More money managers let ideas do the selling

Thought leadership has taken on new importance as institutional investors try to make sense of a vertiginous new world of volatile markets, an unsteady global economy and a proliferation of investment strategies.

“Increasingly, clients are looking not only for products but for ideas about how to use them; they're looking for intellectual capital,” said Benjamin F. Phillips, partner at Casey, Quirk & Associates LLC, Darien, Conn., a consultant to money managers. “That becomes particularly relevant because increasingly, as demand changes among investors, they're looking for innovative products (without established track records). Firms that do this well are able to fill products without track records.”

In addition to helping managers introduce new investment capabilities, thought leadership helps introduce firms to clients in new markets.

“If you're looking to break into new areas, it's a way of showing a) the resources you're devoting to it, and b) your understanding of the opportunity set,” said Divyesh Hindocha, global director of consulting at Mercer in London.

For example, London-based mangers Baring Asset Management Ltd. and Schroder Investment Management Ltd., both known to U.S. institutional investors primarily for their international and global equity capabilities, are trying to build their multiasset businesses in the U.S. And they've kicked off thought leadership marketing programs in the past year to do so.

“You can take your expertise and franchise you have established in one (geographical region) and extend that into another. It's not a short exercise, but you can do that,” said Ian Pascal, director and head of marketing and communications at Baring Asset Management.

Schroders has planned a series of white papers and corresponding round tables with U.S. and Canadian investors over the next 18 months. “They want to see you because you have something interesting to say,” said Nicolaas Marais, head of multiasset and portfolio solutions at Schroders. “At some point, someone is going to say, "So what should I do about it?'” and that's when there might be a commercial payoff for Schroders.

AQR Capital Management LLC, meanwhile, is going the opposite way across the Atlantic in setting up a London-based European distribution business for its quantitatively managed strategies, including multiasset ones. David G. Kabiller, Greenwich, Conn.-based founding principal at AQR Capital, said AQR is using the firm's rich history as a thought leader to not only build relationships with institutional investors in Europe but also to attract investment talent.

“The challenge for us is whether we can hire the proper people with the right” analytical backgrounds that mesh with the firm's “thought leadership DNA,” Mr. Kabiller said. AQR's European staff includes Lasse H. Pedersen, principal, who won the 2011 German Bernacer Prize for the brightest European economist younger than 40, and Antti Ilmanen, managing director, author of the 2011 book “Expected Returns.”

Multiasset is the focus of many firms' thought leadership efforts, as they seek to display their asset allocation insights and attract investors to new products. After the global financial crisis, institutional investors “found out that diversification across multiple managers wasn't a good substitute for diversification across multiple asset classes,” said Roger Urwin, London-based global head of investment content at Towers Watson & Co. That led to interest in multiasset strategies, which, unlike the balanced strategies of old, derive a significant portion of returns from a manager's asset-allocation skills, Mr. Urwin said.

Thought leadership was widespread before the financial crisis of 2008-2009. But managers have pumped up their thought leadership capabilities in recent years. Barings has always run its thought leadership program in-house, but last year increased its team to three from one, while Schroders has added staff, too, according to representatives from the companies.

“We're seeing an increasing head count toward this. This used to be a freelance function; they're now bringing it in-house,” Casey Quirk's Mr. Phillips said.

In 2011, BlackRock Inc. created the BlackRock Investment Institute and hired Lee S. Kempler as executive director. Mr. Kempler, also a managing director at BlackRock, was formerly partner and director of knowledge at McKinsey & Co. “The institute has created a center of gravity or center of emphasis to do all” the goals of thought leadership, be it reputation management or marketing, Mr. Kempler said.

Managers insist thought leadership pieces can't just be a “secret product push,” although 70% of what's produced is just that, said Paul Price, managing director and head of international distribution and client relations at Morgan Stanley Investment Management, London. “You lose all credibility with a client when you do that.”

But institutional investors might be less concerned with apparent commercial interests behind thought leadership and more interested in seeing high-quality ideas on which they can act.

Chetan Ghosh, chief investment officer at the £4.7 billion ($7.5 billion) Centrica Combined Common Investment Fund, which handles the pension assets of Centrica PLC, Windsor, England, estimates “90% of what we get here is fairly vanilla.” Instead, he's looking for “more incisive thought pieces that make a change to the status quo.” Good pieces don't always lead to investment changes, but they should “at least have an influence on the way we think,” he said, adding “it's about the level of depth in how you approach the piece.”

Mr. Ghosh cited Grantham, Mayo, van Otterloo & Co. LLC as an example: “When they talk about asset allocation, they make a lot of sense.” Mr. Ghosh has read GMO's thought leadership pieces for years and would consider investing in the firm's asset-allocation products if the Centrica fund were to add that type of investment.

Another example was Redington Ltd., the London-based investment consultant that specializes in liabilities management. Its thinking on measuring liabilities led Mr. Ghosh's team to move 5% of total assets out of passive U.K. inflation-linked bonds and into assets they hope will deliver better real yields, such as infrastructure, social housing and ground rents. Mr. Ghosh declined to name the manager hired to run the new portfolio.

“It definitely works; it gives you the opportunity to be heard,” said Michael Larsen, director and head of affiliate relations at Research Affiliates LLC, Newport Beach, Calif. “There are lots of smart people with lots of good ideas out there. Being given the opportunity to be heard is key, given all of the noise out there today.”

And the noise level is rising. Michael Falk, partner at Focus Consulting Group Inc., Long Grove, Ill., said: “More people are trying to do it, but it's difficult to say how many more are succeeding.”

In the clamor for investors' attention, managers are turning up the volume. Barings has produced longer, more academic pieces a couple of times a year for about the past decade, but since the financial crisis has added shorter pieces and even a Twitter feed as investors grapple with issues — such as negative bond yields or a possible collapse of the eurozone — that before the crisis would have seemed unlikely. “As people have become short on time, we've been generating a lot more short pieces,” Mr. Pascal said.

And Pacific Investment Management Co. LLC, Newport Beach, Calif., this year added a microsite (http://eurozonedevelopments.pimco.com/EN/Pages/default.aspx) focused on developments in the eurozone. “We aspire to be a trusted adviser to our clients, and seek to achieve that in part by analyzing market developments and articulating our views in a cogent and timely manner,” Dan Tarman, executive vice president and global head of marketing communications at PIMCO, said in an e-mail. “We update the site regularly with new commentary — often several times per week — from our portfolio managers in Europe and here in the U.S.”

But MSIM's Mr. Price questions the usefulness of short, rapid market updates to long-term institutional investors, who prefer a “thoughtful dissertation on a market subject.” MSIM introduced the semiannual Morgan Stanley Investment Management Journal in 2011.