At Schroder Investment Management, assets in its multiasset and solutions group shot up more than 30%, to £34 billion, in the nine months ended March 31. But for Nicolaas “Nico” Marais, who arrived in March from BlackRock Inc. to head the group, that's just the beginning.
Mr. Marais said his transition was eased by the fact that he and the existing team at Schroders share a predilection for managing money by looking at underlying returns drivers known as risk premiums. “The response (to market shocks) has always been "let's get into more asset classes.' That's not the answer. It's not wrong, but it's not a better and more scientific way to manage portfolios,” according to Mr. Marais. A risk premium approach is a “more scientific” way to manage multiasset portfolios because it allows the manager to drill down below the asset class level, he said.
A former managing director and head of active allocation management within BlackRock's multiasset client solutions group, Mr. Marais also has bumped up the size of his investment team by 10% to 66 since March. Additions included senior strategist Lesley-Ann Morgan from Towers Watson & Co. and head of manager selection Rob Hall, who came from Russell Investments. “We're very aggressive about how we hire, and we simply want the best people in the market,” he said.
He's also been spending a lot of time on systems and operations to ensure the business is scalable. “Everybody wants something different, so the biggest enemy of this flexibility in a solution is the scalability; the two are in constant conflict with each other,” he said. “Technology is a very important thing for us. It's got to be state of the art. It's not as if I can put stuff in Excel ... it gets very complex.”
Your background was in banking? Not really. I started at the South African central bank. I grew up in South Africa (and) did my Ph.D. on economics and bank supervision. My role was to create regulatory frameworks for new product innovations. So, it was a great place to start your career, from an innovation perspective.
(But I wanted) to get back inside the engine room. So I became a gold trader for the central bank. Then I joined the World Bank Young Professional Program in Washington and worked on the Mexican banking crisis. I then joined the (World Bank's) treasury and became a bond trader, which was fascinating — that was in the era (of creation of) the euro. Then I became the investment strategist for (the World Bank's) pension fund, which gave me some perspective for where my clients are now.
What innovative things are you working on at Schroders? (One is) strategic beta. This will be a risk premia-based, intelligent way to allocate capital to different betas. That is an approach that is at the heart of the discontent around diversification. It's the next-generation multiasset approach.
(Another) one would be dynamic inflation. We just launched this one in the U.S., where (clients are asking how to best handle inflation). Some people might use commodities, but how do you know that commodities, at this point in time, is the smart exposure? Should it be emerging markets currencies, or should it TIPS?
So what we're offering our clients — and it's also risk premia-based, everything works off that genetic code — is a product that offers our U.S. investors an intelligent exposure to asset classes that at this point in the cycle will protect you most against increasing inflation, decreasing inflation or deflation.
How is risk management different in multiasset vs. single-asset strategies? That goes to the heart of the whole debate. Many investors have confused risk diversification with risk management. It's not the same thing.
There are two elements to this. You have to understand the risks of investing, not at the asset class level but at the risk premia level. That's how I think about risk management. I'm not that interested in the risk in bonds; I'm much more interested in the risk the inflation component gives me and the risk the term component gives me.
The second is downside risk management, because in a severe crisis your diversification is not going to protect you, despite what people believe. Look at 2008: only liquidity is the premium that people search for (in a crisis). That's a reality. If you do not understand downside risk management, or if you don't put a lot of emphasis on downside risk management, it will remain a disappointing investment discipline.
Why do you report to CEO Michael Dobson rather than Chief Investment Officer Alan Brown? First of all, Alan and I get along very well. But in terms of building a business, the thing that can slow you down more than anything else is going through one committee after the other. In order to speed things up, for me to go directly to Mike Dobson is an almost aggressive way to build a business. Does Alan know everything I do? Of course. But I report to one person and I get it decided.
Also, we're increasingly taking on very large strategic mandates on behalf of our clients. They want to know that when they deal with me or the group that they have an ear at the highest level. They are entrusting us with large parts of their portfolio, not just basic mandates. We have to show (clients) we're more serious about dealing with (them) than anyone else.
You have said that your biggest regret was not responding quickly enough to the quant crisis in 2007. Yes. There were warning signs in what was happening in the U.S. housing market; I didn't think it through. There were warning signs in all the money that went into quant; why didn't we pick that up? Why didn't we see that all of our signals were used by everybody else? It's always easy looking back, but that is a frustration.
Now, looking forward, you say, what are we missing? What's going to come back to hit us in six months or a year? As an investor, if you can think about what can go wrong, and that becomes a constant part of your thought process, the probability that you will survive and do a great job for your clients is much bigger. It's about what can go wrong, what do you worry about.
And what are you worried about? I am worried about the U.S. housing crisis and the impact on the consumer. It is going to take the U.S. a long time to digest — and they will — what has happened to them in terms of the crisis. I am concerned about peripheral Europe and the consequences of Greece struggling and what happens afterward. It's a big problem, and what will the contagion be when that happens? In the longer term, I think the Japanese fiscal situation — not in the year or two years or three years — but longer term is an unsustainable situation.
The other problem in emerging markets is, with interest rates at zero, you could be creating an asset bubble because people are chasing returns wherever they can find it. If you look at it from a risk premia perspective, my advice to clients is to be very cautious; this is not a time to take a lot of risk. You're not being rewarded to take a lot of risk at this point in time.
You used to run. Why did you become a competitive mountain biker? I do what's called enduro cross country — two- or three-day endurance races ... where you race every day, but you stop and sleep and you race the next day. But it's pretty extreme. It's a sport that is detox — you don't think about anything else once you're on the second day on a mountain bike. Nothing else matters.
It's a perfect sport at this age (because of the) adrenaline and fitness and skill. It's less impact on the knees — but more on the front teeth!