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Institutional Investment Perspectives      Towers Watson Investment Services, Inc.      December 8, 2011© 2011 Towers Wats...
Today’s presenters   Chris DeMeo       Head of Investment, Americas   Carl Hess       Global Head of Investment   Marko Ko...
Towers Watson Investment Services (TWIS)Who We Are                                                                        ...
The next three years                    FY11                                                                            FY...
Commitment to research and education —Recent examples                   Research/Papers                                   ...
Sources of growth   Delegated Investment Services   Alternatives       Hedge Funds       Real Estate       Private markets...
Our current views — November 2011(Three-year horizon relative to U.S. cash)       Asset Class                 Returns     ...
Return Driver FrameworkThe following return drivers are available to investors:Risk Premium       Investors are Rewarded f...
Return Driver Framework — Mapping different assetclasses onto the return drivers                                          ...
Who are we?                     Our philosophy                     Our process                       Our resultsManager re...
Who are we?                     Our philosophy                     Our process                       Our resultsResearch g...
Who are we?                     Our philosophy                     Our process                       Our resultsResearch l...
Who are we?                     Our philosophy                     Our process                       Our resultsManager re...
Areas of Specialist Knowledge (ASK)Manager Research resources are organized into a series of ASK teams. There are ASKteams...
Who are we?                     Our philosophy                     Our process                       Our resultsKey differ...
TW manager research coverage(as at November 2011)          Managers                                                       ...
Manager searches   Towers Watson does not use a pre-approved manager list from which we   conduct searches       Process i...
US Total Search Activity Through November 2011towerswatson.com       © 2011 Towers Watson. All rights reserved. Proprietar...
Who are we?                   Our philosophy                      Our process                       Our resultsPhilosophy ...
Who are we?                    Our philosophy                    Our process                        Our resultsCombining q...
Who are we?                   Our philosophy                      Our process                       Our resultsPhilosophy ...
Who are we?                   Our philosophy                      Our process                       Our resultsPeople are ...
Who are we?                    Our philosophy                    Our process                        Our resultsTypical pro...
Who are we?                    Our philosophy                     Our process                      Our resultsManager fee ...
Conclusion Key advantages of working with Towers Watson Proven ability to add    •   Global access, experienced team and d...
Contact details   Chris DeMeo       335 Madison Avenue, New York, NY 10017-4605       212 309 3845       christopher.demeo...
DisclaimerThe information included in this presentation is general information onlyand should not be relied upon without f...
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Institutional Investment Perspectives - Towers Watson

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Towers Watson Investment Services addresses current and future investment opportunity and risk, and whether your organization is ready. Towers Watson investment experts discuss:
--What the new world looks like for institutional investors
--Solutions investors are considering
--The latest trends in investment manager selection

Published in: Economy & Finance, Business
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Transcript of "Institutional Investment Perspectives - Towers Watson"

  1. 1. Institutional Investment Perspectives Towers Watson Investment Services, Inc. December 8, 2011© 2011 Towers Watson. All rights reserved.
  2. 2. Today’s presenters Chris DeMeo Head of Investment, Americas Carl Hess Global Head of Investment Marko Komarynsky Director of U.S. Investment Manager Researchtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 2
  3. 3. Towers Watson Investment Services (TWIS)Who We Are Our Client Base Investment consultants since 1961 More than 200 U.S. clients with $650 billion in assets SEC registered investment advisor 160 defined benefit plans More than 1,000 global investment consulting relationships 120 defined contribution plans 675 worldwide associates Corporate retirement plans are our focusOur Resources Our ServicesGlobal Resources Focus Investment Manager SearchInvestment 8 global consultants Economic and market views Policy Consulting Portfolio Construction and SelectionReview 3 dedicated full-time Asset class research Asset/liability modeling Dynamic strategic asset Qualitative manager professionals Coordinate alpha and beta Asset allocation studies allocation reviews specialists Investment manager Opportunistic exposure Determination ofInvestment Resources Activity structure to asset classes and number of managersStrategy DC line-up structure strategies and mixture of styles 143 global consultants More than 475 ALM & Risk Budgeting studies in 2009 with a Investment option Active vs. passive Traditional asset class 88 dedicated full-time volume of structure management searches professionals $951 billion Investment product Suitability assessment Alternative asset class More than 200 structured product analysis searches transactions to date totaling more Risk management than $100 billion Investment policyManager Resources Coverage statement developmentResearch 150 global consultants, 697 global selection exercises in Spending policy 90 full-time 2009 development 108 full-time equivalent 94 selections for alternatives in “End State” Support Plan Operations Other Services consultants 2009 More than 3,500 manager meetings Annuity market Liquidity management DC provider searches in 2010 conditions monitoring Plan rebalancing Trustee/custodian Buy-in vs. Buy-out Custodial interface selectionThinking Resources Recent Themes analysis Manager contract Topical researchAhead 9 consultants Diversity Coordination with plan execution on behalf of Quarterly fund 7 dedicated consultants Combined risk framework administrator and Trust monitoring reports Pension fund governance insurance providerstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 3
  4. 4. The next three years FY11 FY14 700+ associates worldwide More associates More specialists Stronger brand >1,000 worldwide clients More delegated responsibility >40 delegated relationships Increasingly diverse client base especially Insurance, E&F 60% Core consulting More asset based fees 20% Strategy Fiduciary outsourcing and structured 20% Other products contribute an increasing share of revenue and profits FY11 revenue >$200m Ongoing revenue growth Maintain financial momentum through stronger business model, research and innovation leadership and global brandtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 4
  5. 5. Commitment to research and education —Recent examples Research/Papers Webcasts Global Investment Matters Emerging Markets Debt Survey of Investment and Economic Managing Financial Volatility in Non- Expectations Qualified Deferred Compensation Plans Extreme Risks – 2011 Update Risk Management within the Investment Portfolio Do Not Hire Managers for Past Performance Implementing Structured Solution Strategies 2011 Insurance Asset Management Survey Best Practices for Developing and Stable Value Strategies Implementing Portfolio Strategies Asset Allocation Considerations for Nonprofits Global Alternatives 2011 Client Events Opportunities to Build Governance IdeasExchange (iX) conference (New York)towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 5
  6. 6. Sources of growth Delegated Investment Services Alternatives Hedge Funds Real Estate Private markets Structured products Defined contribution plans Foundations Endowments Sovereign funds Insurerstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 6
  7. 7. Our current views — November 2011(Three-year horizon relative to U.S. cash) Asset Class Returns Risk Overall Rating Developed equities Moderately attractive Elevated Moderately attractive Emerging market equities Moderately attractive Elevated Moderately attractive Investment grade credit Moderately attractive Slightly elevated Moderately attractive Emerging market debt Moderately attractive Slightly elevated Moderately attractive Emerging market currency Highly attractive Slightly elevated Highly attractive Real developed govt bonds Moderately unattractive Slightly elevated Moderately unattractive Nominal developed govt bonds Moderately unattractive Slightly elevated Moderately unattractivetowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 7
  8. 8. Return Driver FrameworkThe following return drivers are available to investors:Risk Premium Investors are Rewarded for Bearing the Risk of:Equity Being lower down the capital structure in the event of corporate defaultCredit Corporate bond issuers defaulting on their bond obligationsIlliquidity Holding an asset that cannot be quickly or cheaply soldInsurance Providing protection against extreme lossesTerm The uncertain return and mark-to-market volatility of an index-linked bond compared to holding cashInflation Inflation being higher than anticipated and therefore reducing real returns on fixed-interest bondsCurrency The risk that the purchasing power of the currency falls due to a currency crisisSkill A manager, previously considered skilful, underperforming its benchmark We note that: The term, inflation and currency premia can easily be accessed and have a high capacity The term and inflation premia have a low to negative relationship to equities (a “flight to quality”)towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 8
  9. 9. Return Driver Framework — Mapping different assetclasses onto the return drivers Risk Premia Asset Classes Equity Credit Illiquidity Insurance Term Inflation Currency Skill Developed market equity Alternative credit Alternative betas Reinsurance Commodities Volatility arbitrage Emerging wealth Emerging market equities Emerging Market Debt Emerging market currency Hedge funds Illiquid assets Core global property Core infrastructure Private market funds Bonds Corporate bonds Nominal government bonds (AAA) Inflation linked government bonds (AAA) The above table outlines our view on the risk premia associated with certain asset classes For actively managed investments, the size of the skill risk premium exposure will depend on the conviction in the manager and the alpha they are expected to provide Hedge funds are primarily a skill-based asset class, and different managers will have exposure to various different risk premiatowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 9
  10. 10. Who are we? Our philosophy Our process Our resultsManager research locations1 September 2011 European Research Team 73 researchers Global Research Team Americas Research Team Asia Pacific Research Team 139 researchers 33 researchers 33 researchers (97 full-time equivalents) Small decision-making groups with an asset-class focus: Area of Specialist Knowledge (‘ASK’) teamstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 10
  11. 11. Who are we? Our philosophy Our process Our resultsResearch group structure1 September 2011 Research Asset Research Manager Research Thinking Ahead Identifying attractive asset classes now Finding value added investment Challenging the status quo and solving and going forward opportunities net of fees future problems 7 researchers 139 researchers 11 researchers Average investment experience of 6 years Average investment experience of 11 years Average investment experience of 18 years Administrative support Quantitative support Systems team 15 people 19 people 15 people Strong commitment to research with more than 150 researchers globallytowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 11
  12. 12. Who are we? Our philosophy Our process Our resultsResearch leadership structure1 September 2011 Research Craig Baker Asset Research Manager Research Thinking Ahead David Hoile Craig Baker Tim Hodgson Bonds Equities Process Hedge Funds Private Markets Ed Britton Martin Knowles Jane Welsh Damien Loveday Luba Nikulina Canada U.S. EMEA Asia Australia Zainul Ali Marko Komarynsky Paul Jayasingha Mark Brugner Hugh Dougherty Research Operations Andrew Funnell Significant challenge from leadership and Manager Research Review Committeetowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 12
  13. 13. Who are we? Our philosophy Our process Our resultsManager research stream information1 September 2011 Stream Number of People Full-time Equivalent (FTE) Average Experience (Years) Bonds 31 16 11 Equities 48 29 10 Hedge Funds 21 15 12 Private Markets 36 21 12 Breakdown by FTEtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 13
  14. 14. Areas of Specialist Knowledge (ASK)Manager Research resources are organized into a series of ASK teams. There are ASKteams for all of the major asset classes and specialist activities in the investment industry.Each ASK team is responsible for researching all managers within its asset class, andproviding recommendations of suitable managers. Teams are also responsible for stayingcurrent and providing white paper research on trends in their respective investment areas Equities Bonds Alternatives Specialist Australian Asian Commodities Custody Canadian Australian Currency/TAA/ Target Indexation EAFE Canadian Return Multi Asset Multi-manager Emerging Markets Emerging Markets Hedge Funds — Direct Structured products European European Hedge Funds — Fund of Sustainable Investment Global Global Funds and Corporate Hong Kong High Yield Infrastructure Governance Japanese Hong Kong Private Equity — Direct Quantitative analysis Private Equity — Fund of input Pacific Basin Japanese funds Target date funds Singapore Singapore Real Estate — Europe Transition U.K. Swiss Real Estate — North America U.S. U.K. Real Estate — Asia Pacific U.S.towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 14
  15. 15. Who are we? Our philosophy Our process Our resultsKey differentiators Key differentiators of Towers Watson’s Manager Research team and process: Global reach • Hold 3,000+ research meetings per year and have met 2,500+ managers and access • More than 150 researchers in major financial centres around the world ensures strong coverage • Prestigious client base opens doors to managers and assists in fee negotiations and new product ideas • Input and support from other teams including asset class research and thinking ahead groups Qualitative • Strong focus on qualitative research to identify superior asset managers focus • Focus on the traits of the ‘great investors’ • Past performance is better for providing questions than answers • In-depth quantitative analysis carried out using proprietary tools to inform and allow more probing questions Innovation and • Work with managers to develop strategies that meet the needs of our clients track record • Have demonstrated our ability to add value through manager selections and structure with our model portfoliostowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 15
  16. 16. TW manager research coverage(as at November 2011) Managers Products 6,107 25,509 2,399 7,920 673 2,322 We carry out 3,000+ research meetings per year and have met 2,500+ managerstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 16
  17. 17. Manager searches Towers Watson does not use a pre-approved manager list from which we conduct searches Process is structured/disciplined, but customized for each client’s performance objectives and related selection criteria Overview of our search process: Preliminary Final Planning Candidate Candidate Stage Identification Recommendation Client/consultant/research Focus on “efficacy” (quality), Determined by the relevant staff actively involved led by manager research ASK team (manager staff, and “suitability” (fit), research staff) Determine desired led by consulting staff characteristics/criteria Usually three to six candidates best suited to Set timetable meet the client’s specific needtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 17
  18. 18. US Total Search Activity Through November 2011towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 18
  19. 19. Who are we? Our philosophy Our process Our resultsPhilosophy — Manager selectiontowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 19
  20. 20. Who are we? Our philosophy Our process Our resultsCombining qualitative and quantitativeHow we do this: Qualitative Input View Quantitative Input Formal research meetings Performance analysis Managers internal meetings Portfolio analysis Background checks Output Trading analysis Operational due diligence Capacity analysis Fact-based opinions Fees analysis Define the factors that you believe dictate success; Look for those factors with rigorous researchtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 20
  21. 21. Who are we? Our philosophy Our process Our resultsPhilosophy — Success factors Investment professionals Competitive Advantage Philosophy and insight generation Portfolio management Firm and team stability Sustainability of Competitive Advantage Opportunity set Alignmenttowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 21
  22. 22. Who are we? Our philosophy Our process Our resultsPeople are keyWhat we look for: Competencies Commitment Character Understanding of behavioural Passionate about investment Bounce ideas off people for psychology and its effects challenge not confirmation A desire to succeed and a Ability to separate information constant thirst for learning more Recognise the limits to their from market noise understanding Have learned from their A guiding philosophy, steeped experiences and mistakes Have the strength of character in common sense to wait for opportunities A natural understanding of risk Willing to go against the crowd and able to act amid uncertaintytowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 22
  23. 23. Who are we? Our philosophy Our process Our resultsTypical process for rating products Universe of managers Market knowledge, contacts, publications, databases Desk-based research Experience/stability of team, fees, process/philosophy, quant analysis Initial research meetings Meet key people, detail on process, independent thoughts emails Follow-up desk-based Review manager’s research and quant output, further quant analysis research and conf calls Follow-up meetings Sit in on internal meetings and investment discussions, meet more people Engagement Fees, capacity framework, vehicles Devil’s advocate One ASK member makes case against rating manager highly Skill 1 Key points to cover before moving to a FREX 1 skill rating considerations ASK ASK debates all key issues and decides whether to assign a FREX 1 skill signs off rating Head of stream signs offtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 23
  24. 24. Who are we? Our philosophy Our process Our resultsManager fee negotiation examples Product type Original fee TW-negotiated fee Comment Global equities 75bps 50bps The fees were not uncompetitive, however by engaging with the manager throughout the due diligence process, we were able to reduce the fees exclusively for Towers Watson clients. Emerging market 1.75% + 20% 95bps In 2010 we proposed manager to a client. The manager agreed to provide debt 6% hurdle the product for a lower management fee with no performance fee. Direct hedge fund 2% + 25% 1.5% + 20% As the result of our continued discussions, the manager created a new 2 year lock in share class that will be subject to lowers fees with a two-year lock-in period. This is a significant reduction from the original fee. The lock-in period will be subject to key main clauses and clients will be able to redeem if the fund experiences a drawdown of more than 15% over a one-year period. Private equity fund 2% + 20% 1.25% + 20% Fees in Private Market portfolios are typically the same for all investors in 8% preferred return 9% preferred return a fund; this presents both opportunities and challenges to ensure the fee 100% general 60% general partner terms are acceptable to us. We were able to engage fully with the partner catch up catch up manager on the subject of its fees and change the fee structure of the fund. The original terms were significantly improved upon. Real Estate fund 85bps From 60bps to Fee reduction specific to Towers Watson‘s global client base. Specific fee 20bps reduction depends on Towers Watson advised assets in the fund. RAFI Index fund From 22.5bps to From 8bps to 4bps Fee reduction specific to Towers Watson‘s global client base. Specific fee 12.5bps depending on TW reduction depends on Towers Watson advised assets in the fund. assetstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 24
  25. 25. Conclusion Key advantages of working with Towers Watson Proven ability to add • Global access, experienced team and disciplined process have led to value and innovation superior results • Leverage prestigious client base to gain access to capacity constrained strategies, develop new products offering key advantages to clients and negotiate attractive fees and terms Broad coverage and • Large global team enables us to cover both mainstream and alternative access to other asset classes sources of research • Cross-fertilization of ideas across teams within manager research and with our asset class and thinking ahead research groups leads to innovative solutions being sought Flexibility in the way • We aim to offer a tailored service to our clients to meet their needs we work with you • We are equally happy acting as a traditional advisor as we are offering a more delegated approachtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 25
  26. 26. Contact details Chris DeMeo 335 Madison Avenue, New York, NY 10017-4605 212 309 3845 christopher.demeo@towerswatson.com Carl Hess 335 Madison Avenue, New York, NY 10017-4605 212 309 3800 carl.hess@towerswatson.com Marko Komarynsky 191 North Wacker Drive, Suite 2100, Chicago, IL 60606-1615 312 525 2362 marko.komarynsky@towerswatson.comtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 26
  27. 27. DisclaimerThe information included in this presentation is general information onlyand should not be relied upon without further review by the appropriateprofessional advisors. Towers Watson is not a law firm or accounting firm,and we are not providing legal, accounting or tax services or advice.Additionally, material developments may occur subsequent to thispresentation rendering it incomplete and inaccurate. Towers Watsonassumes no obligation to advise you of any such developments or toupdate the presentation to reflect such developments.This document may not be reproduced or distributed to any other party,whether in whole or in part, without Towers Watson’s prior writtenpermission, except as may be required by law.towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 27
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