An increasingly complex market leaves funds and asset consultants desperate to snag the next generation of top talent. Frontier operative Philip Naylor discusses.
It seems that investment is becoming increasingly complex. Why is that?
Investing is much more complex and quantitatively driven as asset owners and managers seek new and more technical ways to build portfolios and find stronger and less volatile investment returns.
Some of this complexity is being driven by the growing size of several of our institutional investors in Australia.
As funds grow, even small changes in portfolios can have very large risk and return impacts in dollars. That's why increasingly, superannuation funds must understand and consider the granularity of how they invest. They also have to understand what this means at a total portfolio level.
Similarly, choices across and within investment options are increasingly impactful for members. And you can see these challenges are feeding directly into the sorts of positions created in the industry.
Other forms of complexity come from issues that institutional investors and their trustees now need to consider, like a changing regulatory environment and ESG.
As the complexity increases, we are finding the technical capabilities required to address these issues have also risen.
This very much includes an increased focus on quantitative capabilities.
We've seen funds like Cbus recently create new roles focused on investment design. Will we see more of this?
We think this trend will continue.
We are seeing several large asset owners already create new roles and new areas within investment strategy to tackle the challenges across investment options.
Previously funds may have concentrated on setting strategy for their default investment option. However, as these funds have grown, the non-default investment options have also grown - both in terms of dollars invested and the number of members.
This is partly why the size and composition of internal strategy teams are changing and why some of the skills and capabilities needed in the future will be different from what they were, including the need for more technical and quantitative skills.
For example, the potential for interest rates to rise and inflation to be higher-than-expected presents a difficult environment for managing conservative investment options.
Funds are reacting to these challenges by creating new roles and bringing in talented and highly technical staff.
The challenge for investment chiefs is to manage the complexity in strategy across options and manage the complexity in staff as investment teams increase in size and as the skills of staff evolve, including people with very specialist technical skills.
Understanding the complexity and drawing information up to a total portfolio level is a big challenge for the people at the top.
How has Frontier dealt with this need for more technical skills?
We were early leaders in developing technology-led solutions for institutional investors, and many of our moves over the last few years have built on that foundation.
In investment strategy, we have been actively boosting our specialist knowledge and quantitative capability through a range of initiatives, including a PhD internship program. This initiative didn't happen overnight, but I am hoping that it will pay long-term dividends to Frontier and to the universities we engage with.
Earlier this year, we welcomed our first set of interns with Vivian Xu from Melbourne University and Yvonne Fang from RMIT University joining us. Both are simultaneously completing PhDs in finance while working in Frontier's investment strategy team.
A few of us in the investment strategy team are also taking part in a new Practitioners-in Residence program at Melbourne University to collaborate with faculty on joint research projects.
We hope that bringing minds of industry and academia together will help tackle some of the important investment challenges facing our clients.
How important are quant skills for an investment strategy?
We definitely see quantitative capabilities as being an integral part of our investment approach.
Ultimately, we see investment strategy as combining the best of qualitative and quantitative inputs rather than relying purely on one or the other.
This is particularly true when thinking about setting a long-term investment strategy.
Inflation is a great example.
We think if you applied a purely qualitative or purely quantitative lens to dealing with inflation, you would likely make some missteps with your asset allocation. Running a quant process focusing on how assets have performed with inflation in the past may give a false read on where it is going in the future.
However, similarly, you cannot sensibly take on some of the investment challenges of an evolving inflation outlook without quantitative inputs.
For example, a quantitative focus in our investment strategy team has been on building out a granular model for understanding the current dynamics in US inflation.
We have found that this sort of quantitative modeling can be central to our investment decision-making process. In addition, we are also increasingly looking at ways we can better incorporate quantitative tools in our ability to tackle other major investment issues, like climate change.
How do you woo skilled people? We have been told that quants don't like investment firms. What are your thoughts on that?
Well, I absolutely agree that firms like Frontier need to think carefully about the value proposition for attracting and retaining highly skilled staff. There is a range of great career opportunities for people with very high technical skills.
However, we've found the opposite is true - that talented people with good quantitative skills (like our PhD interns and other recent hires) have been very much attracted to working at Frontier.
I think part of the attraction is the value proposition we've created in offering these people a seat in the heart of our asset allocation team.
These individuals are also acutely aware that our clients' actions can play a critical role in determining how large societal issues will play out.
For example, the actions of large institutional investors are and will be, very impactful in determining the broader economic challenge of reaching net-zero carbon emissions and limiting the effects of climate change. We've found talented individuals who are keen to apply their technical skills to issues like this.