Key Takeaways
- • Stefan Dunatov, CIO of Coal Pension Trustees and member of the Wellcome Trust investment committee, argues the investment industry is structured around two profit centers: specialist portfolio construction (manager "special sauce") and volume through commoditized indexation.
- • Dunatov contends that strategic investment advice, which he describes as the most important issue facing asset owners, is largely absent from the industry because it offers no economies of scale.
- • He states that the growth of fiduciary management and outsourced-chief investment officer services does not resolve this gap, as both remain skewed toward portfolio construction and volume.
- • Dunatov argues asset owners must build impartial in-house resources or retain trusted, impartial advisors to address strategic decisions, and that the current industry structure does not fully confront this problem.
Summary
In an opinion piece published on AI-CIO, Stefan Dunatov, CIO of Coal Pension Trustees, a member of the investment committee at the Wellcome Trust, and chair of the 300 Club, describes an investment industry in which new ideas are quickly absorbed because proprietary intellectual property is difficult to protect. He argues that firms therefore concentrate on two areas: specialist portfolio construction, which he characterizes as the familiar "special sauce" pitches of investment managers claiming to be market-beating, and volume, driven by the commoditization of investment through indexation.
Dunatov observes that strategic advice is conspicuously lacking despite most industry participants agreeing that investment strategy is the most important issue an asset owner faces. Large asset owners have responded by building in-house teams to focus on strategic decisions, align investment methods, and increase cost transparency. He argues that the most important step an asset owner can take is to customize its own strategic decision processes, because strategic advice is highly specific to each owner's circumstances and carries complex implications across its business and objectives. General approaches, in his view, offer little value.
He notes that implementation, by contrast, is easier to commoditize and more profitable for managers, which explains where most industry resources are directed. He stresses that asset consultants are not responsible for the legal and regulatory framework in which they operate, and that any structural faults lie with regulators.
Dunatov assesses the growth of fiduciary management and outsourced-CIO services and concludes that these developments do not resolve the paradox, since both skew toward portfolio construction and volume. He attributes this to the economics of the business: there are no economies of scale in offering bespoke strategic advice to each client, so no consultant or manager has established itself as a truly trusted advisor. He argues that such advisers are what the industry most needs. Asset owners should ask how they can build impartial in-house capacity to answer strategic questions and how they can use trusted, impartial advisers to support that work. He concludes that the current industry structure does not fully address this problem.
Dunatov observes that strategic advice is conspicuously lacking despite most industry participants agreeing that investment strategy is the most important issue an asset owner faces. Large asset owners have responded by building in-house teams to focus on strategic decisions, align investment methods, and increase cost transparency. He argues that the most important step an asset owner can take is to customize its own strategic decision processes, because strategic advice is highly specific to each owner's circumstances and carries complex implications across its business and objectives. General approaches, in his view, offer little value.
He notes that implementation, by contrast, is easier to commoditize and more profitable for managers, which explains where most industry resources are directed. He stresses that asset consultants are not responsible for the legal and regulatory framework in which they operate, and that any structural faults lie with regulators.
Dunatov assesses the growth of fiduciary management and outsourced-CIO services and concludes that these developments do not resolve the paradox, since both skew toward portfolio construction and volume. He attributes this to the economics of the business: there are no economies of scale in offering bespoke strategic advice to each client, so no consultant or manager has established itself as a truly trusted advisor. He argues that such advisers are what the industry most needs. Asset owners should ask how they can build impartial in-house capacity to answer strategic questions and how they can use trusted, impartial advisers to support that work. He concludes that the current industry structure does not fully address this problem.
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