ING adapts to new world order

Jan Straatman, recently appointed as chief investment officer at ING Investment Management, is transforming the traditional “silo-based” structure of the E300bn Dutch fund-house into a multi-boutique model, in a bid to increase the firm’s alpha generating capacity and adapt to the changed economic environment. Investment providers must align themselves with needs of fund buyers if they are to serve clients correctly in the new world order, believes Mr Straatman, who anticipates the way distributors will select managers on an open architecture basis will change dramatically. Shifting focus Although fund and manager selectors claim to base selections on a large set of criteria, the spotlight has been on past performance, he said. “I think that in the future the focus will be much more on transparency of the investment process, the quality of the risk management process and the quality of the team. In addition to performance, those three elements will be very important.” Ratings agencies and investment consultants are increasingly interested in the organisational structure of asset managers, noted Mr Straatman, who pioneered this concept as CIO at Dutch pension fund ABP, before joining Pearl-Axial Investments as chief executive in the UK. During the past seven months in his new role, Mr Straatman has been building internal investment boutiques based on people’s skills, rather than asset classes. He aims to integrate the “entrepreneurial culture of a small boutique with operational excellence on a large scale.” Once alpha techniques have been identified, they can be applied more widely. “I want to have these boutiques to manage as many different strategies in as many different areas as possible,” he said. Moving away from a “product to a skill-based approach” will enable the firm to adapt to increasingly correlated asset classes, believes Mr Straatman, who can count on a “substantial” investment budget to implement the changes. “Globalisation of markets and economies has lead to an increase in correlation that will never go away,” he said. Traditional asset allocation, employing building blocks for different sector or geographical exposure, is no longer sufficient to ensure risk diversification, because correlation between blocks has increased. The new model is about combining, across multiple asset classes, strategies that are substantially different in their approach, such as top-down, bottom up or quantitative. This will preserve low correlation and risk diversification in an investor’s portfolio, as well as within the organisation itself, and it will improve performance, said Mr Straatman. Right incentives A risk management function, set within the front office, closer to the investment process but independent from the boutiques, will analyse the strategies and report to Mr Straatman. “I want to be very close to the investment teams,” he emphasised. The investment units will retain “ownership” of both their investment and risk management processes. They will be supported by a “large group” of corporate analysts, integrating credit and equity research, providing a “holistic” view of each company. “Boutiques will be made responsible for growing their client base and optimising alpha,” he said. Mr Straatman is also introducing a “consistency premium” for portfolio managers, where bonuses are paid over two to three years on expected outperformance, but part of the bonus may be clawed back if outperformance is not achieved. “I am trying to get the right organisation in place, the right business and investment models, the right infrastructure and the right people,” he said. “And to get the right people I have to have the right incentives and incentive structure,” added Mr Straatman.

Jan Straatman, ING