Willis Towers Watson research says strategies can lead to big returns
Willis Towers Watson PLC is asking asset owners tired of getting more beta than alpha from their equity managers to double down on the pursuit of alpha, and a growing number of the firm's clients could be moving to answer the call, executives there say.
Mark Brugner, Willis Towers Watson's Hong Kong-based director and head of research, Asia-Pacific, said his firm is calling on both consulting and outsourced CIO institutional clients capable of stomaching short-term volatility in pursuit of long-term gains to put all of their equity allocations in actively managed, high-conviction strategies of up to 20 holdings per manager.
The firm's research suggests clients who tap a carefully blended mix of those "best ideas" strategies can more than double their odds of garnering significant benchmark-topping returns over five-to 10-year periods, Mr. Brugner said in an interview.
Willis Towers Watson said in a June 2 news release that its review of 977 global equity funds in the eVestment database found only 256 managed to outperform their MSCI World net dividend benchmark over the five years through March 31, 2016. Of that minority, 72%, or 184, had "high active shares," a term to describe portfolios that differ considerably from their benchmark index.
The firm defines "high active share" as a portfolio that deviates more than 80% from its benchmark, and "active share" for those that deviate between 60% and 80%. Less than 60% earns managers a "closet indexer" moniker.
Compared to the tepid performance delivered by most "overdiversified" equity strategies, asset owners relying exclusively on high-conviction, low-turnover portfolios — with "cost-effective implementation and best-practice portfolio management" — can look to garner annualized returns of roughly 300 basis points or more above the MSCI All Country World index benchmark over periods of five years or more, the firm's research shows, Mr. Brugner said.
Finding skilled managers is the biggest hurdle to pursuing the strategy.
The concept requires "a reasonable amount" of high-conviction strategies to choose from, in order to mix and match strategies that can offer complementary style and factor exposures, said Mr. Brugner.
That demand has left Willis Towers Watson focused, for now, on the broadest universe, the global equities space, where it has been able to identify 15 to 20 high-conviction managers over the past year or two, he said.
It has proven difficult to find a sufficient number of managers running concentrated strategies in narrower market segments, such as emerging markets equities, he added.
Mr. Brugner declined to identify the managers in Willis Towers Watson's high-conviction global equity universe. However, Alliance Trust PLC, a closed-end investment trust listed on the London Stock Exchange, named eight of them when it announced in January it had hired Willis Towers Watson to manage trust client assets of more than £3 billion ($3.8 billion) in high-conviction global equity strategies of up to 20 holdings apiece:
- Black Creek Investment Management Inc., Toronto;
- Jupiter Fund Management PLC, London;
- River and Mercantile Asset Management LLP, London;
- Veritas Asset Management LLP, London;
- GQG Partners LLC, Fort Lauderdale, Fla.;
- Sustainable Growth Advisors LP, Stamford, Conn.;
- First Pacific Advisors, Los Angeles, and;
- Lyrical Asset Management, New York.
Those firms launched new strategies for the mandate, but a look at the performance of their existing high-conviction offerings — with holdings of between 15 and 47 stocks — suggest why a resilient governance structure in the face of short-term underperformance could come in handy.
For example, the performance of River and Mercantile's $150 million Global Concentrated Fund, with 15 holdings, has exceeded its MSCI ACWI benchmark by an annualized 5.33 percentage points since its launch in April 2013. Along the way, however, it surpassed the benchmark by more than 10 points over the final eight months of 2013, followed by more than 10 points of underperformance in 2014.
For clients who believe in active management but prefer less-volatile returns, "we'll struggle with high active share" approaches, Mr. Brugner said.
Still, Mr. Brugner said, growing empirical evidence that high-conviction strategies can add value, and growing disappointment with the performance of more diversified actively managed equity strategies prompted Willis Towers Watson to move in 2015 to bring its high active share-focused Global Equity Focus Fund strategy to the market.
In a separate interview, David Shapiro, a senior investment consultant with Willis Towers Watson in London, and a portfolio manager for the GEFF, said the fund has delivered annualized returns just shy of 300 basis points over its benchmark for its first 22 months.
The pooled strategy for OCIO clients, with a mix of eight high-conviction managers, was launched with $130 million, and has since garnered $1.4 billion in assets under management as of June 23, said Mr. Shapiro. Willis Towers Watson's discretionary clients in the U.K. drove net inflows during the strategy's initial year, but since then interest has broadened, with GEFF adding clients from markets such as Japan, Germany and Canada over the past year, he said.
Client mandates won but not yet funded will lift that total to more than $2 billion by the end of 2017, he said. He declined to identify any clients.
Pooled vehicle is new
Willis Towers Watson didn't invent the concept of high active share investing, as other leading investment consulting and OCIO firms, including Mercer Investment Management Inc. and Cambridge Associates LLC, have done research on that topic as well. But at this point, at least "we don't see a similar implementable option" in the form of a pooled vehicle in the market, Mr. Brugner said.
Richard Dell, London-based global head of Mercer's equity boutique, said in an interview that Mercer's belief that "highly active strategies" have high chances of delivering attractive returns has been "a core part of our advice on building active portfolios."
He noted, however, that clients must have governance structures that can tolerate volatile returns from unconstrained strategies in pursuit of those solid long-term gains.
In a separate email, Jan-Hein van den Akker, a Dublin-based portfolio manager with Mercer, said equity managers with active shares of 70% to 90%, or more, are a centerpiece of Mercer's multimanager portfolios. But he said those portfolios also typically include quantitative managers. Mercer doesn't offer strategies limited to managers with 20 holdings or less, he said.
Mr. Brugner said in the realm of efficient implementation, Willis Towers Watson has been able to use that growing scale to win fee concessions from its high-conviction managers, providing a further tailwind for performance. "The fees we managed to negotiate with our managers are in the range of 35 to 40 basis points," less than half their typical fees, he said.
In the area of best-practice portfolio management, Mr. Shapiro said his team followed a strict rebalancing discipline, all the more important when a multimanager strategy has high active share managers with short term performance that can vary sharply from the benchmark.