| Gearing up for growth at ILIM |
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| Gerry Keenan was appointed CEO of Irish Life Investment Managers (ILIM) in 2005, having previously spent 21 years with the firm, one of Ireland’s largest asset managers. Since assuming the role, Keenan is focusing on improving the firm’s performance in three key areas: i) performance, ii) service and iii) investment solutions; and is looking from an investment perspective to the coming year with ‘cautious optimism’. |
Q. How do you define success in fund management?
When clients work with investment managers they have outcome expectations. For us in Irish Life Investment Managers (ILIM) success is meeting or exceeding those expectations. We see three main aspects to those expectations, i) performance, ii) service and iii) investment solutions.
Setting performance expectations correctly is very important. These expectations should be set relative to some client relevant benchmark. Somewhere in the performance assessment if an active manager has been hired they must be seen to have added vale as the option of using an index fund or a consensus fund is always available. In ILIM we set the consensus fund as the benchmark. It is a tough hurdle rate and only the very best will beat it. Under-performing a consensus fund benchmark by two per cent per annum or six per cent over three years, as some of the leading managers have done, is a poor outcome. This is a serious cost to clients at a time when pension funding is rising. It is easy to forget that six per cent on a €10 million pension is €600,000. This is why our consensus fund assets under management have grown rapidly in the last five years.
The service agenda is evolving and we believe will become even more important as defined contribution (DC) type pension funds begin to dominate. Service here is giving timely information on funds and performance, but for me it is very important that we are available, and seen to be, to talk to individual members of company schemes on the work floor. Increasingly in our business many managers don’t want to do this. We do and we will continue to do so. It sets us apart not alone with the best product range, but being very accessible.
Investment solutions is our business. Investment products are a means to an end. It is important that in offering solutions to clients we recognise that our internally manufactured product may be only part of the solution and we will source quality product for our clients from other providers, e.g. Henderson run a European property for us as they have more expertise there than we have.
Q. What are you goals for your business?
Investment product is very important to the business of the IL&P Group. Our bank PTSB, our life company ILAC, our corporate business division and ILIM direct business all set out to provide a rich supply of top quality investment offerings to their clients. ILIM is the ‘hub’ of this investment product production for the group. To help the group grow in the investment services arena for each of its client segments is a key objective.
Secondly, we manage a large and increasing number of institutional/ pension mandates for our clients and our goal is to only offer top quality product to them and grow our business by engaging with clients in determining appropriate investment solutions for them.
Q. The Irish Market has performed exceptionally well over the past number of years – can this rate of growth continue? What is your prediction for the rate of return of the ISEQ in 2007?
Despite the rapid pace of change in technology I still can’t get a direct line to the spirit world to predict the future or tell me what the ISEQ will do in 2007. In predicting the coming year, consultants and investment mangers always seem to say that they expect a 5-10 per cent return. They must be smarter than I am because I don’t know.
What I do know, however, is that you are right about the past. In the five years to the end of October, the ISEQ returned over 13 per cent per annum and the FT World markets returned just over four. Only the pacific area excluding Japan has matched the Irish market.
While there is a limited range of companies on the Irish market, very many of them are top class companies with great management and focused business strategy. Of course it has helped enormously that the Irish economy is a star in income growth but our local companies have performed brilliantly in it despite intense new competition. Many such as CRH and Kerry have taken the competition on not just here but on their doorstep.
So I think that since the management is very good, business strategy very focused and the domestic and international economy still sailing along in relatively calm waters, the background to expect continued good performance is evident. So what about valuations?
In the food sector companies like IAWS and Kerry are in many people’s European portfolio as well as Irish portfolios. They have to continue delivering on the high expectations for them. We have no reason to doubt that they will, at present.
In the construction sector there is no doubt that the sector locally is slowing significantly. However, companies like CRH, Grafton and Kingspan are overseas stories to a more or less degree. With any construction sector slowdown, Graftons business has the off-setting balance of a strong DIY business so we are not worried about this sector unless the US economy gets into trouble. The Fed has given itself firepower on the interest rate front if they need to help the economy, so this is not presently a major worry to us. The one area of concern is that the dollar, which forecasters are predicting to weaken against the euro, will hit US profit translations ultimately for Irish companies operating there.
On the banking/insurance side I will have to avoid saying anything about IL&P in case I am accused of conflict of interest. Elsewhere, these stocks are an Irish economy play with strong earnings momentum and are not expensive against their European peers. If you can get them at the right price you can probably put them in the safe deposit box and your siblings are unlikely to be disappointed when they gain access to your wealth generated in the Celtic Tiger.
Investment managers are paid to worry and keep a keen lookout for threats and opportunities. We are approaching markets in 2007 with a sense of cautious optimism.
Q. What is the greatest challenges and opportunities facing the investment management industry at the moment from a) an institutional perspective; and b) a retail perspective?
In the institutional pensions market there are significant changes taking place. In the defined benefit market for reasons which have been well aired c. 40 per cent of defined benefit pension plans have closed to new members and there is better risk management awareness in all plans whether open to members or not. This is a global phenomenon and parallel to this there is a growth in defined contribution pension plans. The investment solutions required are evolving with many different aspects to investment strategy than previously. There is a growing need for index linked government or quasi-government bonds with a duration of 20, 30 and 40 years. Many have suggested that this requires inflation linked swaps. However, while this market exists, they require significant collateral management and often changes in the legal documentation governing pension trust documents and investment management agreements. This is an unacceptable burden on pension fund trustees. There are ‘smarter’ ways and we have evolved smarter solutions for defined benefit clients.
Smarter diversification strategy in the real assets is also necessary. With globalisation the major international equity markets are now highly correlated so that pension funds do not get the same protection by diversifying into continental Europe, the UK, US and Far Eastern market that they did 20-30 years ago. For smart diversification, it is now necessary to look at emerging markets, global small caps, international property, venture capital, private equity, forestry, hedge funds, country and currency management and commodities. Allocations to some of these will increase and managers will have to provide alternative options like these to clients. It is key to ILIM that we lead the way and we have introduced alternative investment solutions for clients as well smarter index linked solutions on the fixed income side.
On defined contributions (DC) the range of products offered is also increasing bundled together alternative investment solutions are offered with the more traditional investments and new Lifestyle solutions. I firmly believe that trustees and members must be offered products from other managers also. So that now when trustees of DC plans talk to us, we will offer them access to other global managers of bond, equities and property. Unless a manager offers an open architecture they end up saying or implying that they ‘alone’ manufacture all or the best solutions. That simply cannot be true.
Investment managers must engage in open dialogue on investment solutions. Managers have great expertise which is of great value to trustees and they will be trusted more if they are offering products other than their own. That is our belief and this is how we are running our business. It is best for clients. |
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