Leading asset owners around the world have been insourcing their investment programs for years, recognizing that they could build their own internal teams for much less than they were paying for money management, with the added flexibility to customize the teams for their own priorities and interests. But effectively executing this strategy requires asset owners to build and sustain an in-house investment team that earns returns that are better (at least net of cost) than they could have achieved elsewhere, putting asset owners in direct competition with commercial asset managers for top talent. The inherent disadvantage is clear: these commercial managers, benefitting from “2 and 20” or other high fees which they still command, can woo good investors with higher pay packages. Beyond financial limitations, the compensation that many asset owners can pay is limited by headline risk or political will. For example, an organization investing on behalf of retired firefighters or governments will often balk at the specter of multi-million dollar pay packages that are de rigueur for their competition. There are some asset owners, such as Canada’s leading “Maple Miracle” pensions or select sovereign wealth funds in the Middle East, that can pay closer to market rates, but many others do not have this luxury. So, what’s a struggling asset owner to do? How can they attract, develop, and retain a strong in-house investment team in an intense competition for talent?
Fortunately, these organizations have unique strengths they can leverage. From our experience advising top asset owners and institutional investment platforms around the world, we have identified four strategies which, leveraged independently or even better, in combination, can help an asset owner differentiate itself in local talent markets and punch above its weight for the talent it can attract.
- Take Pride in your Purpose: The importance of purpose at work has become so trendy as to border on becoming a meme. Jokes abound about “snowflake millennials” who demand roles in the workplace that will allow them to save the world. But the fact remains that people of all generations value finding meaning in the work they do. While some people will choose the highest-paying job regardless of the details (either because that aligns with their priorities or because their circumstances require it), many others will accept lower compensation for a job in which they find meaning. Many investment professionals would take great pride in protecting their country’s sovereign wealth or the retirement of hard-working teachers. Beyond the impact on the organization and its beneficiaries, asset owners can play a lead role in driving change through to portfolio companies based on the standards and metrics that they demand for their investment, including on ESG. That pride has real value and is a key advantage for many asset owners. The ones that leverage this most effectively are explicit about targeting people who are motivated by their mission; they actively screen for it during interview processes and embed its tenets in their culture. Moreover, they remind their people about it loudly and often as part of their employee experience, with the same effect one might achieve by practicing gratitude with the use of a daily journal. Reminding your team that they should be proud to invest for people who need it, rather than further lining the pockets of a select group of partners, will keep this pride top of mind. This focus on mission keeps employees happier and reduces the risk that they will be wooed away by money, as they will be more aware of what they will be giving up in return. Building a strong purpose-driven culture should be intentional and consistent with messaging that reinforces the desired mindset and drives wanted behavior. We have worked with many organizations that have benefitted from undertaking a Culture Diagnostic to establish an initial baseline, which helps plot a course to where the organization wants to take its culture in the future.
- Optimize Exposure: Another key arrow in the quiver of many asset owners is that they do really interesting work. Of course, this can be true for commercial asset managers as well, but depending on their size, asset owners may have a comparatively small team covering many asset classes and strategies. Many endowments and foundations, and some pensions, have investment teams of 10 people or fewer covering the entire portfolio, which means they can offer a breadth of exposure and experience with which larger managers, often specialized and siloed, cannot compete. Even larger asset owners with structured teams can take advantage of the breadth of their portfolio by rotating their people to new teams and roles. It is much harder for commercial asset managers to compete with this given the pace and specialization which client service demands. The asset owners who “round out” their people with discipline, thoughtfulness, and predictability increase their employees’ engagement and “stickiness,” but they also serve their own ends as they develop versatile, well-rounded executives with multi-faceted succession potential. Depending on the structure, some even apply this beyond the investment team, giving their people exposure to member services, finance, HR, value creation or other roles to increase their operational accountability and augment their executive readiness and perspective.
- Assess for Development: Rotating people to new and different roles is one example of a deliberate development intervention and for many people, it might be a particularly impactful one. But others might benefit more from different types of support or experiences. The asset owners who most successfully build and maintain top-performing teams regularly and actively assess their people for the purpose of development planning as well as performance management. Organizations that do not have a history of doing this with rigor may benefit from an initial baselining exercise to build their understanding of their own “bench.” For example, Egon Zehnder has worked with many asset owners to assess the top 10-40 members of their executive teams, frame key strengths and development priorities, and identify the highest-potential members of the team and development opportunities to unlock their ability to drive impact in the organization. For other organizations that already have a good understanding of their team’s holistic talent profile, the imperative is to keep this alive through consistent reinforcement. Investing in your top team’s development cannot slip as a priority or become a discretionary exercise: executives who see a clear path to a next role they seek, and feel their employer is actively investing in their potential to achieve it, will be happier, more effective, and more loyal.
- Maximize Your Board Position: Some asset owners can place members of their investment teams on boards of directors. This is primarily relevant to a subset of asset owners who invest in portfolio companies directly; but for those organizations, it is worth noting that many of them could make more of this opportunity than they do. Most asset owners allow investors to take board seats for the companies whose deals they steward with little or no director assessment, training, or support. As a result, they may be most likely to show up on the board as investors rather than directors since they have not been equipped to be anything else. This is a missed opportunity for both the portfolio company (which might benefit from a more well-rounded director) and the investor, for whom development as a director would have multi-faceted long-term benefits. In working with leading asset owners to assess their employees’ capabilities and development priorities as directors, not investors, Egon Zehnder has seen these asset owners give their employees a new experience with thoughtfulness and support, setting them up for success and further strengthening their shared commitment. For organizations whose investment teams do not currently invest directly in companies, but are keen to build this capability, the lesson is one of alignment of motivation from the candidates and foresight. In seeking leaders for a direct or co-investment program, thorough and comprehensive assessment of leadership capability and future potential is particularly important since they will eventually need these people to have impact that extends well beyond investment acumen.
These four tactics can help an asset owner attract, develop, and retain an outstanding in-house investment team. They are among the strategies which have enabled top asset owners deliver industry-leading returns even when competing with organizations whose pay packages far exceed their own. Of course, the importance of compensation cannot be understated: an organization may do everything within its power and still suffer high attrition if it is unable to pay market rates. But for those who are hamstrung by compensation parameters they cannot control, these strategies offer a path forward to do more with less and punch above their weight in building the team they need.