Adapting to a New Paradigm

Adapting to a New Paradigm

Cyrus Taraporevala, President and CEO, State Street Global Advisors
Cyrus Taraporevala

Adapting to a New Paradigm

Cyrus Taraporevala President and CEO, State Street Global Advisors

New conditions call for different kinds of investment solutions, solutions that are far more capital-efficient and resilient in an era where costs and fees matter more than ever.

Cyrus Taraporevala President and CEO, State Street Global Advisors

Rigor, breadth, innovation and active stewardship — those are the guiding principles that keep us in it for the long run on behalf of our clients.

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In a world where every basis point counts, our ability to show our value for fees is in itself invaluable.

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We take our stewardship role more seriously than ever, using both our voice and our vote to effect positive change.


Sculpture by Kristen Visbal. Commissioned by State Street Global Advisors.

Fearless Girl’s Impact, Since March 2017


Companies were identified for lacking gender diversity at the board level


Companies added a female director

Cyrus Taraporevala has spent the bulk of his career in asset management helping global asset owners and their intermediaries achieve their investment goals.

He observes that even before the current crisis both asset managers and asset owners faced a historic turning point. Asset owner objectives are more complex and the capital markets in which they invest are rapidly changing. This means that asset managers need to redefine the value they bring to asset owners, recalibrating both the nature of their relationships as well as the contours of the solutions they provide. For this report, Cyrus talks about how State Street Global Advisors is adapting to this new paradigm.

What are the new kinds of challenges facing investors?

Asset owners face two sets of pressures. One is simply the macroeconomic and market backdrop. After the long bull run in equities and bonds, longer-term asset class forecasted returns for the next 30 years are lower than returns from the past 30 years. When interest rates are low or negative, that part of clients’ portfolios simply can’t deliver historical levels of return. Even before the crisis, much of the “lower-for-even-longer” rate environment was due to structural changes to the economy; aging populations and shrinking labor forces portend lower growth, while technology advances tend to have a deflationary effect on economies.

In fact, many of the macroeconomic and market relationships we took for granted during most of my career are now being questioned due to structural changes to the drivers of growth and inflation. Investors and policymakers have been grappling with persistently low inflation, low productivity growth and, prior to the recent dramatic turbulence, low market volatility. None of the experts has a definitive explanation, but those new conditions call for different kinds of investment solutions, solutions that are far more capital-efficient and resilient in what is likely to be a lower-return era in which costs and fees matter more than ever.

In addition to those external challenges, the other set of pressures on asset owners is internal: rising technology and infrastructure costs, limited internal investment teams or cumbersome governance structures, and urgent new questions around alternative asset classes or environmental, social and governance (ESG) issues.

As a result, the biggest change I’ve witnessed in my career in the industry is the shift from products to solutions. “Solutions” is often overused, so let me be clear about what I mean. Asset owners are increasingly looking for asset managers who can understand the full dimensions of their investment challenges and create solutions that achieve a predefined outcome, whether it is matching a very specific set of liabilities or reaching a terminal wealth goal or some other multi-dimensional objective.

That is a big change from the old days of selling a star portfolio manager’s strategy. It’s as if these days our clients come to me and say: “Cyrus, I’m tired of buying steering wheels from one provider and a chassis from another and tires from a third. What I really need is a car. Can you build me that?” That is what we mean by outcome-oriented solutions, whether that solution is a target date fund for a defined contribution participant, or a highly bespoke portfolio-wide hedging overlay solution for a sovereign wealth fund.

How is State Street Global Advisors adapting to the changing needs of global investors?

We have evolved to a much more consultative approach when engaging with our clients, helping them think through their thorniest investment challenges. Robust investment performance is still important, but that’s almost table stakes now. For long-lasting strategic relationships, our clients are looking to us to bring them new ideas, insights and research in order to create portfolio solutions that are rigorous, risk-aware and relentlessly innovative. Our solutions approach covers the full spectrum of advice, design and implementation across all asset classes and investment styles. And in those cases where we don’t have a specific capability in-house, we go outside to source it for our clients. We start by trying to understand the client’s implicit or explicit liabilities and then figure out a broad solution, even if we end up providing only a slice of the overall solution.

Over the last few years ESG issues in general, and climate risk in particular, have been major topics of conversation. Some clients have very specific views on how they want to align their portfolios with their beliefs on environmental, social or governance issues, and we can certainly build portfolios to those ESG specifications. But most are still struggling to understand the “how” of ESG investing and what it means for their current risk-and-return parameters. That is why we have made ESG research a priority and created the R-Factor™ scoring methodology (“R” for “responsible”) to frame conversations around material ESG investment issues. We expect the pandemic-induced focus on resiliency will naturally intersect with sustainability issues and that ESG will continue to be an important focus for institutional investors.

As long-term fiduciaries, we regard sustainability as a value-driven imperative rather than a values-driven agenda and are committed to bringing as much transparency and rigor to our ESG-informed strategies as we do to all of our other capabilities.

For example, we are now actively engaged in conversations with clients about how to reduce the carbon intensity of their portfolios. And we can be transparent about the amount of carbon exposure we can reduce in return for a certain level of tracking error, so that clients understand what the trade-offs are. Or we highlight for them the complexities around defining what a “climate-resilient” portfolio actually entails: Is it completely fossil-free? Does it contain some shades of “brown” energy? Is nuclear part of the mix, and how should it be categorized? What is the full range of the physical, economic and regulatory risks associated with climate change that could impact the value of their portfolio holdings? We’re committed to helping clients consider these types of questions and aligning the investment portfolios we manage for them to their preferences.

Creating the next generation of individual retirement solutions is another area where we have committed to innovation. For example, our lifetime income solution allows defined contribution plan participants to help ensure that they will not outlive their assets. Designing asset allocation glidepaths that manage through retirement and incorporate an individual’s preferences and wealth goals over multiple market cycles with greater precision is the next area of innovation for the industry.

And as the creator of the world’s first ETFs, we continue to launch innovative varieties, whether in the range of low-cost ETFs, model portfolio components or thematic ETFs targeting portfolio goals like low-carbon solutions. We are focused on innovation with purpose: our new ETFs address real client needs. Innovation for innovation’s sake is where so much of the financial industry has run into trouble.

What are some of the distinctive strengths Global Advisors brings to this more complex environment?

With the heightened focus on costs in all forms, including management fees, our ability to create capital-efficient portfolios across a range of traditional beta exposures, factor premia and uncorrelated alpha sources is a valuable competency for our clients. The future of investing will entail a thoughtful combination of active, market-cap weighted index, and factor-based strategies in a strategic asset allocation that is resilient for the long run yet flexible enough for tactical adjustments.

Perhaps an even more important advantage is our DNA as innovators, constantly reinventing investing, as technology continues to disrupt the industry. Data and technology will play a bigger role for both quantitative and fundamental managers, especially in terms of driving transparency around how much of an investment return is the result of market exposure or beta, how much comes from smart beta or factor exposure, and how much is truly derived from genuine, skill-based manager alpha. That is a big part of what is driving the rise of index- and factor-based investing, as active managers now need to demonstrate their comparative advantage in a measurable way. In a world in which every basis point counts, our ability to show our value for fees is compelling.

What does it mean to be one of the world’s largest providers of index-based strategies, including ETFs?

First of all, index investing and ETFs have been among the most important innovations in our industry. ETFs in particular have democratized investing by enabling Main Street investors to access global markets in a low-cost way that was previously possible only for large institutional investors. ETFs have enhanced market liquidity by creating secondary trading markets without affecting the value of underlying securities, and we saw how important ETFs became for price discovery during the worst turbulence of first-quarter trading.

Moreover, our indexing heritage is at the heart of what it means to be a long-term investor and the reason we are so focused on asset stewardship. Through our index strategies, we own virtually every public company on behalf of our clients. For as long as a company is included in an index, we own it and are therefore near-permanent capital. Unlike in our active strategies, where our portfolio managers can sell a stock if they disagree with the company’s strategic direction, we cannot make the S&P 500 the S&P 499. We are, in other words, in it for the long term, and must engage with those companies on issues that affect long-term value creation, whether it is effective independent board leadership, sustainability, capital allocation decisions or strategy.

As flows into index-based strategies increase, we take our stewardship role more seriously than ever, using both our voice and our vote to effect positive change. Here, too, we value transparency, publicly communicating to our portfolio companies the issues we will prioritize during engagement season. Our annual stewardship report documents the themes and best practices we identify as well as a record of our voting. We never outsource our voting decisions — we view it as a core part of our role as a fiduciary. And we are pleased to see the measurable impact we have. For example, our Fearless Girl campaign to improve gender diversity on boards has resulted in 681 companies that previously had no female board member appointing one or more women in the three years since we launched that famous statue on Wall Street. Similarly, our call on companies to incorporate sustainability into their long-term strategy, guided by the Sustainability Accounting Standards Board (SASB) materiality framework and our proprietary R-Factor scoring, has coincided with a heightened focus, industrywide, on climate risk and other ESG issues. We believe taking a strong point of view on these material issues in our asset stewardship efforts improves the quality of companies, the indices in which they are included. And the overall health and stability of global capital markets. Rigor, breadth, innovation and active stewardship — those are the guiding principles that keep us in it for the long run on behalf of our clients.

Details 04/19/2019