Chetan Ghosh understands the importance of networking. He landed a top investment job at the £5 billion ($8 billion) pension system at U.K. energy company Centrica PLC in 2009 thanks to networking, and he has made the most of it ever since.
In 2007, after a decade as a pension plan actuary and investment consultant, he decided to take a year off to travel the world before returning home — and to the global financial crisis. A friend at his previous firm, investment consultant Lane, Clark & Peacock LLP, connected him to an opening at multimanager Investment Solutions Ltd., where Mr. Ghosh would manage money for the first time. He felt lucky to have a job, given the state of the industry at the time. “It goes to show the merit of keeping your network and relations good within the industry,” Mr. Ghosh said. He spent about 18 months at Investment Solutions; a co-worker there later connected him with the Centrica job in 2009.
Although his role at Centrica hasn't changed much, in March his title did, to chief investment officer, a new role created following the partial retirement of John Clark, who stayed on as chairman of the pension fund's investment committee.
Mr. Ghosh continues to work his network, but now, instead of a job, he's looking for investment ideas. And he seems to be getting some pretty good ones: The fund's annualized returns for each of the three years to March 31 were in the high teens, comfortably outperforming both the system's liabilities and its pension fund peers, he said. He declined to provide performance data.
How does your money management experience benefit you now? That experience was vital for doing this role. The psychological differences between how you act when actual money is going into the ground vs. just providing advice on what to do — it's hard to convey the importance of it in words, but I feel the tangible benefits of doing so.
What are some of those tangible benefits? Definitely better decision-making, but also a fuller perspective when it comes to taking those decisions. You can, as an investment consultant, set out the pros and cons on a long-term basis of an investment, but actually your entry price does matter. And that discipline of focusing on entry price gets drilled into you when you're at an asset management firm.
You also learn to be more accountable when things go wrong, and that creates a higher degree of discipline within one's self about taking investment decisions. When you know that money can be lost and you've experienced it, you think about it (many) more degrees intensely when you are taking a decision.
What brought you to Centrica? (I was) yearning to get back involved with larger pension schemes where you're able to make greater use of the investment complexity that now exists within the industry.
How are you making use of that complexity? We have a core adviser, Mercer, and we also seek intellectual input from the rest of the market. So, everyone's got an open line of access to us — asset managers, banks, other consultants. They understand our investment dynamics, and where they think they have an investment idea that intersects with what we're looking to do, they will get in touch with us directly. The system is self-selecting and works well — everyone knows that if they inundate us with spurious ideas, that door will close.
Have you acted on any of this external advice? Yes, we've made some investments that will give us U.K. inflation-linked cash flows but with better real-yields than what's available on gilts — in effect, trying to solve this problem where we want to match assets but you don't want to pay up at current levels.
We've done that by making allocations to social housing, infrastructure, ground rents and commercial leases. And we expect that to have 2.5 to 3 percentage points better real yields than inflation-linked gilts. So, a significant pickup while still having inflation-matching characteristics.
So, Mercer isn't exactly playing the typical gatekeeper role at Centrica? They were involved at a very early stage (with these investments). Mercer then did their own research ... and they were able to deliver their view (that) it was an appropriate investment.
That's a dynamic that's having an increasing prevalence among the larger pension schemes, where the bigger consultancies are having to re-engineer their interaction. Quite often when Mercer puts an investment idea to us, it is one we will have already heard of directly from one of our other sources.
That means Mercer and other big advisers do need to rework how they engage with big pension schemes.
Reworking in terms of evaluating ideas? What I've seen some of the smaller advisers do, where they don't have infinite research resources, is focus on the ideas that will add the biggest bang for the buck strategically, and then deploy a hit squad to research that area intensely. Sometimes it's important to act quickly because the opportunity can be short-lived. So that's one model that could also be employed by the big consultancies, especially if they want to adapt their workings with the large pension schemes.
“Solutions” has become a buzzword with managers — what are your thoughts? My personal view is that these solutions teams are just guises for fiduciary management teams. These asset managers don't want to use the term “fiduciary management” to avoid a turf war with traditional investment consultants. Do I think fiduciary management teams are beneficial for the industry? Most certainly. There's a vast majority of pension schemes that don't have any internal investment resource, and they're asked to deal with an ever-increasingly complex investment world, which just is not possible.
If there's one thing that investment managers don't understand about corporate pension funds, what would that be? That we're not obsessed with their business risk and how they measure themselves. We want managers to invest in assets where they have the highest conviction. Unfortunately, so often you hear managers talk about how they can't invest in a certain stock because it would blow their risk budget, and that just makes no sense to us. It's a risk budget relative to how they're being measured; but if one believes risk is a permanent impairment of risk capital ... then it shouldn't matter. As long as you have sensible diversification limits, asset managers really shouldn't be trying to control their business risk, i.e., the possibility that a client might leave them for sub-benchmark performance.
Do you feel asset management fees are commensurate with what you're getting? In general, we would say no. But that's a very difficult fight to take on alone. It probably takes the whole industry to push back. We pay a lot of money to an asset management community where we've seen, on average, not much tangible benefit above benchmarks. We, as an industry, should ask ourselves a pretty hard question as to why we do that.
That accusation would be primarily targeted at the traditional asset classes in terms of relative to benchmark returns. But you can readily extend it to some of the well-known alternatives like hedge funds, private equity and all the fund-of-funds managers. We all work from 9 to 5. Why one sector of the industry deserves to be paid excessively more than others doesn't seem to make a lot of sense.
This article originally appeared in the November 26, 2012 print issue as, "The right connection".