What are your assets under management?
We manage assets worth about $1.7 trillion for 2,763 institutional clients (as of September 30, 2009) from 10 investment centres worldwide, including Australia, Hong Kong, Japan and Singapore. We have 16 locations around the world and employ 456 investment professionals; in fact, we are one of the industry's biggest institutional fund managers.
Who are your investors?
Our clients are entirely institutional investors, and include pension funds, insurance companies, sovereign wealth funds, family offices, central banks and corporate treasuries.
What's your own role?
I lead the investment, research and trading process to ensure that it meets the best standard and that implementation runs smoothly. All chief investment managers report directly to me, and I'm also responsible for the internal management of our staff. A lot of my time is spent meeting clients and the broader investment community, explaining what we do and eliciting feedback.
What types of funds do you run?
A large proportion of the money State Street Global Advisors manages is passive, linked to specific equity or bond indices, so the objective is to achieve beta (that is, market returns), which we do through the extensive use of quantitative tools, making sure that the exposure is managed efficiently. The definition of beta has broadened quite a bit and now includes liability-matching and liability-driven strategies.
And your active funds?
We have grown our alpha funds over the past three years in response to client demand, so they now make up between 10% and 15% of our equity investments. Our portfolio now includes investments in index, active and enhanced equity, fixed income and exposure to absolute return strategies, property and private equity. We also offer 130/30 long-short strategies. Foreign exchange exposure is a constant concern, and many people underestimate multi-year swings in currencies due to government fiscal and monetary policies, so we often use currency overlay (or hedging) strategies. This year, however, investors have been generally cautious about seeking alpha because it has been tough deploying fundamental bottom-up strategies in weak markets, so our beta funds have had a strong appeal. Now that the economic picture is clearer, we'd expect more interest in our alpha funds.
What is your investment philosophy, strategy and style?
For our alpha funds, we deploy a range of traditional fundamental and quantitative bottom-up investment methodologies but have also incorporated many techniques based on behavioural economics and finance, which allow us to identify inefficiencies and anomalies. In particular, we aim to spot emotional biases, such as trends set by over-confidence or loss aversion among investors and take advantage of them. This strategy paid off when we identified over-optimism about the prospects for growth stocks where the market seemed to be extrapolating unrealistic returns from past data; and when credit markets had factored in too high a rate of default probability, which meant corporate bonds seemed over-sold: this view paid off in Europe earlier this year.
What is your view on the state of the recovery?
Global economic recovery is happening but it will be slow. This is a slightly more pessimistic view than the one held by other commentators, but it is enough to remove a major uncertainty, so can form the basis of a profitable bottom-up investment strategy. The trajectory won't be V-shaped: the US consumer must continue to deleverage and it is unclear whether fiscal stimulus packages introduced by many governments will be sufficient on their own to guarantee a sustainable recovery. But the long-term Asia growth story is very much intact, and capital markets in emerging economies in general are developing rapidly, showing closer integration with more mature markets, and offering new opportunities in bonds and equities as cross-border M&A activity increases.
How does this view affect your strategy?
We believe equities are fairly valued, and in December and January we had averaged into developed market stocks so we are now neutral. We are slightly overweight risky assets, including high-yield bonds and emerging market equities, as we are attracted by the earnings growth story and we raised our exposure to both asset classes in May.
But, markets are still vulnerable to shocks so we'd expect them to be volatile. There is no need to invest in anything especially exotic because the corporate earnings cycle is at its low point so there are plenty of opportunities in mainstream equities. Additional risk exposure can be achieved through conventional core-satellite strategies, which can combine alpha and beta strategies. But the past year has reinforced the need for risk budgeting -- that is, determining and then integrating our tolerance for liquidity, counterparty and volatility risk into our investment strategy.
This interview first appeared in the November issue of FinanceAsia magazine.