOs work with asset managers?

Blundell: CIOs are increasingly seeking to build higher-quality, value-driven, strategic partnerships with fewer investment managers. Not only does relationship consolidation tend to help reduce expenses, but the knowledge transfer that typically occurs as these types of bonds deepen can be equally important. In our relationships with partners, we focus significant resources on developing a detailed understanding of not only a CIO’s investment goals but their overall portfolio challenges and organizational dynamics. This allows us to be proactive in developing effective solutions for their particular needs. By combining proprietary asset allocation analytics with practitioner experience, we aim to support CIOs in the effort to make more informed investment decisions. Our advisory partnerships facilitate the sharing of market insights and investment views, provide research and analytics support, and evaluate portfolio exposures in the context of changing risk climates. These relationships feature high-touch knowledge-sharing that is tailored to a client’s specific needs, which may include anything from refining asset allocation to collaborating on investment opportunities in private markets.

For example, while private market investments can be very attractive on a risk-adjusted return basis, they also add a layer of complexity, which makes it critical to ensure that the risks and liquidity considerations, as well as typically higher investment fees, are justified by what the strategy potentially brings to a portfolio. In this regard, we are certain to address these key questions, among others:

  • How much traditional market exposure might be embedded in an alternative strategy?
  • Is the allocation truly uncorrelated to the rest of the portfolio?
  • How do you define and quantify risk in a segment like private credit or infrastructure?

We model our clients’ portfolios so that we can collectively understand the cross correlations of exposures between public and private markets in an effort to continuously enhance asset allocation decisions.

II: Many CIOs continue to face resource challenges. How can these strategic partnerships help?  

Nguyen: CIOs today are increasingly asked to be skilled across a diverse range of extremely complex areas, ranging from new investment approaches, quantitative expertise, emerging technologies, regulatory challenges, and so on. One way to help address this “master of all” challenge, particularly in light of pervasive staffing constraints, is to focus on building strategic partnerships with a solutions team within an asset manager. A trusted partnership can help a CIO identify potential to increase balances and reduce fees, while minimizing operational complexity, which is a big concern if you are delving into something new. It gives a CIO a second pair of eyes on asset allocation, or risk management, or potential solutions within a particular portfolio – all examples of very practical ways CIOs are looking to leverage and get the best thinking from their partners.

II: Are these deeper relationships shaping new investment strategy opportunities?

Nguyen: We are having more conversations around developing investment strategies that are tied to specific goals. These are generally multi-period challenges where complexity increases as more realistic inputs are incorporated. They can require substantial expertise in implementation. Discussions include questions such as:

  • How can I better align my investment strategy to meet my liabilities?
  • How can I better manage to specific cash flows?
  • What is your funding ratio volatility?
  • What are key sources of risk?
  • Is there enough liquidity to fund short-term cash flows?

Optimizing investment exposures under this more holistic view requires the understanding that it isn’t about getting more growth or greater portfolio balance, per se, but about getting the right growth or right balance in the context of a particular set of liabilities. Our platform is designed to help CIOs navigate these complexities and feel confident in their investment decisions.

The good news is that CIOs don’t have to face these challenges alone. Solutions teams within asset managers can provide sophisticated diagnostics, portfolio-modeling best practices, and new advancements in investment innovation. By accessing these types of services, CIOs can tap into a valuable investment resource to help solve a broad range of portfolio challenges – not just in the current investment environment, but also for many years to come.

For more on Invesco’s Global Solutions team, visit their web site.

This is the first in a series of eight stories focusing on the challenges faced by today’s CIOs, and the strategies, tactics, and partnerships they are leveraging to achieve portfolio objectives.


All content provided by Invesco is for informational purposes only and is not an offer to buy or sell any financial instruments. Invesco Advisers Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities. This material is for Institutional Investor Use Only. The opinions expressed in this article are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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