If an asset owner subtracts operational management, tech infrastructure, recruiting, talent retention, and in-house trading from its to-do list, what are you left with? A portfolio, a mission, and a very happy Karyn Williams, Farmers Insurance CIO.
Art by Ping Zhu
CIO: I’m going to be very honest: Insurance companies have a reputation for being the least innovative—or ‘sexy’—of all the institutional fund types. That’s not a reflection of the sector’s investing talent—which is abundant—but of stringent regulation and conservative mandates. Yet you are upending that stereotype at Farmers. Given your mandate is asset security and strict compliance, why isn’t your portfolio… boring?
Williams: The fundamental work that we do here as an investment division is not what a third-party asset management firm does. My group is very integrated into Farmers and its strategic objective, which is to serve our customers. There are major innovations going on for delivering insurance to the market: How do we position for a world of self-driving cars, for example? As investors, we are part of that firm-wide mission. We have to be up front and center and innovate.
CIO: And not just around the margins. You’ve flipped the entire model of general account investing.
Williams: Exactly. We are unique among our peers for running a formalized outsourced program, I believe. Farmers’ in-house group—including everybody who touches the work internally—is only 10 people. However, I consider my team to include the best-in-class managers that we work with. Realistically, not every organization is going to have the top echelon of portfolio management talent. Take Farmers, for example. Maybe I could find and hire the best corporate bond manager in the marketplace, the one with all the relationships to trade in a less liquid market. Maybe, but probably not. An organization that’s much larger, faces many more clients, and has a core investment mission is going to have a much better chance of hiring the people that we need to run these kinds of books.
CIO: Pension funds and nonprofits have been managers-of-managers for a long time. In my experience, investing any assets in-house is the exception rather than the rule. What makes the insurance sector different?
Williams: Many, many insurance companies have traditional in-house investment management teams—a model typically born out of life insurance where you’re trying to distribute products to market and manage them, too.
“I often hear asset owners at other organizations tell me they’re insourcing, and I think, ‘That’s so expensive! Why would you?’”But over the past several years, the infrastructure and costs required to remain effective and efficient as a direct investor have only gone up. More compliance reporting, more systems, new machine learning capabilities: Technology is very expensive and hard to leverage. Every basis point counts. That said, outsourcing is not just about cost. It’s about flexibility. It’s maintaining your ability to grow the surplus of the organization and fuel the engine that feeds the organization.
Especially in a low-rate environment, you want some degree of freedom and optionality in the assets you pursue and the way that you pursue them. Of course, you trade off a little bit of control by giving a mandate to an external manager. That person may have different motivations and intentions than your organization. But if you govern the relationship well, it’s not an issue. It can be well managed.
I often hear asset owners at other organizations tell me they’re insourcing, and I think, “That’s so expensive! Why would you?”
CIO: So, why would they? Because I hear ambitious insourcing plans all the time, too.
Williams: I think personal motivations can come into play. You have a bigger team and that feels good; you can report to the press that 50 people are working for you. But I have 200—they just happen to be at other organizations around the world.
Some would also argue that the economics of insourcing make sense. For extremely large institutions, or where investment objectives are highly complex, perhaps there is a break-even point where they have a substantial enough asset base to justify the cost. But there’s always another organization in the marketplace whose sole focus is that strategy and potentially has a still-larger asset base. Even if you hire the best in-house talent, there’s always the risk they will migrate to that dedicated firm where performance incentives can be aligned more directly to compensation. That’s not easy to do inside of an institution, especially a pension fund.
Personally, I think the economic argument for insourcing is very, very difficult to make.
CIO: Kudos to your executives for supporting a total break from the peer group status quo. For a sector dedicated to risk management, career and peer risks are two exposures asset owners tend to immunize instead of exploit. How did Farmers find a leader—you—with a matching appetite for tracking error?
Williams: I was actually recruited out of Wilshire Associates in 2013 by the former CIO Peter Teuscher, who had come over from Zurich to modernize the fund. After the financial crisis, the market players changed, and so did the playing field.
“As an investor, a strategic philosophy is the most important decision you
will make.”Peter saw that technology, innovation,
and data are important to the investment process and that ours needed to really
transform. He came in to build a team to do exactly that. And he found me. I
joined as head of insurance investments, and was essentially handed a clean
white board to design and build that modern investment process. Of course,
every organization has its own constraints in addition to the regulatory
environment. Subject to all of that, I had substantial license to practice what
I had been advising clients at Wilshire to do for years: Innovate in risk
management and governance.
CIO: You led Wilshire’s fund analytics group, and spent more than a decade there consulting to large institutions. Plus, you have a PhD in finance and background teaching graduate students—all impressive credentials. But Farmers is your first job as an asset owner. In the insurance investing sector, were you a nontraditional choice to lead a multi-billion dollar portfolio?
Williams: No, I wouldn’t say that. There are key decisions that drive investment outcomes, and strategy is the most important one. Having a broad view of markets means looking at liabilities, and considering what risks one needs to take at the aggregate level. How you measure those? What data, infrastructure, and analytics are important to even answer that question? This is a very different approach to markets than trading a portfolio day-to-day.
I had brought to Wilshire and its client base a whole dialogue about risk management, risk analytics, and how they can be used from the board level down to staff. So, there was no training per se to translate that here.
Take a step back. Around the world, at that time, who was thinking in those terms? Peter was one of those people. I was one of those people. We just happened to connect.
CIO: And judging by your recent promotion to CIO, Teuscher and Farmers must be very happy you did connect.
Williams: Succeeding Peter was a natural move for me when the challenges narrowed in focus. After we built the platform and infrastructure, the next step was executing: Building up that best-in-class talent muscle and honing the deep details of our investment process.
This opportunity for organizational transformation—which I love—was huge. So naturally, I was thrilled with the promotion.
CIO: It’s too soon to truly judge, but how is the outsourced model working out so far? Are you pining for a troupe of analysts and a bank of Bloomberg terminals yet?
Williams: It’s working well—we have some early wins. As an investor, a strategic philosophy is the most important decision you will make. I’m very convinced about ours. I would never give up this model.