The Impacts (Or Not) Of Tech, Dodd-Frank On Aflac’s $100B Portfolio | Exclusive Q&A: Eric Kirsch, Global CIO
Eric Kirsch joined Aflac in November 2011 as the first senior vice president and global chief investment officer, and was promoted to executive vice president in July 2012. In his role, he oversees Aflac’s $100 billion-plus investment portfolio and investment team.
In this interview, Kirsch discusses how technology has enabled the automation of his back office, why there’s no robotic substitute for sound credit underwriting and why the potential alteration of the Dodd-Frank Act is unlikely to drastically impact Aflac’s private credit investments.
Kirsch was recently named on Trusted Insight’s Top 30 Corporate Chief Investment Officers 2017 and graciously spoke with us on Aug. 15, 2017. The following interview has been edited for clarity. Read our wide-ranging interview with Kirsch from 2016 here.
Trusted Insight Insight: There is much talk of technology disrupting finance. To what degree is that the case with Aflac’s investment office?
Eric Kirsch: Technology definitely plays a role, and it’s going to continue to evolve as it has done so over the years. On the other hand, when we hear about technological disruption in the financial area, I don't quite see that yet, but it is coming.
From a technology standpoint, our back office is entirely automated with straight through processing and very little manual intervention. As a result, the systems and technology that we use -- which sells, trades and does compliance checking -- allows us to keep our staff very efficient.
Through technology, we also have access to rich data. My investment team slices and dices our investment portfolio using many different metrics. We use a variety of report writers and data checking to parse the information -- whether we're looking at sectors, cross holdings, or risk factors like interest rates, credit risk and things of that nature.
On the front end, as investment professionals who focus on information, markets and investment decisions, by and large, we are fundamentally a credit shop. We have credit analysts and teams that analyze companies and provide credit write-ups, credit opinions. And we have traders who are in the market looking at how interest rates, currencies and credit are trading.
"We haven't seen anything remotely close that could substitute for good old-fashioned credit analysis and underwriting of a company."
From a front-office perspective, it's traditional fundamental analysis, but the tools used to craft that ultimate credit opinion or investment decision is where we see the intersection of technology. For instance, we have a quantitative investment team as part of our front office because there’s an abundance of rich data that is constantly getting better and better. Our team is pulling a lot of data and using quantitative programming to produce a lot of valuable information.
We're certainly looking at this end of the market, but we're not necessarily looking to be a technology firm. We want to keep on top of what the marketplace, asset managers and investment banks are showing us. We want to pick and choose what makes sense to integrate into our process.
Trusted Insight: Do you see the quantitative division overtaking that fundamental foundation over time or is it a mutual co-existence?
Eric Kirsch: It's the latter. I view the quantitative teams facilitating the investment process in a number of ways. Ultimately, when you've got $100 billion global portfolio and you're in the insurance industry, credit is a core competency and is critical. You don't necessarily want to be a government, risk-free investor. When you're doing credit underwriting, that's serious business.
We haven't had people come to us and say that through machine learning we can predict the credit rating, credit spread, management of a retail company or what they're going to do to keep up with technology. We haven't seen anything remotely close that could substitute for good old-fashioned credit analysis and underwriting of a company.
We definitely see where big data can provide us insights and information that hopefully gives us a competitive advantage, because perhaps we're doing something better than somebody else. That's where data comes in to identify trends that can influence decisions.
Another aspect where quants help us tremendously is strategic asset allocation and risk management. When you think about strategic asset allocation, it's a few steps above credit underwriting. If given a choice of multiple asset classes, considering our liabilities and capital, we have to determine what is an optimal portfolio based on long-term returns that minimizes risk. Quants do a lot of modeling, and that starts with things like risk factors and big data to make our models better in terms of projecting the return and risk profiles of asset classes.
That doesn't substitute for credit underwriting, but it adds an element of information from a macro, top-down perspective in guiding us toward asset classes that will outperform in the future. Once we've made that decision, we go back to the bottom-up, the credit underwriting, and see which security is best.
This is definitely an area of evolution. We continue to see it getting better, and we'll continue to explore how it's integrated into the process. I think if you ask me a year from now, I wouldn't be shocked if there's two or three new things that we’re doing that we’re not doing today.
Trusted Insight: In your last interview, you discussed middle market lending and how the Dodd-Frank Act set up for insurance companies to take the role that was traditionally provided by banks. Is your long-term strategy impacted if Dodd-Frank is changed or repealed?
Eric Kirsch: It's a very good question. I think if it has an impact, it will be minor.
Having said that, there are some assumptions about what President Trump and congress may do, but I think we're a long way from really knowing how Dodd-Frank can change. I’m not making a political statement. I'm simply saying from a factual standpoint, there are several legislative items coming out of the 2016 election that we would have thought would be much further along at this point, and they're just not. Dodd-Frank is one of those.
The question is, how much can things change. Will it go back to what it was pre-financial crisis or somewhere in between? In either scenario, it is possible that some change that could allow banks to participate in that market again. It is not likely that it will ever go back to the amount of influence they had, pre-Dodd Frank, but more likely something that gives them some leeway.
Because banks have now been out of this for two to three years, the middle-market lenders, the asset managers themselves, shifted to other sources of capital, to insurance companies like us. We are long-term investors with long-term liabilities, and we don't day trade the market. We make long-term commitments. I suspect that they're going to feel more comfortable with insurance companies from a long-term partnership perspective instead of reversing course and going back to banks that typically have short-term objectives in mind.
To sum it up, Dodd-Frank will change if banks re-enter the market. That will have an influence, but I don't think it will be to the extent to which it reverses the long-term trend. It might just have some effect on supply and demand, perhaps some impact on spreads because there's another investor or bank that's come in the market, but I don't think it would be to the extent that they had in the past. They won’t likely come in with the long-term conviction like an insurance company provides.
"Our promise is the most important thing that we have to uphold."
Trusted Insight: What aspects of your job as a corporate chief investment officer are unique to your role as opposed to a CIO at a university endowment or pension fund, family office?
Eric Kirsch: For what it's worth, I also sit on the board of an investment committee at an endowment. Interestingly enough, in my own profession, I see both sides. When I go to the endowment I notice how it’s different from my full-time job as the CIO of an insurance company.
As an insurance company our main clients are, first and foremost, our policyholders and then shareholders. The nature of our promise to policyholders revolves around their need for voluntary health insurance, including disability insurance, cancer insurance and a variety of other products. Their needs drive our investment process. At the same time, the regulatory environment limits our investment options.
As an insurance company, we have a very high allocation to fixed income, to debt, whether it be credit, structured or securities. That is because we have predictable liabilities, and our promise to our policyholders is that we will pay them the benefits in accordance with their policy. In order to fulfill that promise, we know that our fixed income securities have a high probability of returning principal and earn a return on our investments, assuming we do our credit and risk management well. That allows us to ensure that we can fulfill our obligations to policyholders. That is a primary objective for any insurance company.
In the endowment world, we make a promise to fulfill a gift. We grant funds for the greater good; sometimes it’s short-term or medium-term. As a result, we can take a more "total return" approach. Typically, an endowment has a 5 percent hurdle, which is CPI plus 2 or 3 percent. Since endowments think more in terms of total return, a typical asset allocation is 20 to 40 percent in flexible capital / hedge funds, 20 percent-plus in private equity, 30 percent or so in different forms of public equity and maybe 10 percent in fixed income.
It makes it very unique to be an insurance CIO and to think about stability, policyholders and our promise. Our promise is the most important thing that we have to uphold.
To learn more about corporate pension investing, click here to view the complete list of Top 30 Corporate Chief Investment Officers.
You can view our full catalogue of interviews with institutional investors here.