Seven names came up repeatedly when consultants and competitors were asked to name the biggest players in highly customized investment solutions and strategic partnerships: BlackRock Inc., Bridgewater Associates LP, J.P. Morgan Asset Management, Pacific Investment Management Co., State Street Global Advisors, Goldman Sachs Asset Management and BNY Mellon Asset Management. Brief descriptions of their solutions businesses follow.
BlackRock's solutions-based business emerged from a diversified growth strategy launched about 10 years ago in response to a commitment by the company to “solve client needs with a focus on investment performance. This is in our DNA, it's our core value,” said Michael Huebsch, managing director and head of BlackRock multiasset class solutions unit in New York.
The unit managed $96 billion as of Dec. 31 in customized investment solutions and strategic partnerships that cover client needs as basic as cash management and as sophisticated as multiasset class alternative investment portfolios. The 30-person strategy design group is split into teams that are focused on return-oriented approaches or outcome-oriented strategies and they can draw on every investment strategy managed anywhere in the world by BlackRock. If BlackRock doesn't manage an essential investment strategy internally, the design team can tap a manager research team to find external managers, Mr. Huebsch said.
“The holy grail for clients is when you can bring in as many investment strategies as possible that are focused at the end of the day on investment performance. That's what it's all about,” Mr. Huebsch said.
He said that institutional investor interest is “growing every day” in customized solutions including risk management, liability-driven investment, target-date funds, post-retirement solutions, income generation and funding target strategies, noting that the unit's biggest source of new business is existing BlackRock clients.
Bridgewater Associates already was separating alpha and beta for clients 10 or 15 years ago, but back then “every client had a different alpha,” said Robert Prince, co-chief investment officer of the Westport, Conn.-based firm. In 2006, Bridgewater stopped managing single asset class stand-alone strategies and began to offer just two investment approaches — Pure Alpha and All Weather. A more liquid version of Pure Alpha was launched in 2010.
Today, 85% of Bridgewater's $87 billion of assets under management for 300 clients is managed in customized approaches or through strategic partnerships using these three standardized strategies. Mr. Prince said the three can be used modularly as separate beta and alpha sources to underlie a wide range of customized applications. These include portable alpha and currency overlay strategies, interest rate and global inflation hedges and strategic “best ideas” partnerships like the $500 million portfolio Bridgewater manages for the $38.4 billion Alaska Permanent Fund.
Because “almost all” of Bridgewater's clients use customized services “to some extent,” Mr. Prince said the firm limits the number of clients it accepts. “We could raise a lot more assets, but we don't want to, because it would be a negative. It wouldn't be good for our clients. Our requirement is to perform in the markets and we approach that in a very upfront way.”
When it comes to strategic partnerships, Mr. Prince said the firm is very focused on developing them only with a small number of institutions. “These relationships involve knowing these people personally. ... It starts with people and with building relationships” and the level of research required to share ideas with clients “takes a lot of time. We don't have the capacity for that many of these strategic partnerships,” he said.
J.P. Morgan Asset Management's global multiasset group sits squarely between the firm's alternative and traditional investment management groups, and its 50-member team is organized to provide institutional investors with customized investment solutions.
Those solutions fit into three basic categories: benchmark oriented (outperform a fixed benchmark), volatility oriented (maximize Sharpe Ratio for a given unit of risk); and outcome oriented (risk-adjusted returns that meet multiple objectives), said Jeffrey Geller, managing director and chief investment officer of the New York-based global multiasset group.
The origins of the solutions group goes back about 15 years when the company began to craft tailored benchmark-oriented solutions. Almost all of the group's work now is focused on customized pension plan solutions, Mr. Geller said, especially in the area of dynamic asset allocation and liability-driven investment, but the group is “evolving” to offer more packaged, off-the-shelf investment solutions.
The unit managed $50 billion in customized strategies as of Dec. 31.
At the core of PIMCO solutions, a unit of Pacific Investment Management Co., Newport Beach, Calif., is a risk-factor-based study of a client's individual portfolios and overall asset allocation, a process they've performed about 250 times, primarily for existing clients.PIMCO managed $30 billion in customized investment solutions and strategic partnerships as of Dec. 31.
PIMCO solutions is designed to be highly integrated into PIMCO's existing offerings. It is not a separate product line, but rather is “an approach that leads to a more informed dialogue with clients who value this type of interaction,” said Bruce Brittain, executive vice president and co-head of the solutions group.
Solutions can address client concerns regarding rising interest rates or inflation, managing downside or tail risks and optimizing returns from corporate cash pools.
And the service is free. “There's no incremental charge for this (solutions) group's involvement,” Mr. Brittain said.
So, absent fees, what's in it for PIMCO? A better seat at the table and a chance to showcase other strategies.
“It's changing the way our client-servicing people interact with their clients,” Mr. Brittain said. “Before we would focus on fixed income (investment officers); now we are talking to CIOs and other executives, and having higher level discussions.”
Having broad investment capabilities gives SSgA's client strategists access to both active and passive strategies to use in institutional client solutions, and the firm's approach to solutions has been “any kind of investment program that addresses clients' unique needs,” said Dan Farley, managing director and chief investment officer of multiasset class solutions at State Street Global Advisors, Boston.
Mr. Farley echoed other solutions experts on the importance of relationships. “Having a relationship with the client such that they understand that you have the resources to provide that solution, that they trust the company enough to bring them into the solution, is very important.”
Arlene Roberts, an SSgA spokeswoman, said the firm could not provide assets managed in customized solutions and strategic partnerships as of Dec. 31 because of definitional difficulties.
The strategic partnership approach is a cost-effective way for funds with large internal staffs to get investment ideas they can apply across their portfolios, said Charles Baillie, the London-based global co-head of Goldman Sach's global portfolio solutions team.
“(Pension fund executives) see a lot of innovative stuff because managers know they're competing against other managers” for strategic partnership and customized solutions business, he said.
Goldman's global portfolio solutions team is 50-strong, with another 30 people working to develop short-term tactical tilts for use across the firm.
Mr. Baillie declined to provide the assets Goldman Sachs managed in customized solutions and strategic partnerships as of Dec. 31.
BNY Mellon Asset Management's solutions offering starts with a framework of four basic profiles: diversified growth (primarily equity), diversified income (primarily fixed income), absolute return (assets with low correlation to stocks and bonds) and real assets (those expected to perform well in inflationary environments). Solutions then are customized within these frameworks.
Jeffrey B. Saef, managing director and head of investment strategy and solutions at BNY Mellon Asset Management, Boston, acknowledged the firm's collection-of-boutiques structure does make back-office matters “definitely more complicated, but we are the largest custodian in the world,” which helps smooth over those complications.
BNY Mellon's solutions team of 22 is separate from the money management boutiques, he said, and the team uses whatever investment strategies from those managers that best fit client solutions.
Mr. Saef said BNY Mellon Asset Management could not calculate the amount managed in customized solutions and strategic partnerships as of Dec. 31.