For a long time, value creation in the financial services industry was often viewed as the result of topping the competition in organisational efficiency and functional excellence.

Better operations, better distribution networks and better service all were seen as main factors in improving market share, creating value for customers and, therefore, creating shareholder value.

But, as argued in the 2000 paper Creating Value in Financial Services, customers do not care about functional excellence, nor do they care about whether an organisation has unique resources to take advantage of scale or networks. Customers care about whether the product or service is of utility to them and (in some cases) to the wider society.

This recognition has led to a renaissance in organisational strategies focusing on anticipating, understanding and responding to the needs of customers and developing long-term relationships with them.

Value creation is not only an outcome but also a process. In the case the paper presents, this process involves generating strategies, services, systems and measures of success focused on customer value. However, the International Integrated Reporting Council, in the context of its integrated reporting framework, defines this process more generally.

“Value is created through an organisation’s business model,” the IIRC states, “which takes inputs from the capitals and transforms them through business activities and interactions to produce outputs and outcomes that, over the short, medium and long term, create or destroy value for the organisation, its stakeholders, society and the environment.”

This definition breaks apart the historically narrow focus on value creation as the sole preserve of shareholders and, more recently, customers. So for whom should value be created and how can we measure it?

Organisations have a wide range of interactions within the regulatory, societal and environmental contexts in which they operate.

Value for whom?

This promotes relationships between the organisation and its shareholders, consumers, employees, regulators and other stakeholders. The long-accepted dichotomy between creating value for shareholders and creating value for stakeholders was discussed in Michael E. Porter and Mark R. Kramer’s 2011 work, “Creating “shared value”.

That article’s central premise is that the competitiveness of a company and the health of the communities around it are mutually dependent. Making a similar point was professor in management practice at Harvard Business School Robert Eccles, in an article published by the MIT Sloan Management Review titled “Why boards must look beyond shareholders”. He notes that corporations have two basic aims: to survive and to thrive. He argues that the outcome of a company’s activities, not shareholder value, should be its objective.

With this in mind, at the Thinking Ahead Institute, we propose a balanced approach to better understanding for whom value is being created and, equally, for whom it is being eroded.

First, we define four key terms:

  1. Owner value proposition (OVP): this is well represented by traditional reporting (balance sheet, profit-and-loss accounts) and is the value produced for the owner.
  2. Stakeholder value proposition (SVP): value created for the society and environment in which an organisation operates. This is usually outlined to varying degrees in corporate social responsibility (CSR) reports.
  3. Client value proposition (CVP): policies and actions that deliver value to clients in services and products.
  4. Employee value proposition (EVP): policies and actions that attract, retain and develop employees and teams.

Metrics for the value an organisation creates need to take into consideration all four areas.

This requires organisations to use new measurement techniques that move beyond long-standing accounting and CSR reports. Traditionally, EVP and CVP have not been measured. At the institute, we have created a toolkit to help organisations assess these. There is no strong CVP without a strong EVP, so these should be considered equally in an organisation’s mission and strategy.

In 1997, author John Elkington coined the phrase ‘triple bottom line’ to argue that corporations should focus not only on the economic value they add, but also on the environmental and social value they add (and destroy).

Companies are increasingly seen as needing a social licence to operate, the deterioration of which is linked to tangible reductions in shareholder value and, in turn, portfolio return.

Understanding companies’ creation of value and its impact is at the heart of modern initiatives such as the IIRC framework. It encourages companies to think about value creation and destruction through the lens of multiple capitals over multiple time horizons.

The Global Reporting Initiative’s (GRI) Sustainability Reporting Standards leadership on non-financial disclosures does provide an industry-trusted framework to enable organisations to report publicly on their economic, environmental and social impacts; however, we believe there is more work to be done to understand how we can better measure value creation of companies – the balanced framework proposed above provides a first step towards this.

Marisa Hall is senior investment consultant in the Thinking Ahead Group, an independent research team at Willis Towers Watson and executive to the Thinking Ahead Institute.

 

 

Technology should be a priority for all asset owners but for most it is not, Stanford’s Ashby Monk has said.

“If you don’t sense a blistering pace of technological change in your organisation, then you’re behind,” said Monk, who is executive and research director of the Stanford Global Projects Center. “Most pension funds are operating with a large technological debt [that] will one day lead to technological bankruptcy. Technology should be a matter of priority. This needs urgency.”

Speaking at the Association of Superannuation Funds of Australia annual conference, Monk, who is executive director of the Stanford Global Projects Centre said artificial intelligence can be applied to every element of finance.

“You can apply AI to people, process and information and over time this will lead to a singularity – a permanent and structural change in the way we do things,” he said. “I believe the hype around AI is justified.”

For institutional investors, which have historically found innovation challenging, Monk said the AI revolution demands a huge cultural shift and a re-allocation and re-prioritisation of resources.

“It will fundamentally change your business,” he said.

Monk, who is also a senior research associate at the University of Oxford and a senior adviser to the chief investment officer of the University of California, consults to pension funds and sovereign wealth funds around the world.

He said investors need to build the tools to harness AI and predicts profound disintermediation and re-intermediation in the industry as a result of technology.

“We think autonomous, self-driving portfolios are coming,” he said. “Imagine AI that understands your liability profile, governance constraints and risk tolerance, and designs a portfolio for you. What gets me excited is the future of asset management that could come from these powerful tools.”

Monk told the story of a high-profile, Oxford-based hedge fund that is using AI, which resulted in it generating better alpha than ever before. The problem, he said, is the team didn’t know why it was producing a better outcome, people didn’t understand why it worked. So why should that sit inside a hedge fund with a 2 and 20 fee structure? It raises questions about what will happen to the world of quantitative and active management in the next 10 years.

“Are fund managers better than the PhDs coming out of Stanford? AI is not coming out of Connecticut,” he said. “AI is the first opportunity in financial services to create an enduring advantage out of inference. Speed or inference are our core advantages; for 4000 years, the advantage has been speed.”

Monk points to Alpha Vista Financial Services, a start-up asset management firm that is commercialising a big-data, AI market analytics technology platform with a starting point of chaos theory and reflexology theory, rather than modern portfolio theory.

“If they are successful, it will change the way we deploy capital,” he said. “We need people like Manesh [Nathoo, Alpha Vista’s chief executive], who could have built a hedge fund but wants to democratise the technology. It’s hard to help entrepreneurs [build something other than] a hedge fund out of their cool technology. But we need to help them build information, knowledge-sharing systems, not just a return stream.”

Monk also makes clear AI is a means, not an end.

“AI is another tool in the toolkit,” he said. “Focusing on fees and cost transparency is the most important thing we as asset owners can do. We don’t get from managers the true costs. How do we know if we have alignment of interests if we don’t have fee transparency?”

 

A red-hot Go for innovation

AlphaGo Zero is the latest version of a computer program that defeated the world champion at the ancient Chinese game of Go, a contest of intuition and complexity that was thought to be beyond the realms of any computer.

The interesting thing about AlphaGo Zero, developed by DeepMind, which is now part of the Alphabet group, is it didn’t learn the game by playing humans, but by playing only against itself. In doing so, it quickly surpassed human levels of play and defeated the previous world champion by 100 games to zero. And all this happened in only 40 days.

“Imagine this being applied to risk management, your stakeholders’ needs or portfolio management,” Monk said.

Too many owners don’t think of developing their own internal innovations for competitive advantage, they just think about what goes on outside their organisation, said Monk, who lives and works in the San Francisco Bay Area, drives a Tesla and consults to a number of start-ups.

“How many funds have a process for monitoring new start-ups and tech companies?” he said. “This is cognitive dissonance, you believe one thing and your actions are the opposite. Commensurate urgency is needed to be innovative. Innovation is messy and there’s a natural tension between efficiency and innovation, which is challenging. But asset owners are the base of our capitalist system, from which all capital flows to managers and companies, and we need them to innovate.”

 

Robust networks fuel innovation

Step one for investors in creating this urgency is to take their networks seriously.

“Empower senior leadership to identify companies and academics and build deep relationships with them,” he explained.

The top pension funds in the world embrace such relationships, Monk said, pointing to some Canadian funds that have a network or relationship team and find “super connectors” in the world, put them on the payroll, and help their internal teams connect to solve problems.

“This means making an investment without understanding what the return is,” he acknowledged. “But at some point, relationships will be valuable because they’re real and not based on a transaction. Make 20 relationships; if 10 of them are in technology, it will position you well for the next 10 years of chaos.”

Monk does recognise it’s a two-way street, and that investors have a role to play in educating the technology industry on how to cater for them.

“Technologists don’t know what pensions are,” he said. “They think finance is [the venture-capital firms on the Bay Area’s] Sand Hill Road and don’t know how capital is allocated. So how can they build technology for [asset owners]?”

 

Ashby Monk will be a speaker at conexust1f.flywheelstaging.com’s Fiduciary Investors Symposium at Stanford University, September 30 – October 2, 2018.

The UK’s £3.5 billion ($4.7 billion) Environment Agency Pension Fund, a local government defined benefit scheme for members of the public body charged with looking after England’s environment, has a global reputation for integrating climate risk into its portfolio. Its investment philosophy is shaped around three key themes – to invest responsibly, de-carbonise and engage. Now the fund is stepping up those efforts and calling on others to do the same.

The EAPF wants better disclosure and tangible action from the whole financial industry to provide more support for asset owners seeking to manage the financial implications of climate change.

“The industry needs to step up to challenges posed by a changing climate and the impacts of the transition [to a low-carbon economy]. We need more action and we need it now,” says Emma Howard Boyd, chair of both the Environment Agency and the EAPF investment committee.

From next April, the EAPF will begin to pool its assets into the £28 billion ($37 billion) Brunel Pension Partnership, one of the eight asset pools forming from 89 local government pension funds with collective assets under management of £200 billion ($269 billion). The funds are joining up to cut costs and create savings through their collective buying power.

Most of the EAPF’s local authority fund peers have not matched its efforts at integrating environmental concerns. Now, this could begin to change. The sector’s umbrella, the Local Authority Pension Fund Forum, with help from EAPF executives, has just issued a Climate Change Investment Policy Framework, giving all the funds clear climate risk guidelines for the first time.

LAPFF chair Kieran Quinn says, “Our new framework provides much-needed guidance for pension funds, to minimise adverse financial impacts and maximise long-term economic returns for beneficiaries.”

 

EAPF leads the charge

Changes at the EAPF include the fund pushing for better disclosure from investee companies, asset managers and other partners by “actively supporting the adoption” of the Task Force on Climate-related Financial Disclosures’ TCFD recommendations. The fund will also work with partners spanning investment consultants, actuaries, credit ratings agencies, external audit and risk advisers to ensure their advice, tools, processes, skills and knowledge are “fit for purpose” to support their clients.

The EAPF also will use the Transition Pathway Initiative – a tool that allows investors to track how the highest-emitting global companies are preparing for the transition to a low-carbon economy – to help it evaluate how aligned its listed equity portfolio is with a de-carbonising marketplace. This will guide the fund’s priorities for engagement with companies from now on. The EAPF co-founded the TPI last year.

The call for action from the EAPF comes as the fund updates its Policy to Address the Impact of Climate Change, first published in October 2015. The document will now incorporate new guidance from The Pensions Regulator and the Law Commission that states pension fund trustees must consider environmental, sustainability and governance factors in their decision-making processes, too.

“Our updated policy sets the pace for pension funds that need to keep up a strong financial performance in the race to a low-carbon economy,” Howard Boyd says.

The EAPF will also integrate the United Nations’ sustainable development goals into its portfolio.

A deep dive into water risk – one of the SDGs – will be a first priority. The fund will work with CDP, formerly the Carbon Disclosure Project, to target a 20 per cent increase in the response rate of its listed companies to CDP’s Water Program by 2020. It will also target a 20 per cent reduction in the portfolio’s water impact relative to the MSCI All Country World Index over the same timeframe. The EAPF has already written to about 160 companies in which it holds a stake, encouraging them to provide water risk information to the market via CDP.

“We are on target to deliver all our climate goals by 2020, but need more disclosure from companies and the financial sector if we are going to meet our objective to be 2°C (or below) compatible,” says Faith Ward, chief responsible investment and risk officer at the Environment Agency.

LAPFF’s guidelines

Given EAPF’s expertise, it is no surprise that executives from the fund helped the LAPFF draw up its climate change framework. The guidelines urge funds to enshrine their climate policies into their investment beliefs, put in place targets and reporting processes, and review their climate strategies every three years.

It suggests active management of carbon risk with tilts towards low-carbon companies. It also encourages funds to beef up their oversight of investment managers by monitoring them “on their approach to climate change as part of the regular review process”. The framework also recommends scenario analysis to estimate the relative performances of asset classes and sectors under various circumstances. When a scenario is considered “robust and meaningful” in an ESG context, it should be applied to the asset allocation, the framework states.

Private markets hold most opportunity

Funds will find more climate-related investment opportunities in private equity, private debt, infrastructure and real assets than in public markets, the framework notes, adding that “this has asset-allocation implications, due to the illiquidity and complexity of some of these asset classes”.

The framework also advises funds to do more to integrate climate risk into their often “significant” property portfolios, given that buildings are responsible for more than one-third of total greenhouse-gas emissions in the UK. For directly held properties, it suggests funds work with property management teams on focus areas such as “energy management and owner-occupier relations to reduce these emissions”.

Direct engagement

LAPFF also urges local authority pension funds to engage with companies directly, collaboratively, via processes like TCFD, and through their fund managers. And it calls for funds to apply a similar strategy for engaging with policymakers and regulators “to address market failures and to provide an appropriate strategy and policy framework, which encourages the transition to a low-carbon economy”.

LAPFF’s Quinn says, “Local authority pension funds are enthusiastic about their responsibilities. This offers them a toolkit and is also a way of handholding. It is not prescriptive but it is very good guidance.”

 

A new paper by Focusing Capital on the Long Term (FCLT Global) gives asset owners and managers practical advice on negotiating investment mandates that align with long-term goals.

The FCLT paper, Institutional Investment Mandates: Anchors for Long Term Performance, includes a top-10 list of recommendations for long-term mandates that covers fees, benchmarks, the term of the contract and performance reporting. It gives investors ideas for changing behaviours to better inform long-term thinking; for example, changing the frame of reference of performance reporting, and flipping the standard practice of listing short-term results ahead of longer-term outcomes.

Most of the changes are “common sense” and not very difficult, says Sarah Williamson, chief executive of FCLT Global, adding that the organisation’s membership is considering all of the recommendations and some have already been implemented.

“Most reports look at data in order of quarterly performance, then year to date, then one year, three years and so on,” Williams says. “By the time you get to five- or seven-year figures, it’s too many numbers to take in. One suggestion is to flip it and start with the seven-year performance number. [Doing it the other way] is just a habit, there’s no reason for it.”

Williamson said one of the challenges for the industry is to change these habits and incentives to better align practices with the long-term strategic goals.

“There are incentives, habits and behavioural finance mistakes or tricks played by our mind that lead to short-term behaviour. How do you poke, tweak, nudge each of those?” she says. “Long-termism is interesting to me – everyone wants it, they just have a hard time doing it. Our role is to help people address these habits. My hope is asset owners and managers read this, think about it and ask themselves, ‘Are we setting up investment structures that lead to and support long-term performance?’ If you have long-term liabilities or obligations, it is intuitive, almost obvious, to invest long term. If you have those obligations why would you invest short term? We need to turn the question on its head. The default should be long term, and then if there is a reason [to do otherwise] that’s OK.”

The paper suggests a number of areas for institutional investors to focus on as they negotiate mandates with their managers.

These includes asking:

Do the agreement’s incentives support a long-term relationship. For example rather than tying fees to assets under management, have terms that lock in asset owners for longer in exchange for fees that decline over time.

Does the communication from the manager concentrate undue attention on short-term results?

Is the focus on leading or lagging indicators of performance?

Do the mandate terms reward long-term investing and mitigate common ‘buy high’ and ‘sell low’ patterns of chasing performance?

The paper states that longer-term investment contract provisions can help asset owners and managers focus on the long term. Their long-term behaviour can then translate across the investment value chain to influence corporate behaviour around business and capital allocation, and ultimately help foster improved economic growth.

Some of the other areas of exploration the paper raises include: continuing to report a manager’s performance after it has been terminated and so observing its longer-term performance; using alternative benchmarks that explicitly incorporate long-term thinking; constructive dialogue on portfolio managers’ personal incentives; and performance reporting that considers the economic indicators of portfolio companies alongside financial returns.

“People want to be long term but both asset managers and asset owners are shifting the blame,” Williamson says. “Asset managers say they have a long-term strategy but are afraid if they underperform in shorter time periods they will get fired by the asset owner. The asset owner says the asset manager has a different time horizon to them. Both are shifting the blame. But long-term investing is in both parties’ best interest.”

Building new patterns of behaviour and processes into the institutional investment mandate could provide the discipline required for both parties to change from a desire to act, to acting long term.

Factor investing has been hard to ignore in the last few years. Many new products (often termed smart beta) seemingly offering a silver bullet for investors, claiming sustainable excess returns with high levels of transparency and low fees; however, the practical benefits of factor-focused smart-beta strategies, within the context of long-only equity investing, are not as clear as they might first seem. Such strategies require careful consideration before investing.

Until recently, investors wishing to gain exposure to equity markets had a simple choice of tracking a market-cap index or investing in traditional (and significantly more expensive) active approaches. The development of factor solutions provides a middle ground, and while they are far from homogenous, broadly speaking, factor strategies do bring tangible benefits. Chiefly, these include:

  • Low cost, with management fees often not much more than for tracking a market cap-weighted index
  • Transparent process targeting well-known return premia
  • A focus on absolute risk, not relative risk, thereby avoiding the index-like behaviour of some traditional active approaches.

Beyond these broad characteristics, however, the conversation becomes less clear. Firstly, factor strategies are not clearly defined and cover a wide range of capabilities and approaches. As such, they require careful consideration and we caution against treating them as passive or low-risk approaches to equity investment. Factor strategies and factor indices can involve material deviations from the market-cap index and can often be complex. They require active decisions around portfolio construction and, like traditional active approaches, provide no guarantee of success. Investors should apply the same level of diligence to the assessment of factor or smart-beta solutions as they would to any active approach.

It is also important to distinguish between the different types of factor-based strategies available; for example, simple factor indices can be dangerous, due to their relatively naïve approach and static design. In the case of published indices, rebalancing may be gamed by other investors, making them more prone to risks such as crowding – especially if similar strategies are also offered in exchange-traded funds. Comparable factor-focused outcomes may be generated by a more dynamic approach with investment manager oversight at only marginally higher costs.

Having said that, the development of a range of low-cost, factor-based investment options does present new opportunities to consider. The specific implications will vary depending on each investor’s circumstances and beliefs, but potential actions include:

Investors with a (traditional) actively managed equity portfolio should ensure that it is well-diversified by style factor. To the extent that such portfolios are over- or underexposed to certain factors, actively managed (as opposed to index) factor strategies may play a useful role in plugging any gaps (that is, as a completion portfolio).

Investors who are able to develop a higher degree of conviction in the investment case for factor exposures than they can for traditional active management may wish to hold a core of their equity exposure in active (non-index) multi-factor strategies. This reflects the fact that an investor’s conviction level will play an important role in determining the likelihood that an investor holds onto a manager during periods of underperformance versus market cap.

Investors who already make use of traditional quant strategies may wish to review such holdings against comparable (but typically lower cost) actively managed multi-factor strategies. In some cases, investors may find that a well-constructed active multi-factor strategy offers factor biases and portfolio oversight very similar to a traditional quant strategy, but for lower fees.

Investors making use of factor indices may wish to compare such approaches against active multi-factor strategies. For a relatively small increase in fees, active multi-factor approaches offer superior risk management and portfolio evolution over time.

In short, factor strategies vary greatly and should be considered a form of active management, even when offered in index format. Some factor strategies can play a useful role in building robust equity structures, bringing cost and transparency benefits; however, as with all active approaches, investors need to ensure that they have a full understanding of each strategy’s characteristics, pitfalls and expectations before investing.

Rich Dell, is head of equity manager research at Mercer Investments.

 

The $142 billion Teacher Retirement System of Texas (TRS) has overhauled its equities portfolio to improve integration of a $54 billion allocation that weaves together multiple managers and strategies.

Key changes include increasing risk premia and internal management, reducing active management in US equity and applying new strategies developed by the fund’s research arm to the main allocation.

It’s the culmination of an 18-month review during which TRS researched best practice in global public equities management, consulting with peers in North America and Europe, and the fund’s external asset managers and advisers.

At the heart of the strategy is the creation of a more top-down portfolio, says one of its chief architects, TRS’s new deputy chief investment officer Jase Auby.

Auby was promoted from chief risk officer in September in a reshuffle following former CIO Britt Harris’s departure to join the University of Texas/Texas A&M Investment Management Company (UTIMCO). Rather than focus on intense searches for the best managers in a bottom-up strategy to achieve alpha, TRS’s plan is to drive a single, integrated alpha stream from the top.

“Many allocators manage with a light touch at the total level and rely on the power of the individual strategy and manager selection to aggregate to a good result,” Auby explains. “This is not necessarily a bad choice, so long as risk exposures are managed, the alpha processes remain unconstrained and the focus is simply on choosing the best processes. However, we believed that we could improve on the light-touch model.”

In TRS’s old bottom-up strategy, the fund’s public equity portfolio was structured around internal and external management priorities and different asset management styles. Each portfolio was charged with delivering its own balanced return in a process that resulted in some duplication and cross-overs, says Auby, an Austin native who moved home to join TRS in 2004, after roles with Goldman Sachs and Lehman Brothers in New York.

Now, the fund’s public equities are divided into three vertical portfolios: US stocks (18 per cent of TRS’s total), non-US developed markets (13 per cent), and emerging markets (9 per cent). To this simplified frame, TRS then applies a range of horizontal strategies.

“It allows for more efficient answers to the internal/external, fundamental/quantitative and alpha/risk premia/passive questions,” Auby details, adding that the fund has also tipped its allocation away from US stocks in favour of non-US developed and emerging markets.

Directional hedge funds (4 per cent) and private equity (13 per cent) bring the total equity allocation to 57 per cent of assets under management.

Chasing alpha

TRS has favoured risk premia, particularly value and quality strategies, for a long time, but has tended to use these factors primarily in its dollar allocations. Now the fund will apply risk premia at the total equity portfolio level, with factor strategies targeting half of the 1 per cent excess return target for the total equity portfolio. In addition to the focus on funded beta, TRS has also introduced an internal alternative risk premium portfolio. This is a multi-asset class overlay portfolio for the total pension fund, in a non-funded form.

Although active equity management has added value at the fund – producing 29 basis points, on average, over the last five years, equating to $336 million – most of that has come from active strategies in non-US developed and emerging markets. Active management in the US has struggled with both internal fundamental, and external portfolios underperforming. The introduction of more factor strategies could be a big part of addressing this, Auby says.

Over recent decades, academia has honed in “on the concept of risk premia, and when we looked at concepts expressible across a $54 billion portfolio, these were the ideas that were timeless and universal,” he says. “We believe we can tilt on a long-term basis, and really move the needle. One of the reasons risk premia are appealing is because they offer both fundamental and behavioural explanations as to why they might persist.”

Factors in play

TRS has added a quality portfolio, a defensive portfolio and the multifactor portfolio; internal strategies will concentrate on low-volatility factors in US and developed markets, and fundamental factors in emerging markets and non-US developed markets. In addition, TRS now has three internally managed quant portfolios that go a step beyond traditional risk premia. But external management will still play an important role in the equity portfolio, with these managers targeting highly diversifying strategies not managed internally.

“Clearly, generic risk premia investing processes can come in-house,” Auby acknowledges. “However, many of our external managers rely on risk premia and are able to add alpha on top of that. To the extent that we are trying to aggregate risk premia exposures up to the total portfolio, these managers [add] to the overall process.”

Nevertheless, bringing more investment in-house has meant the loss of some external managers.

“We had a few external strategies with very high overlap with our internal strategies,” Auby says.

External management has been reduced by 8 percentage points – down from 52 per cent to 44 per cent of the portfolio. TRS estimates it saves about $100 million annually from internal active management. Building up the internal team hasn’t required mass hiring.

“We have added to the team in an evolutionary process over years,” he says. “While we don’t describe our exact tilts and the weights to those tilts, it is safe to say that our tilts align with academic thought over the past few decades; we review risk premia such as value, momentum, quality, size and liquidity for inclusion in the portfolio.”

He stresses that all factor allocations are for the long-term, rather than tactical.

“It is very difficult to time risk premia, and even if we did think we could, timing them on a portfolio as large as ours would be difficult.”

Research making an impact

Many of the new strategies have emerged from TRS’s research program. Further strategies under development in that pipeline include risk premium maximising, fundamental small-cap and mid-cap US, and trend following. As markets mature and it becomes increasingly difficult to achieve alpha in the US and other developed markets and ultimately in emerging markets, too, investors will depend on innovation, believes Auby, who says the department is one of Britt Harris’s many legacies at the fund.

“The ultimate test of a leader is how well an organisation does in the years after their departure. Alongside our board, Britt and Jerry built a strong organisation with a deep commitment to innovation and global leadership,” Auby says in reference to Jerry Albright, TRS’s new CIO. “People will have to re-commit to research and innovation. At the end of the day alpha is always elusive; it always has been and will continue to be so.”

TRS has no current plans to change its private markets allocation, which is now at 32 per cent of assets under management.

“Our next strategic asset allocation review, which the board typically conducts every five years, is scheduled for 2019,” says Auby, adding that one of the aspects of his new role he enjoys most is the opportunity it gives to think strategically about the entire portfolio; he’s no longer tucked away in the risk-management department.

“No one ever wanted to talk to the risk guy,” he jokes. “Moving from chief risk officer to deputy CIO adds significantly to the metaphorical line of people standing at your office door.”

He believes one of the keys to his success will lie in good communication with the 152-member investment team.

“My strongest focus is on our people and making sure they have all they need to manage their portfolios. My focus is on giving clear autonomy and authority but in exchange, I require excellent communication.”