With more than two decades of experience, Kweku Obed has learned a thing or two about resilience and what makes for a successful investment strategy. He’s sharing his methods with both his consulting clients at Marquette and with a wider audience, through his new book on financial literacy.
Obed is a managing director and owner at Chicago-based Marquette Associates. He serves on the consulting firm’s board of directors and chairs its defined contribution services committee, in addition to serving as the primary consultant on several client relationships. Marquette Associates was founded in 1986 and is the 21st largest U.S. investment consulting firm with $282 billion in assets under advisement.
Obed’s book Talking About the ABC’s of Financial Literacy was published in late January to promote essential ways that widening socio-economic gaps can be bridged through savings and ultimately investing. The book blends jargon and humor to make learning about finance easy and fun. In a world where Reddit forums can make or (mostly) break amateur investors, the release is arguably right on time.
But keeping socio-economic themes front and center, Marquette recently joined more than a dozen other institutional investment consulting firms in the formation of the Institutional Investing Diversity Cooperative (IIDC). The initiative was established to increase data and transparency around diversity in the asset management industry. Members of the IIDC advise on a collective $4 trillion of assets held by clients in retirement plans, employee health funds, endowments, foundations and other funds.
Along with Marquette, IIDC members include investment consultant and OCIO provider Verus, Angeles Investment Advisors, Aon, Canterbury Consulting, Ellwood Associates, LCG Associates, Meketa Investment Group, Milliman, NEPC, SageView Advisory Group, Segal Marco Advisors and SEI.
It was a pleasure to catch up with Obed, as Alternatives Watch is compiling its own survey on Diversity & Inclusion initiatives.
Vailakis: Thanks for agreeing to share your insights with Alternatives Watch readers.
To kick things off, please speak to how the institutional allocators you serve may have shifted their plans, approaches or portfolio views since March of last year when the US went into lockdown due to COVID concerns, and where are they at now, a year into this?
Obed: Thank you for having me, Nancy. After Q1 of 2020, there were more commonalities amongst plan sponsors than there were differences. Collectively, they’ve been extremely patient.
I haven’t seen any knee-jerk reactions to the macro uncertainty surrounding COVID and related economic factors. They are not de-risking at the worst possible point in the cycle. I haven’t seen any major asset allocation shifts or seismic changes. Plan sponsors are focused on what their policies allow for in terms of being modestly overweight or modestly underweight certain asset classes, due to short term market movements.
Vailakis: Many institutional allocators are talking about an uptick in credit and distressed portfolio allocations. Corporate carve-out activity is in the spotlight, with 60% of respondents to a December 2020 Dechert/Mergermarket survey forecasting an increase in the number targeted by their firm.
Please speak to what you’re seeing.
Obed: What I’m seeing is more interest in infrastructure investments and less interest in core real estate (established real estate with low leverage that is) and perhaps more focus on value added real estate (with a relatively higher degree of leverage). More secondary market interest will likely come in the future. It’s no secret that office and retail related investments were hit hard. There seems to be a real opportunity in industrials, but there is also the realistic fear that this is a big market timing bet.
Whenever there’s a dislocation in the equity markets, there is typically an uptick in closed end strategy interest, particularly as a way to dampen some of the “noise” that can come from the traditional or public market allocations within the portfolio. Also, given that interest rates have been at the lower end of the spectrum, the relative yield that may come from closed end allocations can be more attractive to investors.
If an investor pulled the trigger in 2009, the credit and distressed deal or fund success ratio was high — it was a textbook case of a ‘rising tide’ market scenario. Based on that “feel good” experience of buying at a discount and seeing returns come back strongly in 2009, there was a healthy demand for credit and distressed when we saw some market dislocation in 2016. So in 2016, there were plenty of investors moving into distressed opportunities that didn’t pan out — the magic of 2009 did not repeat itself and not all of those 2016 distressed opportunities were “money good”.
In this environment, perhaps due to the disappointments of 2016, I see more caution and lots of tire kicking on the distressed investing side, after all, some companies are distressed for a reason – it would be inaccurate to think that it is just a simple case of good companies with strong business models needing a small injection of cash to tide them through this COVID hurdle.
This mindset is true for both domestic and international opportunities. COVID truly is global and has impacted international investment considerations as well as domestic ones.
Vailakis: As yields are at record lows, how are you advising your institutional clients with respect to fixed income? This often 40% slice of the portfolio puzzle, classically relied on for a steady coupon, is now a real challenge from the perspective of traditional asset allocation models.
As the future prospect of using fixed income to balance equity risk and deliver returns with modest volatility has diminished, how are you advising your clients?
Obed: There are major headwinds for the asset class. Planned sponsors are generally allocated 15-40% to fixed income, a function of their target rate of return. The higher the needed return for the portfolio, the lower the allocation to fixed income and vice versa.
Traditional fixed income, i.e., largely investment grade, low fee, high liquidity and great transparency still has a role to play as an anchor in a portfolio. However, we are seeing more interest in strategies such as infrastructure that provide a nice relative yield in this low interest rate environment.
We have seen a big uptick in demand for evergreen strategies, as there is no J-curve and monies are invested immediately.
Vailakis: Despite these historically low yields, would you say that many clients are shored up in cash and less compelling fixed income instruments given persistent macro uncertainty?
Obed: Yes. There hasn’t been an extreme change on that front. We are not seeing clients look to time the markets and we are operating within the bandwidths that are permitted per our investment policy statements. Because of this, I would say that some plan sponsors are a little overweight private equity and traditional equities given that fixed income has seen strong mean reversion, i.e., lower returns in 2021.
Vailakis: In terms of actual new allocations, how are you finding clients are adjusting to the largely Zoom heavy meeting environment?
Are you seeing an uptick in allocations to managers that are new to your clients, or are investors largely rolling into new funds being raised by previously known entities and firms?
Obed: I’m seeing clients allocate additional monies to new funds presented by firms that they are already invested in, often originally through earlier vintage year fund allocations.
Plan sponsors are looking at newer managers, but generally those that they met in person several times pre-COVID lockdown.
Vailakis: Since the death of George Floyd, there has been a lot more discussion about diversity in asset management or the ‘S’ part of the ESG equation.
Obed: It is great to see our industry address where we have been lacking from a diversity standpoint. As this is something that can only be resolved by those with the greatest representation, who make up the overwhelming bulk of our industry, the hope is that decision makers will rise to the occasion and see a level playing field as a good thing for the business overall. It will be more than disappointing if five years from now, for example, we are looking at minimal progress.
Vailakis: Talk to us about the Institutional Investing Diversity Cooperative announced in January.
Obed: The initiative was established to increase data and transparency around diversity in the asset management industry.
Members will push for better transparency around diversity within investment teams at the product level and a broader definition of diversity across these initiatives.
Vailakis: With respect to the diverse-manager led fund pipeline, what does the pool look like in the context of the type of allocations you facilitate at Marquette?
Obed: We are seeing all types of institutions including not for profits, corporations and public entities continue to broaden and strengthen their relationships with diverse-owned firms or diverse-led strategies.
This interest exists both on the traditional (equities and bonds) side of the business as well as on the alternatives side, particularly in the private equity segment. We continue to see a strong pipeline of diverse talent out there. While it has improved modestly, the private markets landscape is perhaps one area where diverse owned GPs continue to be unicorns. Over the coming years, one of the litmus tests of our industry’s progress will be the increased level of representation across all levels, particularly amongst GPs.
Vailakis: Please speak to how consultants are already engaged in helping clients source more diverse investment opportunities.
Obed: Our clients continue to be a great source of ideas and similarly, our role as the consultant is to be a source of ideas for clients. I am fortunate to work with clients that really view diverse manager exposure as an essential ingredient for their long-term success. Whether it is traditional equities, fixed income or private markets, we have seen meaningful allocations go to diverse-owned or diverse-led firms and strategies over the past few years.
Vailakis: I’m charmed by your financial literacy book geared toward young readers, Talking About the ABCs of Financial Literacy, ever more topical these days given increased discussion about the wealth gap in America and how to close it.
I’ve been a financial literacy volunteer for the charity High Water Women for a number of years, and I find it quite rewarding. Please speak to your inspiration for the book.
Obed: Absolutely. As you noted Nancy, the wealth gap exists for a number of reasons and there is a lot of focus on practical ways to narrow it. There are likely a number of solutions given the myriad of reasons for it, however, normalizing discussions about finance, financial ideas and concepts, particularly with younger people, is a step in the right direction and a key way to bridge the gap.
By making fundamental financial concepts easy to access and less intimidating for children, parents, teachers, etc., enabling conversations about important decisions and behaviors that will be helpful during life’s journey, I hope to improve the status quo.
Given the disruptions of the COVID shut down, last year’s election cycle and the general stress inducing ride that the market put us all through, the book was a nice distraction for me in the evenings and during weekends, particularly when we were snowed in! Talking About the ABCs of Financial Literacy is the first book in a three-part series.
Talking About the ABCs of Financial Responsibility is the next book in the series and will be coming out in a few short weeks. At the end of the year, the last book will be published, Talking About the ABCs of ESG.
Vailakis: Great, I look forward to reading the next installments!
Thank you for sharing your insights, Kweku.
Obed: Thank you, Nancy.