Towers Watson thinks ahead to map creative investment

Market volatility is not something the Thinking Ahead Group at Towers Watson concerns itself with, it is more worried with understanding the interconnectedness of the world and how that can help create ‘useful investment maps’. With this in mind, head of the group Tim Hodgson, says it recently recalibrated its list of 15 “extreme risks”.

The Thinking Ahead Group (TAG) at Towers Watson, is just that, a group of people who get paid to think. But they don’t think about traditional risks and investment opportunities, they recognise that the world is interconnected – that politics, economics, society, environment, technology and finance all interact on almost all issues in many different ways.

“There are very few self-contained problems,” Hodgson (pictured) , says.

In 2009 the TAG at Towers Watson introduced a list of what it thought were 15 “Extreme Risks”, in June this year that was revisited and two on the list were demoted, with two new risks introduced – resource scarcity and infrastructure failure.

The two that were recently eliminated from the original list were ‘the end of capitalism’ and ‘excessive leverage’.

“We decided that the end of capitalism was too extreme and so not very helpful, and excessive leverage was really double-counting financial risks, so we eliminated those two,” he says.

Two years after the original list was formed the group has decided to add resource scarcity, recognising the finite limit on most natural resources; and infrastructure failure, which recognises the dependence on technology and power.

(The Stuxnet virus was a catalyst for this thinking. An interesting graphic of the potential impact of that risk be viewed here

TAG is also working on a paper entitled, The New Risk Framework, in which it outlines five goals in a better approach to risk: broader, deeper beliefs; a stronger risk governance culture; a clearer mission and journey plan; risk management implementation; and institutionalising long-termism.

The group is tasked with trying to improve the investment map to make it more detailed and useful. TAG is filled with juxtaposition: its ideas need to be as global and generic as possible, and its members are specialists at generalism.

“We are trying to create more accurate mental models to better describe how the world works, then we can make better decisions, and better decisions are more profitable,” he says.

But its “thoughts” don’t just exist in isolation, they feed back into the investment committee, and ultimately into the consultant’s model portfolios,

Hodgson, who used to run a TAG portfolio, sits on the global investment committee which is responsible for the house view on capital market assumptions and TAG has a seat at that table.

The global investment committee now has an extreme risk hedges section in its model portfolio, as well as a gold line item (which currently has a 0 per cent allocation, but does exist).

“If none of what we came up with ever changed a portfolio, there’d be a lot of questions, but Towers Watson never applies pressure, it is pure research and development,” he says.

“Our job is to create accurate mental models to better describe how the world works so that better decisions are possible, and better decisions are more profitable.”

While typically the ideas of the group have existed in isolation, there is a danger TAG is viewed as existing in an ivory tower. Its thinking is evolving at the moment and “we are wondering whether we can co-innovate with clients, and we would like to work with a sub-set of clients with dedicated resources to it.”

At any one time the group will have a dozen or so “thoughts” that are active, all of varying stages of development.

An example is Hodgson’s approach to thinking about sustainability.

“We do work on this but there are some questions we haven’t worked on, and I would say my thinking is not yet complete. If growth is linked to physical elements then in the long term the sustainability of growth is about 0 per cent per annum because there are finite resources. This may be over the very long term, and then I wonder if homo sapiens are wired for long-term thinking?”

Similarly, Hodgson is exploring something that has been “bugging” him for some time, namely, to what extent is it possible, in size, to defer consumption through time.

“Any investment is deferring current consumption, and you do that with the expectation of more consumption later, ie a real return.”

While he says this is possible for any individual, he wonders the extent to which the theory of thrift plays a part on total savings.

“When babyboomers were saving for retirement what happened? Is it that all they did was increase P:E ratios, the value of investments, and now they’re selling and there is no-one to sell to, that P:E will fall, and they haven’t saved as much as they thought.”

The Thinking Ahead Group is made up of eight individuals, headquartered in London, but with feeds from the US and Australia. Its success, Hodgson says, is partly about the individuals in the group.

“I never grew up, I never stopped asking why, and for this we need individuals who are enquiring, discontent and dissatisfied with the status quo.”