Insight Investment has been one of the most spectacular success stories in asset management over the last decade. It has changed out of all recognition from a small UK investment house since finding its home in BNY Mellon, where it is now by far its largest investment boutique.
CEO Abdallah Nauphal has been at the helm throughout its journey and the driving force behind Insight multiplying its AuM to £552.3bn ($746.879bn) from just £55bn ten years ago.
Insight has three pillars to its investment platform: risk management solutions, fixed income and absolute return. “All three are critical in terms of what they deliver to our long-term success,” he says.
It is liability-driven investment (LDI), however, that the firm is best known for and forms the basis of its solutions pillar. Indeed, Nauphal has probably done more than any other person to popularise the approach among UK defined benefit (DB) pension schemes, helping to create a segment that is now dominated by the big three of Insight, BlackRock and LGIM.
The business was built on identifying a structural change in the UK savings market as pension schemes started to reach the decumulation phase; after assets peak, maximising returns starts to play second-fiddle to concerns about cash flow and meeting liabilities.
“The growth has been the outcome of following a policy, rather than an objective in its own right,” says Nauphal. “I think that’s important.”
While his strategy of delivering a “very high-quality offering” to clients is hardly controversial he has demonstrably stuck to his principles, forgoing easy opportunities to boost AuM where he felt quality could be compromised.
The explosive growth of his business did not go unnoticed within the walls of BNY Mellon, of course. He successfully resisted attempts to take his proposition stateside while he felt he needed to concentrate on building the core UK market.
“Even though we felt the US was strategically exciting we did not go there for another five or six years. We were growing very rapidly outside the US and there was no way we could divert bandwidth away from delivering high quality in the UK, and just go and add more growth to our business.”
But he is now ready to expand this star of the asset management world and try to break the American market.
The decision to focus on America was an easy one. Not only does it have a huge savings market but is also at a comparable stage in the savings cycle “so it is very much aligned with our philosophy and approach,” he says.
In addition, many of its UK pension scheme clients had a US parent, which provided it with a potential client base in a market where very few had heard of the brand.
“The US is the next big strategic chapter in Insight’s potential development. We will do it very slowly, very carefully. It’s about planting the seeds of a similar rethink as the one we did in the UK,” he says.
“Our ambition in the US is to be a top LDI provider, a top fixed income provider and to be recognised as such there.” True to form, there is no target AuM, although he will say “we’re quite ambitious and quite comfortable to be ambitious”.
Nauphal is wary of sinking in too much investment upfront to generate business, as he wants to avoid a situation where “you can’t wait for them to come”, he says. “That’s a risk that many asset managers take. They build so much upfront that when the return doesn't come for a couple of years they can’t maintain it.”
His approach is to carefully calibrate the cost of securing a long-term business and make sure that that the firm will be able to sustain it.
“The truth is that we’re doing it at a time when Insight is still doing very well and we can continue to make sure that continues. Our first indications from discussions in the US with clients and consultants are quite encouraging. There is room for us.”
Its success in the UK means Insight could confidently apply its business model to the US, leaving only the question of how.
“When we wanted to go to the US our initial thinking was, ‘let’s go organic,’ because one of the critical ingredients of our success has been the culture we have created.”
However, the reality dawned that the organic route would take a very long time; perhaps a timeline of six to eight years. “We felt from a pure market perspective, and the stage of the decumulation in the US, that we probably shouldn't wait that long.”
It acquired a small business in the US called Cutwater Asset Management to serve as a platform for its expansion. “We spent the first two years embedding it, making sure the pipes are there, the systems are there and the processes are unified between the US and London,” he says. Basically, making sure that the quality could be preserved.
“It’s not something that happens overnight. We have taken our time, so we haven’t really pushed sales in the US very hard,” he says. “We have pushed a little bit, planted seeds.”
Insight has won about $6-7bn in AuM in the US since the Cutwater business was integrated, from existing relationships and “light touch selling”.
“So, it is now that we are in this process of starting to become more external in our focus. I am very happy the whole thing has happened well, we haven’t lost people or lost ground, now it’s about moving the whole thing forward.”
Insight has more than the moral backing of BNY Mellon to draw on in its US adventure – it can draw on the family name to access valuable additional revenue streams.
“When it comes to the core institutional market we would tend to doing it ourselves. When we go to the wholesale market we tend to use BNY Mellon, which already has an infrastructure in the wholesale market to distribute capabilities. We will be doing both.”
While Insight’s existing AuM is dominated by pension funds he is also targeting insurance companies and other institutional investors.
“I would suspect that our focus will be largely in the pension arena, and that is going to be basically the first port of call where we win or lose.”
While the delay in fullscale international expansion allowed Insight to build a reputation for quality – it won the 2017 Global Investor LDI manager of the year award and regularly tops Greenwich Associates LDI surveys – it also allowed others to dominate the sector in the world’s biggest investment market.
It is not the only instance of Insight sticking to its principle of quality over growth. “We are also very happy to close funds when we feel capacity has become an issue,” says Nauphal. “We have often actually closed funds, or at least limited the capacity in many of our funds. These types of considerations take precedence over growth.”
Slightly at odds with Insight’s breakneck AuM growth, Nauphal has maintained a cautious approach to building the business from the beginning and decisions taken at the outset resonate to this day.
Back in 2003, Insight was owned by HBOS (principally Clerical Medical) and acquired Rothschild Asset Management. “It ended up being a reverse-takeover by the Rothschild side,” he says.
“Critically, this led to a re-think of what we wanted to be. At the time, we looked like every other asset manager in the UK.”
With a mixture of middling capabilities in the crowded UK asset management market, Insight needed to find its identity.
He says: “We had the opportunity go back to scratch and say, what is it that we want to offer? We decided to refocus the business on only what we’re very good at and leave the rest to others.”
It identified areas where it could offer a differentiated proposition in the market, where it believed it could add real value, and jettison the rest.
The other side of the equation was identifying a need, something that was genuinely lacking in the market. He says lots of people claim to offer solutions but “all they really do is pre-package generic products”.
He can see why some are tempted by this route – the profits that flow from economies of scale – but he wanted to be bolder.
“We felt there was an opportunity for us to offer truly tailored capabilities to our clients that go to the unique specification of each client rather than through modelling.”
The critical insight was not to chase maximising returns or minimising volatility.
“We wanted to understand the outcomes our clients wanted and maximise the certainty of those outcomes. The global saving industry was going to require more outcomes and people who could deliver those kinds of outcomes. The fact was that the DB market in the developed world was maturing very fast.”
In aggregate DB pension funds were approaching the end of their accumulation phase. “We felt at the time that the DB industry was just at the cusp, and there was going to be a major tailwind in our favour of people re-thinking what it means to be in decumulation,” he says.
“Everybody was operating strategies that were good for accumulation and portfolio optimisation. But once you get past there
“We had already a proclivity for wanting to deliver outcomes, and maximising the certainty of those outcomes. We saw massive potential for the industry to completely change the way it invested because of the trend of decumulation.”
While different countries are at different phases of the DB pensions lifecycle, it’s a phenomenon that pervades the developed world so there is plenty of mileage in the strategy.
While the concept was born in DB, the principles of LDI apply just as much on a personal level to defined contribution pension (DC) savers. In this regard, the US is ahead of the UK.
“There’s a big chunk of people in 401k who are also going to go into retirement, and they have the similar requirement in their own more private, if you like, saving cycle.”
A few years down the road, he thinks that his US business will become more focused on the defined contribution 401k market.
“Right now we will be using other intermediaries as a means to achieve that. BNY Mellon is the key for it.
“In the UK, the DC market is smaller than the DB market. That size difference means that we manage a lot more DB for a number of years to come, but eventually that will shift,” he says.
“In the US it’s not the same story – the DC market is even bigger than the institutional side. We are looking at it, but the DB market distribution side is simpler. For DC you need the bigger platform. Eventually it may change, but it isn’t on the immediate horizon.”
The Insight brand is pretty much unknown in the US, but it believes it reputation will open doors. Most of the consultants in the UK also operate in the US and BNY Mellon can clearly lend a hand.
“But we need to work on that, clearly that’s part of the strategy, but it’s one step at a time. Insight has always moved forward inexorably one step at a time.”
Decumulation will be become entrenched pretty much everywhere in the developed world. “Insight’s view has always been to have a three-stage approach to the long-term development,” he says.
The first stage is to create high-quality capabilities. The second is to put them together into a solution that’s holistic for the pension schemes. And the third is to apply the same to the retirement market for individuals.
“It is a longer-term game, if you like, a long-term game even though it is a bit more advanced. But I think we’re definitely moving increasingly in that direction, pretty much everywhere.”
One potential competitive threat to the DB LDI business is insurance-based pension scheme buyout providers. As decumulation moves forward it becomes cheaper for pension plan sponsors to completely remove risk from their balance sheets.
LDI was once considered to be a barrier to buyouts, as complicated strategies would need to be unwound, but rival LGIM has started converting certain clients in its LDI book to buyouts.
“At the end of the day, you want a fully de-risked portfolio. You have options, one is buyout, but that won’t work for everybody,” he says, noting that buyouts rarely cover the entirety of large pension schemes.
The larger the pension scheme the more the LDI approach makes sense, according to Nauphal. “Nobody buys huge chunks,” he says. “Doing it on a self-managed basis is a lot cheaper as you don’t have costs of regulation and you don’t have the
Insight would be unable to compete in the buyout and buy-in business, which remains the preserve of insurers – backed by an insurer’s balance sheet. “So yes, there are competitors but I don’t think they are people who are going to inevitably take the end game, they are one of the endgame possibilities out there.”
He adds that someone needs to manage the assets side of a buyout, held by the insurer: “In a sense, we end up getting reappointed,” he says. “We are more the investment solution designer, rather than providing the packaging. We work with a lot of insurers.”
FUTURE OF LDI
Nauphal imagines that the next stage of LDI will be greater integration of the asset and liability sides. He says assets and liabilities are still managed separately to some extent and the next generation of LDI will bring the two sides closer together.
“The next stage is how to manage the two sides together efficiently. That’s the evolution, and Insight will be part of that as much as anything else.
“The next step for me is what Insight calls ‘integrated solutions'. It’s basically integrating the assets and liability into a holistic approach to delivering the outcome. That’s the next stage that I think is going to be a big one in the UK market.”