Captive Insurers Need To Ask Investment Managers More Meaningful Questions

Question Marks In Circles On Blue Background

Alton Cogert | November 09, 2016

Question Marks In Circles On Blue Background

What questions should you be asking your investment manager but probably are not? Alton Cogert, president and chief executive officer of Strategic Asset Alliance, posted a blog on the Strategic Asset Alliance website offering the four specific questions that will lead to a more meaningful and useful meeting with your investment manager. Mr. Cogert (pictured at right) has granted permission to share with our readers the thoughts he expressed in his September 15, 2016, blog post, as follows.

The Four Unasked Questions You Should Ask Your Investment Manager

Submitted for your approval. A recent, probably typical, meeting with your investment manager.

"Let me tell you," the investment manager says, "This financial environment is completely unprecedented. Globally, central banks are manipulating supply and demand of fixed income and equity securities."

"Yes, we know," you tell him, "but what can we do about these low interest rates? It seems that every time we meet our portfolio's book yield moves lower and lower."

"Good question," he says, and then turns to his associate.

"If you want to take more risk," she says, "we can get you more yield, but the result will just be a marginal improvement in how quickly that book yield goes lower. We have suggested a few ideas, but you have told us they don't fit your company's risk appetite."

"That is true," you realize and the meeting drones on in its usual fashion. The economy, the portfolio, securities of interest, etc., etc. You exchange pleasantries and wish everyone safe travels back to their home base.

After the meeting, sitting in your office, you start to think something may be missing.

"Did I ask the right questions?"

You probably did, but you may have missed a few questions that managers typically don't hear, but should, from their insurer clients.

What should you be asking and why? Let's review four typically unasked questions.

1. Negative Rates—What If?

You have probably read about negative interest rates and wondered, "How can that be? A government bond that we have to pay interest to the government in order to hold in the portfolio. Who in their right mind would invest in that?"

Well, over 30 percent of sovereign debt, globally, now has a negative market interest rate.

Or, how about corporate bonds with negative interest rates? It is happening now in Europe.

Could this happen with US Treasuries? Or, could a company borrow at a negative interest rate in the United States? Did we ever expect rates to stay this low for this long?

What does your investment manager think is the probability we might see negative rates in the United States? Could this be an unexpected consequence if the typically low probability of recession in manager's models occur? Is this something we should be considering in our planning? If so, how would we mitigate such an occurrence?

2. What Are Other Insurers Doing?

Some managers may have a better advantage than others at answering this question, simply because of their experience with managing insurer assets. And, even if they have that experience, it may not be broad enough or similar enough to your company to provide a useful answer. So, this might be a more difficult question to answer than you might think.

In addition, some managers are affiliated with insurers. In those cases, they may (or may not) feel comfortable revealing what other asset classes their affiliated insurer is utilizing in the current environment.

3. What Would You Ask If You Were in Our Shoes?

This may be my all-time favorite question that I once heard a client ask a manager.

To properly answer it, the manager has to put themselves in your shoes, which should take some thought, and then, using their experience and knowledge, determine what they would really want to know.

Too many times, someone who is asked this question will merely parrot back what they had been saying was important all along. However, by asking them "why" they said what they said, and then "why" again and, perhaps, again, you might find a rather interesting idea at the core of their initial response. This can be time consuming, but it can also be enlightening.

4. How Do You Compare, Quantitatively and Qualitatively, to Your Peer Managers?

Insurers usually compare themselves to other insurer peers, and that certainly can be a worthwhile exercise. However, have you wondered how your manager compares to its peers?

This is both an easy and difficult question for the manager to answer.

Easy, because there is data available that can be properly presented by the manager to show how its performance is "in the top quartile," or something like that, of similar managers. In fact, data analytic companies that market such performance comparisons to the managers feature the ability to customize peer groups, so the manager can be seen in the best possible light. (Of course, there is always the issue of comparing performance from one insurer's account to another due to differing constraints and mandates.)

Difficult, because fairly comparing your manager to other managers is much more complex than just looking at performance. There are numerous other quantitative and qualitative factors that should be considered. For example, we utilize  Manager Select when performing a manager peer analysis, or a manager search (whether an active or just an initial fiduciary search). The traits we find most useful for comparison include organizational background, investment team, experience managing insurance assets, investment process and performance (including attribution).

Manager Select allows us to easily run these analyses. You can preview Manager Select  here and begin comparing your manager to its peers across these various attributes.

The Four Unasked Questions

At your next meeting with your investment manager, you might try asking one or more of these four unasked questions. Of course, they are not designed to be the only questions you ask. But, they can lead to a much more meaningful and useful meeting with your investment manager.

Alton Cogert | November 09, 2016