What We Do
Managing Assets vs. Liabilities
Most institutional investors, and especially retirement plans, exist to make payments in the future, and often the very far future. Whether these payments are highly certain, such as for many pension plans and some insurers, or less so, as for many endowments, meeting them is the essence of what an institutional investor does. Managing assets versus our clients’ unique future obligations, their liabilities, is at the core of what we do.
Using our actuarial expertise, we spend time understanding our clients’ liabilities in detail and how these liabilities intersect with the institution as a whole. We identify and quantify the financial risks inherent in all liabilities. We use our investment and markets expertise to design an asset portfolio that can achieve desired returns relative to a client’s unique liabilities within the risk tolerance of the client.
The managing of assets explicitly versus liabilities in a tightly risk-controlled framework is known as “fiduciary management”. River and Mercantile Solutions is a leading provider of fiduciary management for institutional investors.
For those pension clients who utilize us as their plan actuary, we provide comprehensive valuation, regulatory and compliance services. We also provide thoughtful, forward-looking advice regarding the plan and how it can be most efficiently managed and used to attain the goals of the plan sponsor.
Asset Allocation, Diversification and Fund Manager Selection
We have always believed that asset allocation – the split of a portfolio between different kinds of assets – and the adjustment of that allocation as circumstances change, are among the most important investment decisions that an institutional investor can take.
We continuously review markets and economies with our clients’ asset allocations in mind. We conduct portfolio reviews for all clients on a regular basis and will recommend, or if provided with the authority, change allocations. Our process is a gradual one as excessive trading can hurt returns – but our vigilance means we can respond quickly if conditions dictate.
We monitor a wide range of asset classes including equities, bonds, real estate, commodities and alternative investments. We believe that it is possible to find true alternative assets, those with very low correlation to both stocks and bonds, but that it is very difficult. We do not believe in paying high fees or in giving up liquidity for alternative assets that do not provide true diversification.
We also believe in using both active and passive management, the mix of which being determined by the asset classes used, the frequency of which asset allocation changes will be made and the market cycle at the time. We seek to leverage our size, whenever possible, to drive down fees for our clients. We regard all fund managers’ fees and terms as subject to negotiation. We maintain a robust investment manager due diligence and monitoring process that focuses on the underlying reasons for success or failure, not simply on recent manager performance.
Tailoring our Services to Your Plan
Defined Benefit Pension Plans
Serving corporate defined benefit pension plans is an essential part of our character. DB plans were our first clients, and they continue to comprise the majority of our client base.
We know every DB plan and plan sponsor is different. Our primary aim is to generate significant performance improvements for our clients but we recognize the need to tailor our services to each one – to their funding position, the profile of their liabilities and membership, the nature of their business and the strength of their governance.
We take all these factors into account when working with a new client to establish its target investment return and tolerance for risk. We can then assess the fitness of the plan’s current asset allocation, and the appropriateness of making changes.
Many plans aim to eliminate or minimize their risks, either through termination or by investing in assets that match liabilities using what we refer to as a “hibernation” strategy. We help plan sponsors design de-risking strategies to meet these objectives over time. We believe any such de-risking plans should be managed dynamically as, in certain circumstances, it can make sense to accelerate de-risking, decelerate it or, indeed, even to re-risk.
Defined Contribution Plans
As defined contribution plans have grown in size and importance, so has the need for plan sponsors to monitor and manage them. Some of this need is due to heightened regulatory scrutiny and pressure, but also the understanding that DC plans will form the majority of retirement savings for most people who use them.
River and Mercantile Solutions provides advice as both an ERISA 3(21) and ERISA 3(38) fiduciary. We also provide advice on record keepers, plan design, plan fees and regulations that can impact DC plan sponsors. We offer varying levels of service, from basic fiduciary cover and governance through to the investment management of participant default options.
We believe the needs of DC plan sponsors are evolving from using consultants simply to provide fiduciary cover around fees and the selection of the investment line-up to seeking real advice around how to fundamentally improve DC plans. This can take many forms, from finding better record keeping platforms through to complete redesigns of the investment line-up and trust structure. We believe that DC plans will look substantially different in 20 years, and we anticipate working with our clients to design these DC plans of the future.
Insurance Investment Consulting
Insurance companies have focused on risk management and the management of assets versus liabilities for as long as they have been in existence. This risk-focused mindset fits very well with River and Mercantile Solutions’, making us a natural advisor to insurance companies. We advise on over $20bn* in insurance company assets.
We work with insurers to develop robust investment risk management strategies and governance procedures. We believe these frameworks can be easily monitored and acted upon quickly, as opposed to those that may be more precise, but which are difficult to manage in real time. Investment decision-making should be approached in the same way: maintaining sufficient liquidity and price transparency for leveraged institutions like insurers is critical and should not be given up lightly.
We provide both discretionary and advice-only investment services to insurers. Our discretionary asset allocation services are generally focused on the higher risk assets (such as equities and high yield bonds) in the portfolio and we typically work alongside one or more core fixed-income managers who handle the management of the lower-risk assets.
* Assets under advisement and assets under management figures include River and Mercantile LLC in the US and River and Mercantile Solutions Investments Ltd. in the UK.