Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
  • Print
Breadcrumb
  1. Home
  2. Print
June 23, 2008 01:00 AM

Taking the helm: Face to Face with Carl Hess

Watson Wyatt's Carl Hess talks about plotting a course through changing and volatile markets

John D'Antona Jr.
  • Tweet
  • Share
  • Share
  • Email
  • More
    Doug Goodman

    Carl Hess on July 1 will take on the title of global head of investment consulting. Mr. Hess, a 20-year veteran with Watson Wyatt, will replace Roger Urwin, who served 13 years in the global head position. Reflective of his new title, Mr. Hess believes that investing no longer needs to be limited by geography or traditional asset classes. Given plan sponsors' need to maximize return and the global economy, the current investment market paradigm of 60/40 allocations between U.S. equities and bonds has gone the way of the Ford Model T: No one size and variety fits all anymore. As the U.S. markets flounder amid rising inflation, stemming from rising commodities prices, recession fears and dwindling returns, Mr. Hess sees a greater variety of investment opportunities from overseas emerging markets and alternative investments. A runner in his free time, he recognizes how the basic tenets that make a good runner — proper conditioning, resolve and course evaluation — are applicable toward reaping higher-than-average returns in today's markets.


    How are clients responding to market turmoil? Clearly, with the recent volatility, we've seen unexpected effects. What were staid fixed-income vehicles have had quite a lot of risk underneath ... The first call to arms has been “what do I have, what do I own and what is it really going to behave like. Am I comfortable with the set of strategies I thought I had in place” ... And so that top-order review has been one of the top actions we've advised our clients to take. The market for risk is clearly in a different position now than 12 months ago.

    Carl Hess talks hedge funds, real estate, LDI and his outlook for pension funds interested in these issues

    [Listen now - click the play button above]

    Download Audiocast

    [right-click the link above and select "Save Target As..."]

    Carl Hess

    • Position: Global head of investment consulting at Watson Wyatt Worldwide, effective July 1
    • Age: 46
    • U.S. clients (full retainer/client relationships): For the investment practice of Watson Wyatt, about 200 retainer clients covering assets of $250 billion
    • Education/certifications: BA in logic from Yale University; fellow of the Society of Actuaries and the Conference of Consulting Actuaries; a Chartered Enterprise Risk Analyst
    • Personal: Married with 3 children
    • Interests: bridge, running

    How has diversification in alternatives panned out? To a large degree, diversification has worked well. If you run your mind through the list of alternative investment classes that funds have diversified themselves into ... “all-star” commodities (have) proved to be quite a good hedge against turbulent equity markets. We're not saying it will continue forever, but it's nice to have some market that's an all star ...

    On the other side of the coin you have property, although the commercial markets haven't been hit as bad as the securitized markets or the residential markets. Going forward, we think for funds that can afford to sell liquidity, (real estate) will be a good and attractive choice of returns ...

    The private equity markets — clearly with the cost of leveraging increasing — is one area where we do counsel a bit of caution. The best-performing private equity managers can continue to add quite a bit of value in excess of what the public equity markets have. But the typical private equity managers have been able to make money through leverage rather than through skill.

    Looking to hedge funds, with the cost of leverage going up, these will be more challenging times and we'll see further shakeouts in this market. Fees are very expensive and while it's not impossible for top-quality managers to add value, we'd rather they share a bigger portion of it with our clients rather than keeping it to themselves.

    Hedge fund returns have been weak this year. Are investors growing disenchanted with investments? I think perhaps investors may be concerned with particular investments, but not the asset class or strategy class. The fact is that most investors still are underdiversified. The concentration of reliance on equity risk premium is still paramount for virtually all funds and Watson Wyatt, among others, still is very much encouraging funds to better diversify their programs ...

    This is a difficult area. Skill is more transient than beta; the fact is that the equity risk premium we have has a positive value. Skill, on the other hand, almost by definition has zero or a negative value associated with it. So unless you're going to be a bit better than the average investor, you're not likely to succeed here.


    Is the trend to LDI picking up steam in the U.S.? We see LDI has moved past the stage of any controversy whatsoever and what you have is the internalization that this is the natural position for a fund ... most if not all larger funds have gotten to here. LDI doesn't mean exiting equities and just moving to all liability-matching investments, it's much more about a philosophy and a framework than it is about cash matching.

    We think LDI is here to stay; certainly as a framework and very much so as an investment style for a large number of corporate funds. But if there is some movement in (Governmental Accounting Standards Board) accounting, just you wait — there'll be sea change on behalf of the investment of government funds as well.


    The U.S. real estate market looks pretty glum. How are you advising clients on investing their real estate portfolio? The ability to strike quickly is pretty critical here. We look to our higher governance clients to be able to take advantage of individual opportunities as they arise. We do think this is not likely to resolve itself terribly quickly and so there will be opportunities for months, if not years, going forward. There are also opportunities abroad. Clearly, emerging market real estate — to the extent we can find good vehicles that give our clients access — is a play on emerging market economies that may be attractive.


    The era of the big deal in private equity is over. What's the outlook for this asset class? Over is a strong word. Asleep for a while; or perhaps taking a nap. This is a more difficult market for private equity than it was 12 months ago. We do think that the best private equity managers will be able to continue to add value going forward. A part of what makes them best is their ability to be nimble; they've built up excellent relationships and they have a very strong sense of what it takes to keep their best people engaged, occupied and adding value. At this point, we think there will be greater bifurcation in terms of the marketplace. The cream of the crop will continue to produce extra-normal returns but those generating normal returns using leverage will find it very challenging to make a good economic case for their efforts going forward.


    “Real assets” are very popular as inflation hedges. What do you advise clients? First, you want to make sure you have inflation to hedge. For many pension funds, inflation is great as you will be deflating fixed promises you have made to your retirees. For other investors, inflation hedging may make a lot of sense. What we would encourage is for the truly long-term investor to take a long-term view with regards to some of this. The thought of timber in particular is clearly (for) a long-term investor (only) — there's not a lot (to be gained) in the short term. So, choose your inflation hedge carefully, make sure it is in line with what you need to do and what you want to do, and pursue it as a strategic part of your portfolio.


    Some people think this could be turning point for the dollar. What's your view? As someone who goes overseas a dozen times a year, I hope so. One, against developed currencies the dollar has sunk quite a long way and probably a bit more than the fundamentals indicate. We haven't done anything really about the trade (imbalance). The consumer correction in the States has happened to some degree, but we have a farther way to go. Have they really (curbed) spending yet? No, they've not. Thus, while the dollar may be a bit oversold, it doesn't appear to be the world's biggest buying opportunity either.


    What do you think a McCain or Obama presidency would mean for retirement plans? Given how likely it is the Democrats will retain control of the Hill, an Obama presidency (may result in) more defined benefit favorable legislation actually getting passed ... A McCain presidency with a very Democratic Congress — it's just very unclear what we could see.

    Contact John D'Antona at [email protected]

    Recommended for You
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Pension Risk Transfer: Derisking Trends and Considerations
    Sponsored Content: Pension Risk Transfer: Derisking Trends and Considerations
    Sponsored
    White Papers
    What a Fed pivot and ‘higher for longer’ mean for emerging markets
    A Guide to Home Equity Investments: The Untapped Real Estate Asset Class
    How to Modernize a School District Retirement Plan
    Q4 2023 Credit Outlook: Price Is What You Pay, Value Is What You Get
    There's More Than One Way to Be a Climate Investor
    Exploring the Commercial Application of Artificial Intelligence
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    October 23, 2023 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
    • Print