(April 11, 2013) — A good governance structure is crucial to the success of in-house asset management, according to Christopher Li, chief investment officer at Lockheed Martin Investment Management.
Speaking at the aiCIO CIO Summit 2013 in New York, Li told delegates that at his firm the investment team were left to focus on the actual investing of assets, and that all major decisions to do with approving budgets and setting risk parameters were left to the main board.
“I think this is the right way for funds with in-house investment because you get the best out of your in-house expertise,” he said.
Fellow panellist Charles Millard, managing director of pensions relations at Citi and former director of the Pension Benefit Guaranty Corporation (PBGC), agreed, adding that having investment professionals work in-house made governance of managers easier.
“When people are on the hook for their own due diligence you find they do their homework more and will be a lot more on their toes,” he said.
Li continued by listing the four key benefits of taking your asset management in-house: cost reduction, ensuring you get the best investment professionals working on your scheme, being able to employ a consistent strategy, and having access to both the buy and sell side information.
“People asked me, ‘Chris, do you really believe you can hire the best manager with the limited resources?’ And I said ‘Yes, because I can hire people I know really love investing and will invest for the long term,” he added.
There are difficulties too, Li admitted. Speaking candidly he said: “The drawbacks are you’re managing a bunch of people who all think they’re really smart and all have their own opinions. And there’s issues like compliance to think about, which outside asset managers would do for you.”
Citi’s Millard added that if you decide to go out to the market to be a counterparty to a transaction, you’d have to recognise that you aren’t one of the biggest players and would therefore not be able to get the best price.
One of the biggest laughs of the day came from Li when he was describing the importance of setting out your scheme objectives as an in-house asset management team.
“People ask me what happens if we get to being fully funded – I say don’t focus on that, you should be focussing on performance,” he said. “I was told in one role, ‘Chris, your job is to get us to being fully funded’ to which I responded, ‘But then I’ll be out of a job!’. They said, ‘Yes, but you’ll have a wonderful resume.”
And when asked what he would do if the strategy went horribly wrong, and whether the scheme would revert to outsourcing their asset management again, he responded with: “I don’t know. It hasn’t happened yet. If we really screw up and lose a lot of money, we’d ask why. It’s important to ask why. But I don’t think we’d see anybody hitting the panic button.”
The fourth annual aiCIO CIO Summit runs this Thursday – Friday at the Harvard Club of New York.
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