On Aon Podcast: Navigating Volatile Markets as an Institutional Investor

June 5, 2023 21 mins

On Aon Podcast: Navigating Volatile Markets as an Institutional Investor

Episode 54: Our Aon experts discuss navigating volatile markets, as well as examine the role of the Outsourced Chief Investment Officer

Key Takeaways

Institutional investors are currently facing major challenges in the market.
Strategies are in place for a better understanding of risk exposures and identifying potential areas for increased diversification.
There are benefits and difficulties to the evolving role of investment consultants.

Russ Ivinjack:

Hi. My name is Russ Ivinjack. I've been an Aon colleague for 29 years. I currently serve as the firm's global chief investment officer in our Wealth Practice. Institutional investors today face an array of challenges in managing their investment programs. We have volatile capital markets, an array of complex investment strategies that continue to evolve, growing operational complexity and implementing investment programs and generally leaner stats across our client base that, in past years, are all hallmarks of the issues facing institutional investors today. Organizations are seeking ways to effectively govern and implement their investment programs in light of all of these considerations. So, how can organizations and institutional investors better understand the opportunities and the risks that they're facing in today's environment? Are there opportunities to improve the risk-adjusted performance of their investment programs going forward?

So, in today's podcast, we'll explore these questions as well as the role of the Outsourced Chief Investment Officer, or what we like to call OCIO. With me today are Heather Myers and Bryan Ward. Heather has been at Aon since 2016 and currently serves as Aon's Non-Profit Solutions Leader. Bryan has been at Aon since 2005 and currently serves as Aon's U.S. Head of Solutions and Sales. Bryan and Heather, thanks for being here today. I'll start with you, Heather. Maybe you can tell us a little about yourself and the role you play at the firm.

Heather Myers:

Yeah, thanks, Russ. I wear two primary hats. I am the Nonprofit Solutions Leader as one hat, and the second is the Chair of the U.S. Investment Committee. So, my day role as the Nonprofit Solutions Leader is really fascinating because I'm working across our business. I work with our sales team and develop solutions for new nonprofit clients and build the business there. I work with our current nonprofit clients and making sure we have the right answers to their questions, and that we're able to keep on top of what's going on in the industry. And then broadly, it's just that. Understanding what is driving endowments and foundations and healthcare in particular today? What are the topics of most interest to them? How do they want to build their portfolios going forward?

And then, wearing the other hat as the Chair of the U.S. IC, this is the group that is responsible for things like our investment beliefs and our model portfolios and the strategies that we're going to implement in our portfolios. So, as you already said, the world is really interesting and there's a lot going on in the markets today. So, both roles keep me busy and engaged.

Russ Ivinjack:

Wow. So, what we're going to have to, maybe later on in this podcast, talk about your organizational skills in order to handle all that. But let me go to Bryan. How about you talk about your roles and responsibilities at the firm?

Bryan Ward:

Thanks, Russ. It is great to be here today. Thanks for including me in this. In terms of the Solutions and Sales Leader role, it really is at the highest level, harnessing the capabilities of Aon Investments both within the U.S. and globally to bring solutions to our various client types. So, investment research, investment manager research, portfolio construction, risk management and really developing what it means to be a nonprofit client of Aon Investments, a corporate pension client of Aon Investments and then bringing that to market to grow the firm. So, that's really how I define the role at a very high level.

Russ Ivinjack:

Wow. So, we definitely have the right two people today for this podcast to talk to institutional investors about what's going on. So, Heather, let's start with you. What challenges do institutional investors currently face in managing their investment programs due to the current environment?

Heather Myers:

Yeah, that's such a great question, Russ. There are many challenges, as we say, shall we be lucky enough to live in interesting times? A few of the big ones right now that we're talking about are one, illiquidity. We like illiquid investments, but portfolios have experienced additional illiquidity based on the environment we've had today. So, we spent a lot of time looking at the illiquidity and reassessing risk tolerances, different pools of capital, whether you're a corporate defined benefit plan or a public pension plan or endowment, have different levels of risk tolerance. So, we need to work really closely with our clients to understand what is that level of risk tolerance, what kind of investments can they assume? I was in an investment committee yesterday and they have a higher risk tolerance. They're like, "Hey, is there an opportunity for investments today in things like real estate because I know their stresses in the market and others can't take opportunities like that?" So, those are just a few of the ideas right now that we're focusing on with our clients.

Russ Ivinjack:

Right. Thank you, Heather. I really appreciate that. And one of our big themes has been resiliency. How do you build resiliency in the portfolios? And I'm sure we'll get into it more, but the private market allocations our clients have, have really served them well over the past couple of years. But now they're dealing with the growth of those illiquid assets in their portfolio. So, really appreciate it, Heather. Bryan, what do you have to add to that question about the environment institutional investors are facing today?

Bryan Ward:

I think Heather hit on the key points. I would also add just one more thing as we go through periods like this with a lot of uncertainty and perhaps some economic stress in the system. You get a lot of regulatory and legislative impacts to the markets too, that can really change investors’ time horizons, perceptions of risks and return needs. So, not only are we dealing with just the general market environment, but we're also dealing with changes that may come out of DC as well.

Russ Ivinjack:

So, you're saying the regulators continuously throw us curveballs that we need to deal with.

Bryan Ward:

I'm going to just say they continue to drive change in the marketplace.

Russ Ivinjack:

Alright. Great answer. All right. I tried to trip you up there. Not intentionally. So, Bryan, let's stay with you. Another key topic that we're dealing with is just how our role as an investment consultant has evolved. So, you'd speak to it, we've moved from a traditional consulting model to an extension of staff to the Outsourced Chief Investment Officer with many of our clients. So, what are the benefits and challenges that we face as the model has changed?

Bryan Ward:

Yeah. So, that's a great question. And we actually did publish a paper recently on the evolution of the traditional investment consultant. And it really goes back to really the great financial crisis. So, I mean, it's been 12 or 13 years in this environment. And while OCIO, or Outsourced Chief Investment Officer, has become somewhat of a household name in our industry over the last several years, it never really was before. And I would say the start of this was, again, GFC market volatility, not too dissimilar from than the uncertainty and volatility we're facing today. Where many asset owners were looking for help to manage through volatility and looking to help meant asking their trusted advisors to take on more responsibility. Instead of us doing this, can you help us implement?

And what we saw over time was just an increased demand for discretion, meaning they don't have the bandwidth, the capabilities in-house to manage through periods of volatility. So, they would ask their advisor to take on discretion and then evolve over time. And so, what we're seeing here now is that evolution really taking to a new kind of standard market delivery for probably close to half, if not more than half of the institutional asset owner universe, where they outsource some or all of their portfolios. So, the market's adjusted to asset owner needs over time.

Russ Ivinjack:

Wow. Thank you, Bryan. And I know you've been front and center in that evolution, particularly working with our corporate pension clients, where we've seen really a seismic shift over the past ten years from the traditional consulting model to OCIO. So, Heather, what do you have to add to that? 'Cause I know you work with nonprofits and that's a different marketplace in how they use OCIO, or traditional consulting, continues to evolve as well.

Heather Myers:

Yeah. Bryan hit a lot of good points. As you started the conversation, the investment industry has not gotten any easier. It's so much more complex than it was even a decade ago. The ability to pivot and make investment decisions quickly when things like a war breakout or rates rise. Investment committees have realized they don't have the bandwidth, nor the time or the energy to do that. And so, they have appreciated what we can offer as an OCIO, what we can offer in terms of managing that portfolio through these challenging times. And so, I think that there has been this appreciation that they need a partner who's been in the industry, whose day-to-day job is following the markets and not just coming in on a quarterly basis and just giving them ideas. So, there's more of an embrace to partner with a good OCIO than there was a decade ago.

Russ Ivinjack:

Thank you, Heather. Yeah, the world has become incredibly more complex. I like to say, when I started the industry, there were four main food groups, stocks, bonds, cash and real estate. And now, we have hedge funds, private equity, private credit, infrastructure and the list can go on and on. It would take up all the time in the podcast if I kept going. So, with that in mind, how can organizations and institutional investors better understand their exposures? Are they truly diversified, or do they think they're diversified but potentially have concentrated portfolios? So, Heather, I'll turn to you for that question.

Heather Myers:

Yeah, one of the things that we have done a really great job on is building tools to help understand that. There are surprises in the market, 2022 was a perfect example. When you saw correlations between the fixed income and the equity markets, that weren’t something that typically happens by a long shot. But our business is both very qualitative and quantitative. There is this innate understanding that we have to have in terms of how markets behave and an understanding of when things go awry, what may impact the portfolio. And so, we spend a lot of time looking through our client's portfolios, both at a security manager level and an asset class level, and just thinking about where are those risks and potential areas of concern or where we need to manage. We have had some recent crises, where we were able to quickly respond to our clients and evaluate the portfolios as to where they might have had exposures.

So, the more that you have looked through and understanding, and we talk a lot to the asset managers in the industry to see what they're understanding. So, ours is very much heavy information. We have to take through this information and narrow it down to some key points for our clients. Again, a benefit for an OCIO because we have a deep staff to do that.

Russ Ivinjack:

Great. Thank you, Heather. So, Bryan, what do you have to add to that? It's a lot going on. So, how do we help our clients continually to understand their exposures?

Bryan Ward:

No, I think that's a good question. And you're dealing with a market environment right now that many have not experienced. You've got a very aggressive central bank, rising interest rates, stubborn inflation, when many of us haven't lived through this, haven't experienced this. And so, it's really being that steady hand for the clients. They don't overreact. This too shall pass in terms of some of the illiquidity challenges, and some of the rebalancing needs. It's a time to step back and take a look at your time horizon. And so, there's a lot of thinking that's going on, but there's also, from our standpoint... Pardon me. Being that advisor be able to help them manage through this in a very methodical and thoughtful way to where no one's overreacting to the situation.

Russ Ivinjack:

Great. What I hear loud and clear from you is be deliberate and patient. So, like we always tell clients to be.

Bryan Ward:

Yes.

Russ Ivinjack:

Alright, so now, I'm going to make it a little more difficult for both of you, and I'm glad I'm not asking this question to myself, which is...and, Bryan, I'll start with you. So, what do you think the outlook is for the, give it immediate or intermediate future going forward?

Bryan Ward:

So, Russ, that's a good question. I don't know why it's hard because I think the answer is nobody really knows in this environment. So, I'll say in the immediate to the near term, maybe medium term, there's still a lot of uncertainty. So, you have the market really, really hoping for a Fed pause. They're really, really hoping for visibility into interest rate cuts to spur and take the pressure off the equity markets. But no one knows if that's going to happen, the economy to use a term that you use a lot is quite resilient.

And so, you've still got wage pressure growth, you've still got stubborn inflation. And so, I do think you're dealing with a near-term period of uncertainty. But in terms of our world and what we do, that near-term period of uncertainty could, again, continue to deliver opportunities that we haven't found yet. So, we need to be ready, keep our eyes out, and be prepared to take action on behalf of clients because, again, uncertainty, and volatility creates opportunity, especially for those with a very long-term time horizon.

Russ Ivinjack:

Great. Thanks, Bryan. So, Heather, we gave you a little bit of time to polish your crystal ball. What do you have to add there?

Heather Myers:

One of the things we've really experienced, I'd say even over the last decade, if not longer, is a real evolution of differences of how defined benefit plans are approaching their portfolio versus defined contribution versus endowments and foundations. So, Bryan gave an excellent list of the key things from economics that we're looking at and those impact all of those portfolios. And then, there are these other issues that are driving different pools of capital. So, for instance, when I talk to endowments and foundations today. Yes, we need to talk about what inflation expectations are, and what our interest rate expectations are. We also need to talk about things like ESG, a big discussion for nonprofits. DEI, a huge discussion for nonprofits. They tend to have very high allocations to alternatives. As I mentioned earlier, illiquidity, they also have allocations to things like China.

So, for those pools of capital, we have some other broader topics that don't apply to everybody. But in terms of the crystal ball, if I were to say what are the top topics over the next year. It's the markets as Bryan talked about, and then the few, the DEI, ESG, and China illiquidity that we'll be talking to a lot of our nonprofits about.

Russ Ivinjack:

Wow. So, both of you just gave me a full array of things that we're talking with clients about dealing with. And I know one thing that is not happening typically is the amount of time we have to spend with our clients in committee meetings are not expanding. It's usually shrinking. So, how do you execute on that in a shortened timeframe, given all the variables you just went through? So, I think this sort of leads back to what we talked about before and the role of how OCIO has become more prominent or we've become even more an extension of our client's staff.

Alright. So, final investment-related question is as we start wrapping things up. So, are there opportunities to take advantage of given current market conditions and our clients' portfolios the way they're positioned today? So, Heather, I'm going to start with you.

Heather Myers:

Yes, absolutely. When there are risks, there are opportunities. And, again, as you said earlier, there are several areas we're really focused on. Private credit is one of those areas. Reevaluating the fixed income allocation for many of the endowment foundations, where fixed income had lost its utility for a long time, but there is value in fixed income today. So, moving into fixed income allocations for clients who haven't had much. And then, as I said earlier, real estate's going to be an interesting one and broadly real assets. But yeah, so there are a few.

Russ Ivinjack:

Alright. Thank you. Bryan, I'll turn the same question to you.

Bryan Ward:

Yeah, I think we talked about earlier that a lot of times regulatory and legislative issues can make opportunities as well, and we've been really focused on the credit space for quite some time, the private credit space for quite some time. And so, initially, we had legislative actions that led us into that space due to some dislocation and market disruption. And now, with the regional bank crisis going on, that creates additional potential opportunities in that space. So, I know we spend a lot of time in the broad credit markets, and I think that's going to continue for quite some time.

Russ Ivinjack:

Great. Thanks, Bryan. And I'm going to pile on that, which is we've geared so much of our research team toward the last three years, sort of opportunistic credit strategies and private credit strategies as we anticipated the continued evolution and complexity of the credit marketplace. So, thanks for providing an opportunity for me to pile on there. So, first and foremost, thank you guys so much for your insights and discussion today. So, let's wrap things up maybe with an easier question. We started off with making sure you guys didn't pull your hamstring. So, Heather, I'm going to start with you. What is the last book you read?

Heather Myers:

I just finished Demon Copperhead, won the Pulitzer Prize for fiction by Barbara Kingsolver, and it was a remarkable book. It's a modern-day telling of David Copperfield.

Russ Ivinjack:

Alight, so, I have to add it to my long “to read” list. All right. Appreciate that.

Heather Myers:

On all your plane rides.

Russ Ivinjack:

Alright, Bryan, I'm going to switch it up on you. What's on your playlist right now?

Bryan Ward:

So, Russ, I'm sure you can relate to this. It's Luke Combs' Gettin' Old album. And so, I would say there's a song on that album that's just released maybe a month or so ago, Growin' Up and Gettin' Old. So, anyone with 20-ish or more years in the professional industry in your career can relate to it. The general theme is you still got some gas left in your tank, but you probably should go to bed around 9:00 at night. So, highly recommend it.

Russ Ivinjack:

Alright. I'll have to look that up. I was waiting for you to tell me it was Baby Shark was on your playlist. So, thank you, Bryan, Heather, really, really appreciate the time, the insights you shared on the podcast today. Just to our audience, I want to make sure you know that there are opportunities later this year. We have four Wealth Insight conferences in Dublin, Singapore, London and Miami. Please go to aon.com if you're interested in attending. They are meant to be very engaging, dynamic events, where we are interacting with institutional asset owners, asset managers and Aon colleagues, really across the spectrum to tackle the challenges that we all face today. Thank you both. That's our show for today. Thank you all for listening. Look for the next episode of On Aon coming soon.

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