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Joe Antonellis, State Street, interview
14 August 2012
State Street’s Joe Antonellis talks to Alastair O’Dell about
the changing demands of institutional investors and how
asset managers are reacting
Joe Antonellis is in a perfect position to observe trends in the business of asset management, holding several key positions for global giant State Street.
Globally, he is vice chairman of State Street and a member of the management committee, the most senior strategy and policy-making team. For Europe and Asia Pacific, he leads global services and global markets, where he is responsible for strategy, operations and business development.
Anotellis commissioned the Economist intelligence Unit to produce a report, published in June, which independently surveyed the opinions of 160 asset managers. The report suggested that the increasingly sophisticated demands of institutional investors are leading asset managers to focus on their core competencies and outsource non-essential functions.
Have institutional investors finally finished reacting to the financial crisis?
We are in unprecedented times. In my 36-odd-year career in this business, I’ve never seen disruption quite like this. We’ve had bubbles and bursts, but not this dramatic. At the beginning we did not think we would have a lost decade like Japan – but guess what, we are already five years in and we are struggling with many of the same problems.
How are institutional investors now positioning themselves?
Pension schemes are underfunded so they need yield – but they are also more risk averse than ever before. They have not just moved out of equities but are changing their strategies. Schemes are covering beta by putting the vast majority of their portfolio into index funds and then searching for alpha separately with boutiques, emerging markets, direct investments and alternatives such as private equity funds and real estate funds. There has also been interest in dividend yield, which seems to be gaining traction.
Illiquid alternatives appear less volatile but may not if they had to mark-to-market.
It is less liquid, but sophisticated pension managers are thinking less about funding levels and more about their cash flow needs. Globally, funds have moved into infrastructure. The buzz is around getting money to work for governments – that sounds great and patriotic but the real attraction is cash flow. Ontario Teachers’ Pension Plan (OTPP) started this trend many years ago. It built its own private equity group and made major investments. It concentrated on matching future liabilities with continuous long-term cash flows as much as returns.
Did State Street take a minority stake in PensionsFirst to help schemes match cash flows?
We invested in PensionsFirst because it has great technology for calculating pension fund liabilities. It provides funds with scheme-specific actuarial estimates at their fingertips, utilising postcode-based mortality rates, rather than relying on generic tables.
A scheme could use cash to reduce its deficit rather than spend it on analytical fees. How worthwhile is this level of accuracy?
There is a tipping point. The funding status determines the right time to move to a truly liability-driven investment (LDI) strategy. If you are going to be woefully underfunded, there is no point wasting the time or money and instead take more risk and go for returns. But pension investment managers can’t make such trade-offs without analysis. They are smart people and are becoming more sophisticated. Our research found that they are turning to asset managers and saying ‘here are my objectives, help me build the solutions’. They now have a better idea of their endgame and are asking better questions.