INTERVIEW Meet Karyn Williams: The Queen of Risk - Thought Leadership for the Insurance Investment Community - Insurance AUM Journal
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Q4 2020
INTERVIEW
Meet Karyn Williams:
The Queen of Risk
Thought Leadership for the Insurance Investment Community
In This Issue
The Editorial ................................................................................................ 3
The Interview .............................................................................................. 5
We bring you articles and editorials
Meet Karyn Williams: The Queen of Risk from some of the most successful
financial institutions in the industry, full
The Interview ............................................................................................ 11 of technical and educational information
that matters right now in our industry,
Real Estate Investing in the Wake of COVID-19 without advertising clutter.
David Roth, CFA
We deliver in several formats:
The Short List • Hard Copy via email
• Website Access via secure firewall
• Subscription-Based via email
1 Municipal Bonds: Attractive Again? • LinkedIn via followers
SLC Management ........................................................................ 18
Print subscriptions are complementary
2 Brave real world for insurance investment professionals,
Robeco ........................................................................................... 21 and are available to other members of
the institutional asset management
3 Insurance Outlook: Finding Attractive Opportunities community for $150 per year.
in Challenging Credit Markets
PIMCO ............................................................................................ 24 #1 Source of Thought Leadership
as ranked by insurance CIOs.*
4 Insurance Quarterly: Perspectives, challenges,
and opportunities Be part of the fastest-growing
Principal ......................................................................................... 27 technical publication, email:
5 High Yield for Insurance Companies: editor@insuranceaum.com
For Everything There is a Season
MetLife Investment Management ........................................... 37
2021 PRODUCTION SCHEDULE
6 Fund financing for insurers today Edition Content Due Released
Aberdeen Standard Investments ............................................ 45
7
Q1 (JAN, FEB, MAR) FEB 12 MAR 15
Opportunities within the Structured Credit Universe
Loomis Sayles ............................................................................... 47 Q2 (APR, MAY, JUN) MAY 14 JUN 15
8 U.S. Investment-Grade Credit: Q3 (JUL, AUG, SEP) SEP 10 OCT 12
Actively Managing the Investment Opportunity Q4 (OCT, NOV, DEC) NOV 12 DEC 15
DWS ................................................................................................ 49
9 2021 Real Estate Strategy Outlook * Source: Insurance Asset Outsourcing Exchange,
Principal ......................................................................................... 57 2019 Survey
10 Pockets of Value Still Exist in Securitized Credit
Results based on 46 insurance company CIO’s response
to the question, “What are your preferred sources
T. Rowe Price ................................................................................. 59 for thought leadership from third party investment
managers and consultants?” The Insurance AUM Journal
was the most frequently selected source for Thought
The Chuckle ............................................................................................... 63
Leadership from a list of seven specific institutional-
focused media. Sample limitations reduce the statistical
level of confidence associated with this result.
Q4 2020 Insurance AUM Journal 2 insuranceaum.com
The Editorial
We chose this cover image because we feel as though we are Stewart J. Foley, CFA
breaking through to a brighter 2021 and beyond. The first Editor In Chief
COVID-19 vaccination in the U.S. was reported this morning, as stewart@insuranceaum.com
a matter of fact. We are all longing to get things back to normal Stewart Foley is the Founder of Insurance
and my feeling is that we’re heading in the right direction. AUM and the Editor-In-Chief of the
Insurance AUM Journal. He is also an
Instructor of Finance and Economics at
We are very thankful for this year. I’m hesitant to say it but Northeastern Illinois University (NEIU) for both graduate
2020 has seen our business nearly triple. In addition, we have and undergraduate courses. Stewart’s track record includes
announced an exciting new partnership with CAMRADATA, the successfully raising and managing over $25 billion of
leading asset manager database in the U.K. and Europe. We insurance general account assets in the U.S., London and
Bermuda markets. He graduated with honors from the
will bring powerful and intuitive asset manager search and
University of Missouri with a BSBA in Finance, has an MBA
evaluation tools to U.S. insurers . . . free of charge. It is part of from the University of Chicago Booth School of Business
our ongoing commitment of being the insurance investment and is a Chartered Financial Analyst.
industry’s go-to resource for research and education. This
capability will go live 1/1/21 and there will be how-to videos Lindsay Mickles
Managing Editor
for both investors and managers alike. A very special thank
lindsay@insuranceaum.com
you to Sean Thompson and his team at CAMRADATA for
making this groundbreaking alliance possible. Lindsay Mickles has been involved in
the communications industry for most
of her professional career. She has
This quarter has broken many records here – this edition extensive experience in corporate internal
has the highest number of articles, we produced the largest communications, served as the Editor-in-Chief for an
number of podcasts, and we are seeing viewer growth of online magazine and a literary magazine, and has more
around 15% per month. All of this is made possible by than 4 years’ experience as a freelance content creator
and web designer. She holds BA in Visual Communication,
our Members and contributors who demonstrate their
with a focus on commercial photography,
commitment to the industry every day. and an MA in Intercultural Communication.
From our family to yours, we wish you a very healthy and Glenn L. McLaughlin
Happy Holidays. Thank you for your support and kind words eDirector
during the year. We appreciate them all very much. A highly experienced User Experience
design professional with significant
accomplishments in creating solutions in
Best regards,
complex, detailed, data rich financial service
companies. A background grounded in
visual design and an obsession to detail.
Ammi Teir
Graphic Designer
Ammi Teir is a graphic designer with more
than 11 years of international design
Stewart experience. She is passionate about design,
and has worked with many well-known
brands, such as Harley-Davidson. Ammi is
originally from Finland, but is now working
remotely from anywhere in the world.
Gia Clarke
Associate
Gia Clarke is a rising sophomore at Loyola
University Chicago in the Interdisciplinary
Honors program. Gia is an Advertising/
Public Relations major in the School of
Communications. At Loyola, Gia works for
the Office of Undergraduate Admissions as
a tour guide and student ambassador, and is planning on
working for the Department of Residence Life as a Resident
Assistant in the coming academic year. After graduation,
Gia hopes to find a career in digital communications.
For more, visit insuranceaum.com/about
Q4 2020 Insurance AUM Journal 3 insuranceaum.com
+ The Industry's Investment Resource Digital Database • Journal Articles • Manager Research • Opinion • Assisted Searches • Podcasts • Investment Analysis • Webcasts • Thought Leadership Research Events • Investment Research Report • Virtual Conferences • Investment Survey Report • Seminars • Micro-Sites • Roundtables • Brand Awareness Studies insuranceaum.com camradata.com 847.868.0044 +44 (0)20 3327 5600 Q4 2020 Insurance AUM Journal 4 insuranceaum.com
The Interview
Guest Q&A
Meet Karyn Williams:
The Queen of Risk
STEWART: Welcome to another KARYN: Thank you, Stewart. Well, engine, if you will, to get there, the
edition of the Insurance AUM Journal that's a great lead in. There's, as risk, that was very, very unclear for
podcast. My name is Stewart Foley. I said, a lot to unpack here in this most people. And so we're starting
I'll be your host standing with you at conversation. And so maybe the thing with why is that? The tools long have
the corner of insurance and asset to do is to start with what I observed been, as you said, being variants. And
management, with none other than in practice for a very long time. And also, as you said, Harry and others
the queen of risk, Karyn Williams. when I started, I made the jump from who had brought similar kinds of
Welcome Karyn. the academic world into Wilshire concepts in Sharpe, think about
Associates, which we practiced the arbitrage pricing theory, these
KARYN: Stewart, thanks for having implementing some of the concepts really are academic grounding for
me today. We have a lot to talk about. that we're now talking about. And our understanding of risk, just as an
what I had seen, time and time intuition, there is a systematic risk in
STEWART: We do. And here's the again, was regret disappointment, the marketplace.
thing, Karyn did not give herself the confusion, and generally an inability
name the queen of risk, I did. And I for a lot of people to talk about risk, It's not a prescription for how to
just think what you're going to find period. And so over time, and it took actually build a system that would help
out today is that Karyn's firm and a lot of different perspectives in the you to make a decision, huge insight
Karyn's approach to risk and risk industry for me to really understand about how the world works. And so
management is unlike anything that and absorb this, was a view from I think that having that translated
is really been done prior. Right? So governance, a view from the people exactly into a tool was compelling.
let me just set the stage a little bit. involved and then a view from the So if we just take a step a little, why
We both know, and I think anybody systems that were used. would people do that? It's actually
listening to this podcast knows really simple. It's simple stuff, in a
that traditional mean-variance If I reflect, there were challenges in way. So it's analytically, very tractable.
optimization for risk management all of those. It's generally true, from a It allows for risk to be described by
doesn't work, right? It doesn't work governance perspective, that people various attributes, think portfolio,
when it's supposed to help you, are pretty clear about what they want think marginal risk or contribution
which is market dislocation. We've all their investments to accomplish. They to risk. There are some metrics you
learned about, "Oh, diversification, wanted it to pay out, they want to can derive that are actually really
it's supposed to help you," blah, blah, support various goals, they want to straightforward.
blah. And all of that portfolio theory pay fees, they want to cover inflation.
that was built decades ago, the people Those are actually relatively easy. In You also can explain, if you will, the
who built it knew it didn't work, if the fact, I remember spending years and results of your portfolio in risk terms.
assumptions changed any. Now you years getting in the last basis point of So you can generate information
have a PhD in finance. Let's talk about return, very clearly defined. But with ratios and Sharpe ratios. And so
why you think that is all wrong. respect to how do we get there, the it actually simplifies the analytical
Q4 2020 Insurance AUM Journal 5 insuranceaum.com
THE INTERVIEW
Meet Karyn Williams: The Queen of Risk (cont.)
world, but it's not really very good like an insurance company, that's was fantastic. We helped to transform
for decision-making because people complicated, there's a lot of asset the investment program from one
don't use, okay, so who are people? classes and oh, by the way, there's that was really roughly conservative
Who is at the investor table, if you will, these things called liabilities that is because they couldn't see the kinds
with this choice, risk choice, portfolio the core of their business? And so of risks that we were talking about,
choice? For institutions, as you might those things fit together, but you've like let's put a lot in cash, let's put a
know, and you think insurance moved out of, and I don't want to take lot in reserve, but then getting clear
institutions, you've got an investment you off that line of thought where you on how much we could take and then
committee, which may include very were, and I like how you throw out the putting it to work in factor space was
bright people who are investment name Harry, is Harry Markowitz, the really powerful for the organization.
professionals and sophisticated, and granddaddy of them, right? And we got everyone behind. It took
they understand. Beyond that, you some time.
could have a board where you have KARYN: Yeah.
non-investment professionals, very STEWART: Well, I think it took some
bright business people, but who don't STEWART: So how do you come at time, but at the end of the day, you
speak the language of investments, it as opposed to the mean-variance were really early, too.
who don't speak the language of framework that is the most common
standard deviation and risk. And so it's approach? KARYN: We were.
not a very familiar kind of discussion
or choice to make. KARYN: Well, there are a number STEWART: You were super early in
of ways early days that I started to that factor, in that risk factor approach.
STEWART: Yeah. And I think from come at this, I guess I would say I have yet to meet an insurance CEO
which you speak right? You were the kind of bottom up. And I realized in that didn't say we have a conservative
Chief Investment Officer of Farmers coming at this from the bottom up investment philosophy.
Insurance, you've sat on boards. The was insufficient. So what is bottom
governance angle is a good one. And up? Bottom up is first teaching the KARYN: Yeah.
I know that you've been in the room committee or committees, because I,
when this has happened and I've been like other insurance CIOs reported to STEWART: What the hell that means,
in the room when this has happened. not just one investment committee, heaven only knows. But at the end of
So you get through your presentation but potentially several committees the day, what's always been viewed
and you've gone through and blah, and boards. And so one of the as, and I'm doing the air quotes, the
blah, blah questions, and then first journeys we took with them conservative approach, is different
there's no questions for a minute. was to understand that risk was today with rates with the 10 year
And then some brave soul raises shared among asset classes, that note at 90 basis points or whatever
their hand and asks a question that fundamental drivers of performance it is today. And those big allocations
is incredibly obvious that you were are shared. That's powerful they to high grade bonds is a very risky
talking dramatically above their head had never heard that before. Their strategy in this kind of environment.
the entire time. facility with asset class is actually So it's interesting that while you had a
pretty good, somewhat limited. And big learning curve at Farmers, you guys
KARYN: Yes. if you get into maybe some newer were early on, I mean early, early days.
descriptions of an asset class today.
STEWART: Right? To which somebody But generally speaking understood KARYN: Yes. And I have to get the
on the other end of the room goes, that these should be working together attribution, right. So Farmers is an
I'm glad you asked that because I to diversify. But once you started to affiliation with Zurich Insurance and
was going to ask that too, or I didn't talk about the fact that a growth risk a lot of the original groundbreaking
understand that either. factor lives in multiple asset classes, work was within the investment
that oh, all of a sudden, we have a lot management function and team really
KARYN: That's right. more at risk than we believed. at Zurich. And we were in a really
nice position to have the freedom
STEWART: And it really speaks to And so I know that you've had other to do the right thing, which was not
your point, which is we all know conversations about this, for example, being conservative, but also not being
intuitively what risk is in some the Northern Trust conversation crazy with risks that we would want
manner. But how do you get it? How about risk factors. And so that was to take to improve the investment
do you quantify that? How do you the way I started to come at this. And program. But actually, first of all, let's
put risk management into an entity, that was when I was at Farmers, and it understand, how much can we take?
Q4 2020 Insurance AUM Journal 6 insuranceaum.com
THE INTERVIEW
Meet Karyn Williams: The Queen of Risk (cont.)
And that's a very different approach to world. And I didn't want to end up the basis of which we would derive a
investments than say, well, we want to there because all of my experience function to optimize. So the problem
produce X percent income, Y percent had taught me that it was in the I had with that is that specifying utility
growth, and we want to have alpha. deepest drawdowns, which happen function means also to get from you
all the time, where the potential lies somehow a risk aversion measure
And so yes, you can certainly set in the innovation, thinking about the or parameter. Well, I don't know
those out as objectives, but getting tail, thinking about the sequence. So what that is. And there are surveys,
clear on what is available to put to it's not just that these events happen especially in wealth management,
work is the real innovation here. more often than a normal distribution where like, okay, we're going to do
That's completely distinct from, and would suggest. It's also that there are a survey today. We're going to ask
only by chance related to standard sequences of drawdown. you all these different questions and
deviation. It would just be the rarest we're going to say, "Oh, well, you fall
of circumstances that the amount that So it's the pain and it's the duration. into this very conservative class of
you could put to work actually met that And I thought, well, gosh, we can do investors or very risky." At that point
standard deviation number that you a lot more. So what did I do? I said, in time, I don't know that that's any,
would produce in a mean-variance all right, I'm going to approach one of and then you've got to translate that.
optimization. So anyway, the bottom the smartest people that I know. And
up work was essential, but that wasn't I literally went out to Caltech and he STEWART: Absolutely. And oh, by
enough. There's a lot more work to said, "Yeah, I'd be happy to help you the way, when you tell the board of
do. And let me just tell you a little bit think through this." I was just looking directors the equity market can be
about the journey for Hightree. for a thinking partner, in Jaksa Cvitanic down 30% and they all nod and say,
who's out there. And I actually wrote "Yes," and then you're down 28%,
STEWART: Hightree Advisors is the down all of the things that I wanted that's a whole different conversation,
name of your firm, right? I just want a new approach to have or not have. right?
to make sure that when you say And I wanted to be able to capture
Hightree, everybody knows what this idea that there could be multiple KARYN: That's right.
you're talking about. objectives and multiple limitations so
that there would be potentially soft STEWART: Depending upon the
KARYN: Yes. limits on a drawdown and hard limits situation at hand and the way that
on drawdown, that you might have the markets are and the mood in the
STEWART: This is the firm that ability to specify a number of different market and whatever, that's not a
you founded. You're the founder, targets, for example, on the plus side. constant, right?
predominant partner. There are So multiple, if you will, objectives with
others, but it's Hightree Advisors, respect to the value of a portfolio at KARYN: That's right.
and that's you. So how did that come some future date. So that was kind of
about? number one, is that why just do? STEWART: I'm putting words in your
mouth, I don't mean to, I'm asking.
KARYN: Yes. How did that come STEWART: I think that when it's That's not a constant, is it?
about? I'm still wondering. something that sounds very simple.
But when you start expanding the KARYN: No, these are not constant.
STEWART: I hear you. variables in that way, the math gets But at the same time, it's not like we
orders of magnitude heavier, right? can, I'm not necessarily interested in
KARYN: You've always been an forecasting and I don't want to put
entrepreneur, but now I'm officially KARYN: Potentially. people in a box.
an entrepreneur. But so I knew that I
wanted to bring that bottom up kind STEWART: Potentially or no? No? STEWART: Right. Exactly, yeah.
of intelligence as an independent
portfolio, if you will designer, for KARYN: No, ours did not. The way KARYN: So the question is, well, where
organizations. Very much in the spirit that we actually simplified things quite do you go from there? So let me add a
of what I had the opportunity to build a bit. The other thing that I wanted few more things. I also wanted to make
with colleagues at Farmers. And yet, to avoid was assuming that I knew sure that we didn't have to fall into
I knew that I was still going to be Stewart Foley's utility function, like to this trap of thinking that the market
dealing with, even if you use a factor- specify your utility function, there are, was normal, normally distributed, that
based approach, you could still very as you probably know, tens if not more returns were normally distributed
much end up in the mean-variance types of utility functions that exist on because we know they're not.
Q4 2020 Insurance AUM Journal 7 insuranceaum.com
THE INTERVIEW
Meet Karyn Williams: The Queen of Risk (cont.)
STEWART: Yeah, clearly not. Yeah. KARYN: Yeah. Well that happens whether it's our advice or it's financial
everywhere. technology, has to be clean.
KARYN: And so, I said whatever we
create here as a tool, as a decision STEWART: But it's true. Yeah, it's STEWART: Yeah.
support tool, has to be flexible enough really true. And I do think that one of
to, if we made it real, that we could the things that the insurance industry KARYN: It has to be fiduciary ready.
have whatever distribution we want. does a lot of and probably should do And it has to be aware of the role
We could say that it corresponds to less of is this looking at peers, right? and job that a governing board has.
this return generating process, or we So we actually, we've designed for
could say that we're using history, but KARYN: Yes. that concept. And so if you go down
it would have to be realistic. And there the path of saying, "All right, well,
were a few other things along the STEWART: Because what's good for what are our objectives, and can we
way. But basically, what we ended up your peer and what's good for you. measure our ability to get there?" And
working out was this measure we call You know what I think it is at the end I'll come back to the definition in a
portfolio Pi, thinking about the whole, of the day? People don't want to stick minute, then you have a completely
the whole portfolio and what we want out, right? different kind of conversation at the
that portfolio to accomplish. And so board, are we on track or are we not
portfolio Pi is actually kind of simple. KARYN: Absolutely. on track, et cetera. And in a way you
Maybe the other thing to mention, can start to see the cost of being the
sorry to go back one step again, is it was STEWART: They don't want to stick out. same, the cost of simplicity, the cost
critical for me, critical, that whoever of making a choice that everyone
was to learn the measure, that they KARYN: That's right. feels comfortable with, but is actually
could understand it, even if they were working against them, oddly enough.
a non-investment professional. STEWART: But your situation may be
completely different than the peer KARYN: So let me go back to the
STEWART: And I think that's critical. group. That's why I like what you're definition. So Pi, very simple over an
doing in the Pi system, I like this investment horizon, let's just say it's a
KARYN: Yes. holistic approach that has things in three year or five-year period, is once
simple terms. the objectives have been laid out is
STEWART: When board members the average chance you'll hit them.
are being asked to provide a KARYN: Yes. So take objective one. What's the
governance function and vote and probability we'll hit that? Okay, well
approve decisions that they may not STEWART: And oh, by the way, you that's 90%. Objective number two,
understand fully, I think that this is a don't have an axe to grind, right? that's 70%. Objective, number three,
particularly important point. You're 100% independent. You don't et cetera. And so the average of those
have an axe to grind by asset class or probabilities as Pi. So if you go to any
KARYN: Yes. And Stewart, you by anything else. investor, even a retail investor, and
probably saw this too. If they don't you say, "Well, you have a 50% chance
have something like this measure KARYN: That's right. of hitting your objectives." And they
that they understand and can track, may say, "Whoa, I didn't know that."
what did they do? They focus on their STEWART: It's just, here's an
peers, which the peer set may have a approach, I can define variables that STEWART: Absolutely.
completely different set of objectives are understandable and put them in
and ability to take risks. They focus on, a holistic context. KARYN: And they would probably say,
and I thought this is maybe what you "I didn't know that. Well, can I increase
were going for before, oh, that's all KARYN: Yes. And this is informed that?" Yeah, you probably can.
great, but what happened to Apple? a little bit by working with boards
my whole career, I'm also an STEWART: Yeah.
STEWART: Yeah. That was always my independent director for a publicly
joke is like you manage a billion dollars traded company. And so the focus KARYN: And how do you do that?
of fixed income and 7 million worth that I particularly have in Hightree on Well, how do I do that? Well, you have
of equity, and the equity portfolio independence and my colleagues, to understand what your objectives
dominates the discussion. It used to we are 100% behind this idea that are and maybe you can get what you
drive me wild. whatever information we produce, want. Maybe fixed income isn't going
to give you the luxury that we've had
Q4 2020 Insurance AUM Journal 8 insuranceaum.com
THE INTERVIEW
Meet Karyn Williams: The Queen of Risk (cont.)
over the last 20 years. And so, you have KARYN: Yes. STEWART: Absolutely.
to think about either making better
trade-offs and you want to have a tool STEWART: The wind blows and the KARYN: So if you're really clear on
that is designed for you to make that equity market falls and you've got what the objectives are and you know
trade-off, you as an organization, you double trouble, right? They're not how much risk you have to put to work,
as an insurance investor, you have independent. and you say, well, if we could improve
specific capabilities. And so, let me go that, chance of hitting the objectives,
a little bit further, so capabilities. So KARYN: That's right. And so then if we shift the portfolio around,
Pi, one of the measures you can set of understanding how those evolve maybe we conserve on risk, maybe
course, is a loss limit. And the way that through time, as time moves we avoid some of the tail risks that we
our team has built the technology, it's forward, what's happening with our have in the portfolio that we're finally
not just considering loss at a point in commitments, what's happening with now seeing, what does that look like
time, but actually through time. the assets, what's happening with in terms of dollars? And so we came
other parts, key parts of the business up with a second term, which is Eta.
But let me simplify and talk about that actually people in the company It's a Greek letter H. And this is where
at a point in time. So that limit that know. They have a good handle on we get to geek out a little bit.
you set is for the investment assets, this business. They know what their
which as you rightly said, sometimes line of business is likely to look like STEWART: This is my favorite part.
an insurance covers ten. We had 50 and how it's likely to evolve.
balance sheets, almost 50 balance KARYN: The question is, what Greek
sheets at Farmers. And so there's a lot STEWART: Absolutely. letter hasn't been used in the field of
of different moving parts and getting finance? Eta would be among the set.
a very clear handle on what the KARYN: Even under different
investment size is in relationship to conditions. And so, it's not the STEWART: Eta's there.
the equity or the surplus is critical. And intelligence doesn't exist. It does,
knowing how much of that surplus do but there hasn't really been a good KARYN: Eta's there. It's also with H,
you get to spend? Do you get half? Do framework for it. And one that, as Hightree. But, further than that, I
you get a third? Do you get a quarter? I said, a board, a group of people in wanted to find some meaning in it.
That's probably more art frankly now charge, could actually understand. So And so Eta is a term that is used in
than science. In the future, when I'm when we first worked on portfolio Pi thermodynamics, and it's a measure
old, that's going to be science. Right together, I kind of harassed Jaksa a of efficiency.
now, it's probably more art. little bit. I said, "Well, it's not enough."
He said, "What do you mean it's STEWART: Oh, there you go.
STEWART: But it does help to define not enough?" I said, "Yes, people
your opportunity set. understand probabilities vastly better KARYN: That's great. So Eta is this
than they do standard deviation." other term and it works kind of like
KARYN: Yes, absolutely. Yeah. If There's actually work that shows a certainty equivalent. How much
you can put to work, for example, a this, empirical work that shows this money would you have to add to
billion dollars of risk on a $20 billion through betting. But how important your current portfolio, that has a 50%
portfolio, that tells you a lot about is 60% chance versus a 65% chance? chance of hitting your objectives,
how much equity risk you can take What is that? How is that important? each year, such that you have the
and why it's super important not just Oh, so what, it's 5%. Big deal. But 60% chance? And so it's a measure of
to think about the trade-offs, hitting maybe that's really important. Maybe worth or value of moving the portfolio
your return, your income target and that's a lot of money. And so we came from where you are to a place that is
your growth target, but also thinking up with an approach where basically better serving your outcomes. And
about, "Oh gosh, are we going to blow we could translate the improvement then once you have that language,
through it at the same time that the in Pi into dollars. the world opens up. It really does
insurance business has a problem?" open up. And this is what I find super
You're sharing a balance sheet. STEWART: Which is something that exciting, and I don't know if we get to
everybody understands, including talk about it today, but super exciting
STEWART: And you know what? That boards of directors and everybody for asset managers.
is so true and so missed, I think. You else.
are sharing a balance sheet. You are STEWART: Yeah. Well, we're at the
running money inside the belly of the KARYN: Yeah. And the CFO, especially. 30 minute mark and I feel like we just
beast, right? started talking. I'm beyond interested
Q4 2020 Insurance AUM Journal 9 insuranceaum.com
THE INTERVIEW
Meet Karyn Williams: The Queen of Risk (cont.)
in what you do and I love it. Deep person on this planet can benefit governance and a whole host of other
in my heart, I'm a finance geek. And from, financial knowledge. And to a things, I think. So you can count on
at the end of the day, the idea that certain extent today, it's inaccessible. seeing more of Karyn. But thanks for
you can take complicated topics and And when I take a big step back, being on today.
put them into terms that everyone and we're not just talking about
understands, you are a professor, I'm insurance investment, we're talking KARYN: Stewart, it's super exciting
a professor, the best teachers in the about investors more generally, and for me to be able to talk about this
world, that's what they do. maybe even some of the clients and and geek out with you on investment
customers of insurance companies decisions.
KARYN: That's right. that have investment products, this
opens the door for them to better STEWART: I love it. We're both such
STEWART: They're able to take understand better relationships. geeks. It's so great. Okay. That's good.
complicated things and make it such There's just much more that you can So if you like what we're doing, follow
that you can understand it, or that do. And so I felt very much, and I said us, tell your friends. You can find us
anyone can understand it. And that's this when we first started working on on all the major platforms. If you
the power I think of the Pi system the concepts, I said, it's really critical. have ideas for podcasts, please email
and the way that you've gone about We have a job to do here. And it's not us at podcast@insuranceaum.com.
it, is you've created a language of risk perfect. There are a lot of practical We've also just announced a major
that's not technical really. It's straight things that we will be learning in this joint venture with CAMRADATA that's
forward. You almost think, "Gee, that journey. But I feel like it's an important going to bring managers search tools
can't be that simple, can it?" Teaching step forward, that giving people the and evaluation tools to insurers, free
a different vernacular is part of the ability to talk about things that are the of charge. So for more on that, check
learning curve. most important drivers of outcomes, out our website. Thanks for listening.
that's where you got to start. I'm Stewart Foley, and this is the
KARYN: It is part of the learning, and Insurance AUM Journal podcast.
it is, I'm going to push it further. I'm STEWART: Absolutely. We are having
going to say it's the responsibility of you back on and we are actually
an academic to bring these kinds of going to create a series with Karyn
concepts to a world that every single on risk and risk management and
About Karyn Williams
Karyn is the founder and managing partner of Hightree Advisors, an independent consultancy committed to helping investors identify and create sources
of value through improved risk deployment and governance. Drawing upon her experience transforming institutional investment programs, Hightree offers
clients comprehensive solutions that combine high-touch strategic counsel and investment intelligence delivered as software-as-a-service.
Prior to establishing Hightree, Karyn was the chief investment officer of Farmers Group Inc., head of client solutions at Two Sigma Advisers, and a partner and
managing director at Wilshire Associates. Over the course of her career, Karyn has built a track record of success in designing and implementing effective
investment programs for a wide variety of organizations.
Karyn is an independent public company director, NACD Governance Fellow, and serves as finance chair, treasurer and trustee for public and private
foundations. She is an industry leader, author, innovator and educator. Karyn graduated from Arizona State University, where she earned a B.S. in Economics
and a Ph.D. in Finance.
Q4 2020 Insurance AUM Journal 10 insuranceaum.comThe Interview
Guest Q&A
David Roth, CFA
Real Estate Investing
in the Wake of COVID-19
STEWART: Welcome to another And this downturn, if you will, this college. The reason I mentioned this
edition of the Insurance AUM Journal inflection point, this moment in time is that a lot of our businesses about
podcast. My name is Stewart Foley, that we're in, it's not characterized pattern recognition. And so this is now
and I'll be your host standing with by negative impacts across the real my fourth inflection point, if you will,
you at the corner of insurance and estate sector. There are certain going back to the late eighties, and
asset management with David Roth. sectors that are being helped in you're always trying to think, "How is
Welcome, David. certain sectors that are clearly being this the same? How's it different? How
challenged. It's worth noting that did the different sectors respond to
DAVID: Thanks, Stewart. Nice to see you. we're, we're talking today when Pfizer different impacts from the economy
has announced that they think that or from other exogenous shocks", and
STEWART: David is a partner and the there's a 90% efficacy rate on their the last downturn, frankly, during the
head of U.S. real estate, private equity vaccine, obviously to the extent that GFC, there was sort of a widespread
at Ares Real Estate Group. David, I this COVID crisis extends longer, decrease in value as all parts of the
don't know of another asset class that as opposed to being shortened by real estate sector really were being
has been talked more about in terms something like the introduction of a hit at the same time. What's been
of COVID impact than real estate, vaccine that will have more impact different this time is that there are
right? It's been a tumultuous year. It's on the psychology of consumers and certain sectors here that have actually
likely to have a lasting impact on this businesses. So today's announcement been helped.
market, but I think there's probably is actually a critical piece in the
more hysteria than truth out there. puzzle and something we've all been And so you can go through the
What's your view on this market? wondering when it might occur. different, what we would call main
food groups, and then some of the,
DAVID: Well, look, I think when you STEWART: It is amazing of all of the what I would call more niche sectors.
think about real estate, we're impacted non-economic or the exogenous And you could think about how they've
by the economy and of course the things that are going on in the market. each been impacted. Some have been
economy is being impacted by COVID, And it's your job, and thankfully not winners, some have been losers, and
but perhaps more than a lot of mine, to discern all of that into a view some are sort of in between, and
other sectors we create, we own, we on by sector. And you talked about time will tell. So if you think about
develop space that people use for the sector just a minute ago. Can you go the winners, I mean, obviously one
most part. And so in a world where into some of those sectors and how thing that's happened with COVID
we are worried about being closer you think they're going to be impacted? is historical trends towards the use
than six feet to each other, clearly Because I think I'm reading into this, of e-commerce has accelerated.
there are going to be impacts across but clearly not all equally, right? So, that has made a big, big winner
the real estate sector. So, the thing to out of industrial assets. The need
remember is that there are a lot of DAVID: Yeah. Look so start by giving for industrial assets has gone up as
different types of real estate. a little bit of my background. I've been e-commerce has really accelerated
investing in real estate for about 30 into this. And now there's a view here
years now. I started out when I was in that the pace of acceleration is going
Q4 2020 Insurance AUM Journal 11 insuranceaum.comTHE INTERVIEW: David Roth, CFA
Real Estate Investing in the Wake of COVID-19 (cont.)
to continue, even if we have a vaccine. hard right now, the other obvious DAVID: Yeah. Happy to give you a
I think people who were perhaps not answer is retail. little bit of background and you try
inclined to use e-commerce through not to take our entire time because
this COVID crisis have really learned And the difference between retail and I certainly can just talking about
of what it's like. hospitality is that we were somewhat myself. I've been in real estate now for
oversupplied in retail, in this country upwards of 30 years, I started buying
I know that my wife has, although she going into this crisis. And as a result apartments in college back when you
knew going into it. So the industrial we've had acceleration to e-commerce could do things, sort of no money
sector is something that we've spent that has continued to hurt retail, down if you recall those days.
a ton of time in over the years, we've but even when we recover, we don't
owned 111 million square feet or so necessarily think it will be as fast or STEWART: I do.
of industrial assets over the years. as stronger recovery as hospitality,
And we've only accelerated our pace let's say. This is all generalizations. DAVID: And I ended up in a
of both buying and developing into Every asset is a specific asset. Every partnership that when the first
this strength. Another area that we situation has idiosyncrasies and downturn in the market occurred,
think will continue to show resilience you have to analyze the market and which was the late eighties, early
and has done remarkably well, are the assets specifically, but these are nineties, resulted in me selling my
residential real estate in particular generalizations. And then in between interest to one of my partners and
markets and particular types. So those winners and losers, you have going to be an attorney. And I went
we think longterm the residential the office sector, which is harder to to NYU Law School and ultimately I
sector, which is an area that we've figure out because the use of office became a corporate M&A attorney at
spent lots of time in, in the past, we'll space, time will tell how quickly we all Wachtell, Lipton, Rosen, & Katz, never
continue to do well. There are some go back to the office. I would say at wanting to be an attorney. I'd never
geographic differences. The cities like Ares, and my personal belief is that really planned on being an attorney.
New York, San Francisco are being the office sector is not going away. And I did it for about a year and a half
hurt right now, as people think about and promptly left. I did a move that
dedensification and have moved in We've found great success through very few people I think have done
many cases home with their parents. Zoom, and we can talk about that before, or since. I left Wachtell to go
Obviously, if we have a vaccine that aspect of how we all do business move to Santa Fe New Mexico and
will reverse somewhat the longer if we want, but long-term, it's hard joined a real estate startup and went
this takes, the more likely that people to maintain a culture onboard new back into the real estate industry in
will continue to migrate out of those people have a collaborative culture 1993, I was with a company called
kinds of places. and be productive, I think if you're security capital group where, which
working from home. So, we think was basically, it was a private equity
But in terms of multifamily, we that long-term, there's clearly going firm focused on real estate operating
continue to develop assets into to be a need for office, but in the companies. I was with them for a
that sector. We spend a lot of time short intermediate, and even in the number of years in Santa Fe, opened
historically in the Sunbelt which longterm there's dedensification, up an office in Chicago, ultimately
are markets that benefit from which potentially helps in terms of moved to London and became CIO of
dedensification. The losers, if you will, the number of square feet that you Europe for them.
are obviously the hotel sector which need to manage the same number of
went from, and this was never really people, but opposing that is remote Soon, at some point I came back and
happened in history went from being working. And so there's a push and I joined a group called Walton Street
well occupied to being 0% occupied. pull here and we'll see over time, how Capital. This is condensing a much
And the hotel assets actually cost that plays out. longer story. I was with Walton Street
money when they're under occupied. Capital in Chicago. It's an opportunity
So, that sector is being hurt in ways STEWART: It's interesting. You fund that's run by Neil Bluhm who's
that we've not seen before. And really mentioned, you just kind of touched the B of J&B. I was there for about
almost every asset today is distressed. on your background. You've been at four years. And then I got a call from
Now, long-term we think there's going this awhile, right. You've been at Ares a head hunter and ended up joining
to be opportunity because we think not as long. So can you just kind of give Blackstone in late 2005. And I went
the hotel sector is going to recover a little sense of your background? And to Blackstone and was a partner
over time, certainly for certain assets I mean, I know that you're steeped in there ultimately was there for about
and certain markets, but that is a the real estate, but maybe everybody a dozen years. Ultimately, I ran Latin
sector that's certainly being hit right else doesn't know. America and at some point had a
Q4 2020 Insurance AUM Journal 12 insuranceaum.comTHE INTERVIEW: David Roth, CFA
Real Estate Investing in the Wake of COVID-19 (cont.)
desire to come back to the US and an So super excited about it. And I think STEWART: And we talked a little
opportunity came up to, to join Ares, our, really, approach, which we have bit about the real estate equity,
to head the US business. And I took three different offices around the real estate debt. Do the two teams
that opportunity and I haven't looked country. So we're always very close to collaborate, how are they on the
back since. on the ground. We have to know our capital stack? Can you talk a little bit
markets and our assets very well and about that?
STEWART: Yeah, that's where I was be nimble investors is something that
headed, right? Is like those sound like really appealed to me. DAVID: Yeah. First of all, give you a
very interesting roles aside from the sense of Ares, which we really didn't
attorney part. I'm with you. I'm not STEWART: Yeah. It's interesting you talk about, and probably we should.
sure I would've made it a year and a say that because it just seems like in We are part of $165 billion in assets,
half. I'll be honest with you. But why that smaller market, you can create alternative asset manager, publicly
Ares? Why did you make the move? more value from applying more of traded company. The company
That's not their largest block of assets. your experience maybe than you can started as a middle market lenders.
It takes some courage to make that in the megas. And it makes sense to So it has a very large credit business,
move. me. What areas, this sounds so weird, probably the largest direct lender
it's an odd question, but do you see to businesses. That's where a lot of
DAVID: No, obviously I haven't growth anywhere out there in the real the information flow comes from
had problems in the past changing estate space? Where's the growth side? other parts of the firm, in terms of
roles and always had a pretty understanding markets and industries
entrepreneurial background. And DAVID: Yeah, for sure. Look, there are and tenants. It's very helpful for us,
when I wanted to come back from real winners coming out of this post but there's over 110 billion of assets
Latin America the opportunity to COVID environment, obviously what's under management and credit.
help this. And I think there are things happened from a personal standpoint. There's about 25 to 30 billion in assets,
about Ares that are unique and I was very sick in March, by the way. So under management in a private equity
attractive for me. And when I try to I've actually experienced it. business that has been very successful
hire people, I explain this to them. for a long time and real estate's about
And frankly, when we talk to investors, STEWART: Oh, I'm so sorry. 14 and a half billion. And in our real
I try to explain it as well. Ares is a estate business about a third of that is
tremendous corporate platform, DAVID: And so I feel for everybody in mortgage debt.
right? And the benefits of that from who's involved, but I mean, there are
information flow to relationships, to certain sectors that are being helped. DAVID: So we have an origination
deal flow, to ability to raise capital. As I mentioned in the industrial platform. We have a publicly traded
These are all things that I knew about sector, some of the sectors like the mortgage rate that we manage, and
from my experience at Blackstone. single family to rent market that has then we have a number of SMAs that
The difference, though, is that we benefited from dedensification and we manage. And then the balance
were investing in, we are investing people wanting to have their own space of the equity is split pretty evenly
much smaller pools of capital a billion and have a place to work as they're between the US and Europe with
to $2 billion pools of capital. And so I having to work from home. Obviously in each region, currently we have
was excited about going back to that life science is something that has two strategies closed end funds
part of the marketplace. benefited from and their geographies that manage in the case of one
that are benefiting, right? So, some of opportunistic capital, where we're
DAVID: I also thought that that the less dense markets around the looking to generate a high teen type
would be an interesting place to be country are going to benefit whether returns and then a mid-teen type
during what I thought would be a it's Atlanta or Nashville or Charlotte, capital source for what we call value
coming inflection point, which we've or Austin or Phoenix or Denver, they add. So we in the US have about 53
now experienced. Nobody had any seem to be benefiting from a migration or 54 investment professionals now
idea COVID was coming, but we from the denser larger cities to the less between the equity and the debt
were long in the tooth on a long dense environments. So there clearly business. We have offices where
dated economic cycle. And so I liked are areas that are doing well, that are, we all sit where we have individuals
the idea of being in a smaller, more you would call that our growth areas from both sides of the house, both
nimble place and having the ability to for sure. debt and equity in New York, LA and
bring the experience that I've had to Atlanta. And then within the debt
bear, create the culture that I wanted business, we have additional offices
to create to help grow this business. in San Francisco and Chicago.
Q4 2020 Insurance AUM Journal 13 insuranceaum.comTHE INTERVIEW: David Roth, CFA
Real Estate Investing in the Wake of COVID-19 (cont.)
And so we have people pretty well DAVID: Well, look, obviously, real for insurers. And then our other
situated in most of the major markets estate has been an important asset strategies, which are on the equity
that we operate. We operate I don't class for insurers for a long time, side value add and opportunistic
know what the right phrase is, but particularly life insurers. The idea of real estate. This also allows insurers
hand in hand with our partners, we're match funding with their liabilities in insurance investors to seek you
sitting on investment committee, I'm requires cashflow streams that are additional return through property
on the debt investment committee. long dated, that are secure. And in improvement. And again, the choice
The partner who runs our debt the best case scenario that grow at of who you pick as managers really
business, Brian Donahoe sits on some inflationary or better growth matters on that.
my equity committee and we are rates, so lots of different types of
within the same offices sitting next to real estate. And of course the real STEWART: And I know that you
each other. And so we're very much estate industry is not one size fits all. being Ares, partner with insurance
LinkedIn, and this has tremendous There are certain industries that are companies, can you get into any
benefits from us, from everything a 20 year lease to an Amazon is one specifics on any of those mandates?
from information floated, direct deal thing, and then there's assets that
flow. So I'll give you an example. We are like hotels, right? And so the type DAVID: Well, I've been told that I'm
have a deal that we just put under of collateral matters quite a bit. And not supposed to talk specifically
contract to buy a student housing I think one of the things that I think about each of our funds and either
deal, and I'm in a kind of a large the insurance industry is grappling how they've performed. And there's
student housing market. And that with today is that perhaps in the like lots of requirements around
student housing market is one where past, there was a focus on CMBS for that, but I would say this, insurance
we, on the debt side, have made loans CMBS sake, but not as much focused clients have invested across the
to several other properties in the on the underlying collateral and in a Ares real estate platform, debt and
neighborhood, right in the same area, world where the collateral types are equity in both the us and Europe.
same school. sort of dramatically performing in a And given this need to enhance
differential way, I think this is going to income, given the low interest rate
That's an example of one way that be increasingly important to them. environment on investment grade,
we, on the equity side benefit from fixed income portfolios we've noticed
our debt business. On the debt side, But again, going back to the main a heightened interest in strategies
giving an example of a deal where we points insurers have invested that both distributed income, but
were selling the asset that we owned, in longer duration, fixed rate, also have some growth attached to
the property that we developed in commercial mortgages and core type them. Certainly for debt investors,
Chicago, and that resulted in an real estate for a long time. As insurers including life insurance companies we
opportunity for our debt business to are thinking about how to match have been a provider of sourcing of
provide a loan to the buyer. And since their liabilities, match their funding shorter duration, transitional lending,
we obviously knew the property well, needs in the future in a close to 0% which obviously can create different
and we knew the situation, we didn't interest rate environment, I think exposures and provide incremental
control who the lender was going to they're increasingly focused on that yield over time. We've worked with
be, but they had the opportunity to five or 7% bucket of alternatives of separately managed account clients
pitch and win the business. So there's which real estate is part of. And I think to make sure that our loans are like
a lot of synergies between the two we can provide incremental yield in pleasurable to FHLB, which I know
sides, I would say. a really what I think of as a good risk is important to insurers. And if they
adjusted way compared to some of participate in the lending program,
STEWART: So, David, if we turn just the other alternatives for insurers. which I assume many do.
for a minute to our specific audience,
why do you think real estate should On the debt side, obviously there's STEWART: That's a no brain deal.
be a part of an insurance company been a historical focus on longer term, Absolutely. I think that's a really big
portfolio? What type of an insurer either CMBS or RMBS shorter term deal for them.
talk about the liquidity aspects, floating rate loans to like transitional
whatever you want to talk about, but properties that can offer like sector DAVID: Yeah. And most, I think, do.
the insurance industry is screaming, diversification, additional yield for life And we offer transparency on our
crying, for yield. And how does this insurers, but really requires, I think, co-mingled vehicles to facilitate the
asset class, and based on your high quality managers. And that's one best possible capital treatment. So by
experience work in this industry? of the things we're trying to provide partnering with somebody like Ares,
Q4 2020 Insurance AUM Journal 14 insuranceaum.comTHE INTERVIEW: David Roth, CFA
Real Estate Investing in the Wake of COVID-19 (cont.)
we think insure investors can gain more difficult to find the right job them. So find a way to talk to as many
exposure to high quality, well managed and to find any job. And those are people as you can. Not in a way that
portfolios of shorter term floating rate always tough times. The answers I makes it look like you're begging for
loans, loans on transitional assets, tend to give are more generalized in a job, but just in informational ways.
and basically incrementally help with this specific moment, which is find And I'll put myself at risk saying this,
yield. And then for the insurers that something you do that you like. That's but somebody reaches out to me
are comfortable with value ed real the most important thing. If you like, and says, they want to talk to me, I
estate returns are opportunistic as what you do, you will do it better and generally say, I'll talk.
a small component of what they do. you will enjoy it over time. So I give
We think we provide strategies that people that advice for when they STEWART: Yeah, I think it's sort of one
have a proven long-term track record actually find a job, my advice is be a of these deals where we need to pay
and can really help meet the return learner, be a learner, be the person it forward. And it's an interesting time.
requirements that they're looking for. who says I will do that.
Thank you for being on. You've been a
STEWART: The question I have is you I will try that. I will expand myself and great guest. We've really enjoyed you
are walking across the stage of your take risks. Find ways to make yourself being on.
college graduation at the ripe old indispensable to the person you work
age of 21, and you take your mortar for. That's how you will get ahead. DAVID: It's a pleasure. It's really the
board off, you give it a fling and you Take on more responsibility than you most important thing for us at Ares
meet yourself today. What would think you, and even you think you can is our clients. And a lot of them are
you tell that 21 year old David Roth, handle. Put yourself at risk. That's what insurance providers. And so it's great
given the current environment for I think is the best thing that young to have this opportunity to talk to
opportunities and internships and people can be doing when they're in them directly.
full-time job? the work environment. As for other
advice that I would give somebody in STEWART: Thanks to our audience
DAVID: Yeah. I mean, look, I think this particular time period I think you for joining us. If you like us, please
that, that's a great question. I get just have to make a job, if you're out follow us on all the major platforms.
asked these kinds of questions all the of work, of getting a job. You just have We'd love to hear your suggestions
time. And what's interesting, I mean, to talk to as many people as possible. for future podcasts. You can reach us
of course this environment I'm sure is Because in my experience, oftentimes at podcast@insuranceaum.com. My
more difficult than some and cyclically people don't even know they need you name is Stewart Foley, and this is the
we have these moments where it's as an employee until you've spoken to Insurance AUM Journal Podcast.
About David Roth
Mr. Roth is a Partner and Head of U.S. Real Estate Private Equity in the Ares Real Estate Group and a member of the Management Committee of Ares
Management. He is also the President of Ares Commercial Real Estate Corporation. Additionally, Mr. Roth serves on the Ares Real Estate Group's Global and
Debt Investment Committees. Prior to joining Ares in 2019, Mr. Roth was a Senior Managing Director of the Real Estate Group at Blackstone. Previously, he was
a Principal in the Acquisitions Group at Walton Street Capital, where he was involved in numerous real estate transactions. In addition, he worked at Security
Capital Group as Senior V.P. and CIO Europe and at Wachtell Lipton Rosen & Katz as an Associate. He serves as head of the Executive Committee for the Board
of Directors of Project Lyme and as a Board Member of Jas Aspen. He is also on the national council of the Aspen Art Museum. He has served on the Boards
of Directors of numerous real estate entities including Invitation Homes Inc. Mr. Roth holds a B.A., magna cum laude, from Dartmouth College and a J.D. from
New York University School of Law. Mr. Roth is a CFA® charterholder.
Disclaimer
These materials are neither an offer to sell, nor the solicitation of an offer to purchase, any security, the offer and/or sale of which can only be made by definitive
offering documentation. Any offer or solicitation with respect to any securities that may be issued by any investment vehicle (each, an “Ares Fund”) managed or
sponsored by Ares Management LLC or any of its subsidiary or other affiliated entities (collectively, “Ares Management”) will be made only by means of definitive
offering memoranda, which will be provided to prospective investors and will contain material information that is not set forth herein, including risk factors
relating to any such investment. Any such offering memoranda will supersede these materials and any other marketing materials (in whatever form) provided
by Ares Management to prospective investors. In addition, these materials are not an offer to sell, or the solicitation of an offer to purchase securities of Ares
Management Corporation (“Ares Corp”), the parent of Ares Management. An investment in Ares Corp is discrete from an investment in any fund directly or
indirectly managed by Ares Corp. Collectively, Ares Corp, its affiliated entities, all underlying subsidiary entities shall be referred to as “Ares” unless specifically
noted otherwise. Certain Ares Fund securities may be offered through our affiliate, Ares Investor Services LLC (“AIS”), a broker-dealer registered with the SEC,
and a member of FINRA and SIPC.
Q4 2020 Insurance AUM Journal 15 insuranceaum.comYou can also read
