© 2010 Towers Watson. All rights reserved.
Institutional Investment PerspectivesFrom Towers Watson
December 14, 2010
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Towers Watson Investment Services (TWIS)
Who We Are Our Client Base● More than 200 U.S. clients with $650 billion in assets● 160 defined benefit plans ● 120 defined contribution plans● Corporate retirement plans are our focus
Our Resources Our Services Investment Policy Consulting
Portfolio Construction
Manager Search and Selection
Asset/liability modelingAsset allocation studiesInvestment manager structureDC line-up structureInvestment option structureInvestment product analysisRisk managementInvestment policy statement developmentSpending policy development
Dynamic strategic asset allocationOpportunistic exposure to asset classes and strategiesActive vs. passive managementSuitability assessment
Qualitative manager reviewsDetermination of number of managers and mixture of stylesTraditional asset class searchesAlternative asset class searches
“End State” Support Plan Operations Other Services
Annuity market conditions monitoringBuy-in vs. Buy-out analysisCoordination with plan administrator and insurance providers
Liquidity managementPlan rebalancingCustodial interfaceManager contract execution on behalf of Trust
DC provider searchesTrustee/custodian selectionTopical researchQuarterly fund monitoring reports
● Investment consultants since 1961● SEC registered investment advisor● Over 1,000 global investment consulting relationships● 675 worldwide associates
Global Investment Review
Resources-8 global consultants-3 dedicated full-time professionals
Focus-Economic and market views-Asset class research-Coordinate alpha and beta specialists
Investment Strategy
Resources-143 global consultants-88 dedicated full-time professionals
Activity-Over 475 ALM & Risk Budgeting studies in 2009 with a volume of $951 billion-Over 200 structured product transactions to date totaling over $100 billion
Manager Research
Resources-150 global consultants, -90 full-time-108 full-time equivalent consultants
Coverage-697 global selection exercises in 2009-94 selections for alternatives in 2009-Over 3,500 manager meetings last year
Thinking Ahead
Resources-9 consultants-7 dedicated consultants
Recent Themes-Diversity-Combined risk framework-Pension fund governance
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The Next Three Years
FY10 FY13
675 associates worldwide More associates
More specialists
Stronger brand>1,000 worldwide clients
>30 AIS relationships
More delegated responsibility
Increasingly diverse client base
60% Core consulting
20% Strategy
20% Other
More asset based fees
Fiduciary outsourcing and structured products contribute an increasing share of revenue and profits
FY10 revenue ~$200m Ongoing revenue growth
Maintain financial momentum through stronger business model, research and innovation leadership and global brand
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Educational Webcasts
2009 Webcasts
Watson Wyatt’s 2009 Global Survey of Investment and Economic Expectations
Watson Wyatt’s Capital Market Expectations
Implementing Sustainable and Responsible Investment Strategies During the Economic Crisis
Managing Defined Contribution Plans During the Economic Crisis
The New Reality of Pension Investment Strategies
The Current and Future State of Stable Value
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Educational Webcasts
2010 Webcasts
The Impact of Extreme Risks on Economic Growth and Asset Returns
Liability-Driven Investment Strategies: Where Are We Now?
Defined Contribution Investing: Bringing Theory to Reality
Webcast — Private Equity: Emerging From the Crisis
Public Policy: Regulating the Financial Sector
Integrated Pension Journey Planning: What Does It Really Mean?
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Sources of Growth
Advanced Investment Solutions (Global)
Alternatives (Global)
Structured products (Global)
Market share (Americas)
Defined contribution plans (Global)
Other institutional asset pools (Global)FoundationsEndowmentsSovereign fundsInsurers
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Our Current Views
NeutralElevatedModerately attractiveDeveloped equities
NeutralElevatedModerately attractiveEmerging market equities
NeutralNeutralNeutralInvestment grade credit
NeutralNeutralNeutralAlternative credit
Moderately attractiveNeutralModerately attractiveEmerging market debt
Highly attractiveNeutralHighly attractiveEmerging market currency
Moderately unattractiveSlightly elevatedModerately unattractiveReal developed govt bonds
Moderately unattractiveSlightly elevatedModerately unattractiveNominal developed govt bonds
Overall RatingRiskReturnsAsset Class
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Our Current Views
Public policy will be a big part of the future investment landscape
Investment opportunities can be captured whatever the conditions but requires
Appropriate governanceRobust quantitative portfolio construction techniques to manage— Risk exposures
— Liquidity
— Costs
— Manager exposure
— and their inter-relationship
Context is key
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-
Global Manager Research Resources
European Manager Research Team
55 full-time manager researchers9 support staff
13 part-time manager researchers(65 full-time equivalents)
Americas Manager Research Team
21 full-time manager researchers4 support staff
14 part-time manager researchers(25 full-time equivalents)
Asia Pacific Manager Research Team
14 full-time manager researchers5 support staff
15 part-time manager researchers(18 full-time equivalents)
Global Manager Research Team
90 full-time manager researchers18 support staff
42 part-time manager researchers(108 full-time equivalents)
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Stream Summary
Stream Number of people FTE* Average experience (years)
Equities 44 29.0 11.0
Bonds 27 14.5 10.7
Private Markets 31 19.3 12.8
Hedge Funds 24 14.7 11.4
Split by full time equivalent:
Equities
Bonds
Private Markets
Hedge Funds
*There are an additional 30.6 full time equivalent people involved in specialist research and in support roles
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Further Globalization – Recent Announcement
Global rather than local reporting linesWithin stream rather than within market
Stream leaders and ASK heads have objectives around serving the global client base
Greater need for travel and rotating people around regions
Hire where there is need, not where there is revenue
Regional head role changesEnsure the needs of the local client base are being metSpokesperson for manager research in the regionImprove relationship with client consulting teams
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Global Manager Research Structure
Martin Knowles, FIAHead of Equities
Ed BrittonHead of Bonds
Craig Baker, FIAHead of Private Markets
Damien Loveday, CFAHead of Hedge Funds
Global Leadership roles
Craig Baker, FIAGlobal Head of Manager Research
Market Leadership roles
Paul Jayasingha, FIAEMEA
Marko Komarynsky, CFA US
Mark BrugnerAsia
Hugh DoughertyAustralia
*Average years industry experience: 19 years**As of October 1, 2010
Zainul Ali, CFACanada
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Areas of Specialist Knowledge (ASK)
Manager Research resources are organized into a series of ASK teams. There are ASK teams for all of the major asset classes and specialist activities in the investment industry. Each ASK team is responsible for researching all managers within its asset class, and providing recommendations of suitable managers. Teams are also responsible for staying current and providing white paper research on trends in their respective investment areas
EquitiesAustralianCanadianEAFEEmerging MarketsEuropeanGlobalHong KongJapanesePacific BasinSingaporeUKU.S.
BondsAsianAustralianCanadianEmerging MarketsEuropeanGlobalHigh YieldHong KongJapaneseSingaporeSwissUKU.S.
AlternativesCommoditiesCurrency/TAA/ Target Return Multi AssetHedge Funds – DirectHedge Funds – Fund of FundsInfrastructurePrivate Equity – DirectPrivate Equity – Fund of fundsReal Estate – EuropeReal Estate – North AmericaReal Estate – Asia Pacific
SpecialistCustodyIndexationMulti managerStructured productsSustainable Investment & Corporate GovernanceQuantitative analysis inputTarget Date FundsTransition
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ASK Team Heads
*Average years industry experience: 14 years**As of October 1, 2010
Asia and EM, JapanCraig Mercer
AustraliaHugh Dougherty
CanadaZainul Ali, CFA
EAFERon Radcliff, CFA
EuropePaul Jayasingha, FIA
GlobalStephen Miles, CFA
Greater China, Hong Kong, Korea, Malaysia, Taiwan
Mark Brugner
Long-Term Long-OnlyStuart Gray
UKJim MacLachlan
US Large CapHyde Hsu, CFA
US Small CapJanice Fritz-Snyder
EquitiesMartin Knowles, FIA
Equity, Multi-StrategyLeon Beukes, FIA
Fixed IncomeDamien Loveday, CFA
Fund of Hedge FundsCraig Stevenson
Hedge FundsDamien Loveday, CFA
InfrastructureDuncan Hale, CFA
Private EquityMark Calnan, CFA
Real EstatePaul Jayasingha, FIA
Private MarketsCraig Baker, FIA
AustraliaTony Arnold
CanadaSylvie Methot, CFA
Emerging Market,Mark Horne, CFA
Euro, UKEd Britton
GlobalChris Redmond
JapanToshiya Takenaka
Malaysia, TaiwanMark Brugner
USMarko Komarynsky, CFA
BondsEd Britton
CommoditiesMartin Dietz
DistressedLuba Nikulina
Emerging WealthCraig Mercer
Implementation – Custody, Implementation – Transition
Colin Rainbow
Implementation – IndexationRoz Amos
Multi-Asset – Diversified Growth
Matthew Roberts, CFA
Sustainable InvestmentsJane Goodland/Emma Hunt
Traditional multi-manager Andrew Funnell, CFA
Specialist
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Manager Searches
Towers Watson does not use a pre-approved manager list from which we conduct searches
Process is structured/disciplined, but customized for each client’s performance objectives and related selection criteria
Overview of our search processPlanning stage— Client/consultant/research staff actively involved— Determine desired characteristics/criteria— Set timetable
Preliminary candidate identification— Focus on “efficacy” (quality), led by manager research staff, and “suitability” (fit), led by
consulting staff
Final candidate recommendation— Determined by the relevant ASK team (manager research staff)— Usually 3-6 candidates best suited to meet the client’s specific need
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Total Search Activity Through October 2010
Total # of SearchesThru October 29, 2010
01020304050607080
2006 2007 2008 2009 2010
Int'l Equity Fixed Income Large US Equity
Sm/Mid US Equity Multi-Asset Alternatives/Specialist
Alternatives # is not accurate prior to 2009.
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Typical Process for Rating Managers
Global asset class head signs off
Universe of managers
ASK signs off
FREX 1 checklist
Devil’s advocate
Engagement
Follow-up meetings
Follow-up desk-based research & conf calls
Initial research meetings
Desk-based research
Market knowledge, contacts, publications, databases
Experience/stability of team, fees, process/philosophy,quant analysis (see supporting materials)
Meet key people, detail on process, independent thoughts e-mails
Read manager’s research notes & valuation analysis, further quant
Sit in on internal meetings & stock discussions, meet more people
Fees, capacity framework, vehicles
One ASK* member makes case against rating manager highly
20 key points to cover before moving to FREX** 1 rating
ASK debates all key issues & decides whether to rate FREX 1
* ASK = Area of Specialist Knowledge** FREX = Future Return EXpectation
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The Qualities We Look for in Managers
PeopleTalented and experiencedSmall decision-making teamsDepth of resourcesCultural alignmentStrong recruitment and trainingHealthy staff turnover
BusinessLong-term focusAsset Management is the core businessStable corporate structureStrong compliance/technologyLimitations to growthEmployee ownership
ProcessClear competitive advantageSuperior researchEfficient communicationEvolution of processStrong portfolio constructionTransaction cost monitoring
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ABC - Large Cap Growth: Qtr End 2009Q3Business success factors
People success factors
Process success factors
Long-term focus on asset management by strong business leaders
Non-bureaucratic, investment-led culture
Stable corporate structure
Significant investment in key aspects of business
Business structure and employee interests are aligned with those of clients
Successful management of the growth of the business as well as the existing client base
Insightful, experienced and motivated investors
Focused decision-making with clear accountability
Healthy staff turnover, neither too high nor too low
Effective, cohesive teams with complementary skills and personalities
A clear investment philosophy and process designed to leverage competitive advantages
Adequate depth of resources relative to the process employed
Culture that promotes creative thinking and collaboration
Superior research that produces unique investment insights
Pro-active consideration of potential process improvements
Effective management of wider impacts on performance, such as capacity issues and transaction costs
Appreciation and management of all risks relevant to the investment approach
Portfolio management that efficiently translates research insights into portfolio positions
This section provides a description of the investment team, including commentary on the experience of key professionals (prior firms, etc.) and the roles of team members.
This section provides a brief description of the manager’s investment process, focusing on information sources, key decision-making criteria (and the decision-making process), and portfolio characteristics.
FREX rating Skill Exp Deviation Soft Risk
Large Cap Growth 1 Average Average
Product Description
Key Investment Professionals
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ABC - Large Cap Growth: Qtr End 2009Q3Critical Success Factor Changes/Comments
Key Issues to Watch
This section provides explanations of changes to “traffic lights”and/or rationale for non-green lights.
This section provides a description of potential events that could cause a re-evaluation of the manager, examples include:
– Departure/retirement of key professionals
– Excessive asset growth
– Change in portfolio characteristics
Recent developmentsThis section provides a description of developments associated with this manager/product over the past 12-18 months, examples include:
– Personnel additions/departures
– Asset growth
– Portfolio strategy
– Business Ownership
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SWISS TableBusiness People Process
Focused purely on asset management
Diversified client base
Heavy investment in technology and infrastructure
Equity participation for majority of investment professionals
Broad and experienced team
Charlie Loveday, Chief Investment Officer (CIO) is insightful and market savvy [correct spelling of names]
Ability to attract talent
Large, focused research resource
Small decision-making teams
[no use of the word 'strong']
Investment Committee vets every major portfolio decision and carries out weekly sense checks
Clearly understood, disciplined, macro-driven process
Risk management and portfolio monitoring tools
Access to wide range of research sources
Emphasis on asset gathering
History of destabilising corporate activity
Management of capacity
High fees
[points related to traffic lights]
Departure of Paul Miles, Senior Portfolio Manager [include full title]
Analysts have limited idea ownership
Limited evolution of quantitative inputs [avoid unnecessarily long comments]
Derivative expertise and capability lags competition
Impact on culture and morale following acquisition of ABC Corporation
Ongoing FSA investigation in to allocation of initial public offerings (IPO's) [use of acronyms]
Succession planning for key investment professionals
Outsourcing of back office functions to DEF Limited
[no use of numbers that can change like AUM]
Recent changes to the investment committee
Global expansion and multiple locations creates communication challenges
Impact of the hire of Jim Disdale as Senior Portfolio Manager
Link between investment performance and remuneration is unclear
Asset growth may impact the implementation of ideas
Performance and risk objectives are based on back testing ratherthan actual results
Do enough analyst ideas filter through to the portfolio?
Is the process increasingly short-term [use of hyphen]
One year lock up period for this product
Management techniques in this product may incur high administration costs [comments on product structure as well as process issues]
XYZ Example Manager (XYZ) is a business focused on asset management with a diversified client base. [double spaces] The recent acquisition of ABC Corporation has the potential to be destabilising [review trigger], although the business remains asset management oriented.
The key investment professional involved in running the zzProduct is Charlie Loveday, Chief investment Officer (CIO), who is a fundamental investor with a passion for the markets [review trigger]. The team is well resourced, particularly from a research standpoint. However, there have been some changes to the formation of the Investment Committee, which may have repercussions for idea generation [review trigger].
The investment process is disciplined and has a clear macroeconomic backdrop. There are strict stop losses for every position. Concerns include the degree to which analysts feel they have ownership of positions [monitoring point]; asset growth impacting implementation [monitoring point] and the limited experience and use of derivatives [monitoring point]. [Do not include advice to clients in the SWISS table. However, it is often appropriate to include a comment relating to what environments in which the manager may perform strongly/poorly][THE DUE DILIGENCE PROCESS FOR THIS PRODUCT HAS NOT BEEN COMPLETED. THIS SWISS REPRESENTS OUR INITIAL VIEWS AND SHOULD NOT BE DISTRIBUTED OR RELIED UPON WITHOUT CONSULTATION WITH THE ASK TEAM]
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Towers Watson Manager Research Current Issues
See clients searching out new strategies or ways to do things – yields/returns are low; broaden out mandatesRisk control continues to be very important across strategiesEQUITIES
More focus on tracking error and passive mandatesLess demand for quant strategies and traditional equity buckets Greater demand for global mandates that can improve efficiencies
BONDSHedging and risk controlled strategies: LDI, tail risk hedgingImproving returns in a low rate environment so looking at opportunistic markets
ALTERNATIVESMany are giving up on VC and some not getting back investment in ‘97 vintageEmerging markets PE is attracting interest from LPs, but we need to direct them to alpha opportunities vs. beta plays FOF fees are under pressure from clients who are looking for a better mousetrap
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Contact Details
Chris DeMeo335 Madison Avenue, New York, NY 10017-4605212.309.3845 [email protected]
Carl Hess335 Madison Avenue, New York, NY 10017-4605212.309.3800 [email protected]
Marko Komarynsky191 North Wacker Drive, Suite 2100, Chicago, IL 60606-1615312.525.2362 [email protected]
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Disclaimer
The information included in this presentation is general information only and should not be relied upon without further review by the appropriate professional advisors. Towers Watson is not a law firm or accounting firm, and we are not providing legal, accounting or tax services or advice. Some of the information included in this presentation might involve the application of law; accordingly, we strongly recommend that audience members consult with and involve their legal counsel and other professional advisors as appropriate to ensure that they are fully advised concerning such matters. Additionally, material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments.
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