More firms turn to academia for a little bit extra

Global money managers increasingly are forming partnerships with universities and academic institutions, seeking a competitive edge in portfolio construction and research.

Sources in the money management and investment consulting industries say they have recently seen more high profile tie-ups.

Among them are Schroders linking with Imperial College London and AQR Capital Management with the London Business School.

Thinking differently is a key part of these partnerships. “In finance, we tend to have been trained in the same way, trained to think the same and process information in the same way too,” said Nicolaas Marais, head of multiasset investments and portfolio solutions, London, at Schroders PLC. “Everybody studies for (the Chartered Financial Analyst program) and there is almost a monolithic way of thinking. It is incredibly important to break that mold, and engage with those thinking differently.”

“There is a big disconnect between academics in the field of financial research and financial practitioners in (London),” said Simon Pryke, London-based chief investment officer at Newton Investment Management Ltd. “What strikes me is how little both parties talk to one another. Our job in investment management is to think laterally about themes driving change in the world, then to find stocks in which to invest. The idea of tapping into smart people with different perspectives makes a lot of sense.”

Part of that has been a recognition that universities and colleges have long been running successful endowment funds, some for centuries, said Mr. Pryke.

The latest data from the annual NACUBO-Commonfund Study of Endowments shows that 832 U.S. college and university endowments returned an average 15.5% for the year ended June 30, up from 11.7% the previous year. These institutions represented $516 billion in endowment assets.

“Our focus as investment managers is on identifying long-term themes driving change, and then finding great stock ideas consistent with these themes,” said Mr. Pryke. “Academics typically have a bias to the long term so can be very helpful in identifying themes. By contrast, investors are often more short term. Endowment asset management is inevitably focused on long-horizon investing — some endowments have been around for centuries.”

In October, Newton — which has £50.7 billion ($75.8 billion) of assets under management — announced a five-year partnership with the Centre for Endowment Asset Management at Judge Business School, Cambridge University, England, renamed the Newton Centre for Endowment Asset Management. “We are learning a lot, and we think the center's work will be of interest to our current and prospective clients,” said Mr. Pryke.

Teaming up with universities or academic institutions and tapping into their long-term thinking could help money managers to address their big challenge: “We and all investment firms (are) trying to keep all our clients thinking longer term. In the U.K. and the U.S., education endowments have long-term investment track records; we think there is an awful lot that we could learn from looking at them.”

Of course, the partnerships work both ways: Newton can tap into academic knowledge and research around investment decisions and impacts on institutional investors. The school can further extend its research and educational efforts with Newton's support. “We help to find an audience for their research among our clients in the U.K. and in North America,” said Mr. Pryke.

This desire to learn from the learned has manifested in an increased number of recent tie-ups.

In January, money manager AQR Capital Management LLC and the London Business School launched the AQR Institute of Asset Management, which aims to advance research and best practice in money management.

The AQR Institute — to which AQR has made a 10-year commitment — funds and generates research in money management, sponsoring events for academics and policymakers, alongside research and teaching.

“A number of (executives) at AQR came out of academia, or applied research,” said David Kabiller, co-founding principal at AQR, in a telephone interview in January. “There is in common (between AQR and LBS) an intellectual search for the truth.”

Money managers have been teaming up with academics not only to improve their thought leadership and research, but also in ways directly linked to their investment activities.

Schroders, which has £300 billion of assets under management, has a number of relationships with academic institutions around the world. But a recent tie-up with Imperial College London and its financial signal processing lab, was particularly exciting for Schroders' multiasset group.

The two teams are thinking “big data” in particular. “Big data, for example, is all about processing - those who will be successful will be interpreting it and processing it. The academics can do that, but it is us who then need to translate that into actual portfolio positions,” said Mr. Marais.

Schroders' multiasset team uses the data-processing capabilities of Imperial's unit and translates it into investible ideas. “We need a common language with academics — ours is risk premia,” said Matthias Scheiber, a London-based Schroders fund manager in the multiasset investments team who leads the relationship with Imperial. “We are in the business of refining beta into advanced beta — academics can help us in identifying new opportunities.” Right now, the teams are also in the process of redefining how you measure risk. “The Imperial College's cooperation is fully integrated in our investment process,” he added.

“There is a lot of data out there — to a certain degree, an information overflow,” added Mr. Scheiber. “We are not in the business of selling diamonds, but of making jewelry — it is about refining that data and information.”

But there must be clear and defined terms of use for the partnerships, before they can succeed. “There is a financial arrangement — I'm very happy to pay for the effort,” said Schroders' Mr. Marais. “It is a very formal arrangement, and we all benefit from it. A lot of time goes into the relationship.”

He said Schroders decides upfront what will remain as internal research, “to inform our own investment process,” and what they are willing to share with the outside world.

The increase in tie-ups has been noted by sources in the money management and investment consulting industry.

Roger Urwin, global head of investment content at Towers Watson & Co., London, said the consultant's "Thinking Ahead Institute' — which aims to “find and connect industry participants who believe in the value and power of thought leadership to create change,” according to its website — has researched the relationship between academia and market practitioners in a forthcoming paper. Further details were not available by press time, but Mr. Urwin said: “In general, mainstream financial academic input has been strong on ambition, but has been weak on reality and practical application.”

However, academic value has, he said, been significant from lateral sources of research, and there are times when working together and building on the work of academics has resulted in tangible outcomes.

One such example was the development of a 12-factor model of global best practice, studying practices and performances of large global asset owners. This was the result of two pieces of 2008 research by Mr. Urwin and Gordon Clark, director, Smith School of Enterprise and the Environment, Oxford University.

This model is not only embedded in certain parts of Towers Watson's work with asset owners, but is also used as independent benchmarking support by more than 15 very large pension funds and sovereign wealth funds worldwide, with assets amounting to more than $1 trillion, said Mr. Urwin.

And some money managers grew out of academia itself, including $51 billion active global equity manager INTECH.

The firm describes itself as having been “founded on research.” One of its founders, Robert Fernholz, published his academic paper “Stochastic Portfolio Theory and Stock Market Equilibrium” in 1982 — and the manager's investment process has remained true to its scholarly history.

“Academic theory is behind everything we do,” said Adrian Banner, CEO and CIO at INTECH, based in West Palm Beach, Fla. “It is in our DNA. We will never abandon our academic roots - it is baked in.”

London-based Arabesque Partners also grew out of academia. Omar Selim, CEO and founder, launched the firm in June 2013 with the aim of creating a money manager that translates environment, social and governance research into investment performance. A collaboration with the U.K.'s University of Oxford on a metastudy on all the available research on ESG, published September, was an important building block. n