Nationwide Exploring 'New Ventures To Compete In The Future' | Christopher Graham, Chief Investment Officer | Q&A
Christopher Graham is the chief investment officer at Nationwide Insurance, where he oversees the $67 billion mutual fund complex. In this interview, he discusses why his goal is to get the best institutional asset managers interested in the '40 Act space; why insurance firms should be thought of early on when deploying assets; and how Nationwide is exploring venture capital and technology investments through its new platform.
Before becoming CIO, he served as a portfolio manager at Nationwide Insurance for nearly 12 years. Prior to that, he was a private wealth advisor for Salomon Smith Barney. Graham holds an MBA in finance from the Wharton School and a B.S. in finance from Hampton University.
Christopher Graham was named on Trusted Insight's 2018 Top 30 Insurance Chief Investment Officers. This interview has been edited and condensed.
Trusted Insight: How has Nationwide's portfolio evolved under your leadership? Are you trying anything new?
Christopher Graham: Retail and institutional investment philosophies and organizations can be very different and in many regards and are likely never going to be the same, but I do think they're going to get a lot closer. Since joining, I've tried leveraging some of our institutional relationships and knowledge that exist in private equity and hedge funds. In a world of cheap beta, I think it important to access investment thinking that gives investors the best odds in outperforming passive indices. My goal is to get some of the best institutional asset managers more interested in '40 Act. To give the average retail and smaller investors a chance to participate in some of the investment strategies that are much more well-known on the institutional side.
"[Nationwide] has another business line that is being built out that focuses on building new capabilities to help existing or new ventures compete in the future. Within the Emerging Business platform, there is a venture capital team that is actively making investments in technology."
We've been working on trying to bridge that gap. And it’s certainly going to take a little bit of time. The Blackstone(s) of the world have already done it. I think KKR even has a bit of exposure on the retail side as a sub-advisor. Most of the concerns that keep institutional asset managers away from '40 Act vehicles revolve around regulations, costs and distribution complexity. This is our current business model for our $67 billion portfolio that I believe can be leveraged.
What we're trying to say is, "We already do the infrastructure work for '40 Act, now let's bring over some of these more compelling investment strategies." We know that some of them can't come over directly because of leverage or illiquidity, but there’s certainly a piece where we can bring them together. We're looking at some things right now in the private debt and reinsurance space.
There are a lot of investment strategies on the institutional side that can come over to the ’40 Act. It won’t be in the same scale, but at our size of $67 billion, something like private debt that has very limited capacity can add a lot of alpha to our portfolios with an allocation in the $500 million to $1 billion range.
Trusted Insight: Technology is expected to disrupt finance, things like machine learning and artificial intelligence. To what degree is that the case with Nationwide’s investment office?
Christopher Graham: Our two core business lines are property and casualty insurance and financial services. We have another business line that is being built out that focuses on building new capabilities to help existing or new ventures compete in the future. Within the Emerging Business platform, there is a venture capital team that is actively making investments in technology. We are trying to understand how Nationwide can leverage its portfolio to work with smaller and innovative companies that can help improve our existing businesses or start new businesses that aren’t directly in line with what we're doing now. That is something that Nationwide is looking at on a broader scale.
We've got a team here in our mutual funds group that does look at adoptions of funds and acquisitions. In the mutual fund space, you've got robo-advisors, you've got people offering different solutions that are easily accessible over the internet. I'm not quite sure what's going to make sense for us, but we certainly have people out there whose job and mandate is to really try to understand the tech space. They’re uncovering things that we think might be strategically advantageous for us.
Trusted Insight: With respect to your long-term approach, how do today’s near-term market factors play into your investment strategy?
Christopher Graham: We like to consider today’s near-term factors in the context of how and why similar factors existed in history. We don't claim to know the path of how these factors may play out, but we do think that there are relationships, patterns and market behaviors that are repeatable and increase our odds at making the right allocation decisions. We use a four-phase credit cycle framework that focuses on interest rates, employment and the yield curve to inform us on the economy’s likely path and how that may manifest itself in the market.
"In terms of strategic partnerships, insurance companies like Nationwide should be thought of early on when deploying assets. We can partner with asset managers that are looking to enter into the '40 Act space."
Similar to our macro efforts, most investors focus on the Fed and interest rates for economic and market perspective. Right now, we believe we are in phase three of the credit cycle which followed one of the longest phase two(s) on record. We also believe that phase three will be abnormally long due to global monetary policy and the large amounts of debt that have existed on individual, corporate and sovereign balance sheets for some time. These factors along with much of the positive momentum that is building due to changes in taxes and regulations should keep the global economy in a positive disposition without causing inflation that could influence global central banks to raise rates.
Our number one economic concern is inflation, but we haven't seen any big warning signs of inflation. Wage inflation appears to be under control which could potentially impact corporate earnings. Earnings growth has been strong and momentum in earnings appears to be holding up. And I believe that demographic shifts may keep wage inflation in check a bit longer than what we’ve experienced historically. Commodities have certainly gone up, and that could put a bit of pressure on inflation. But, housing and rents are a decent component of inflation and I’m not convinced that housing prices will have a big impact on forward-looking inflation after already increasing past pre-crisis levels in 2007.
We still think there's room to the upside for equity markets. While we do not see the same type of appreciation that we’ve experienced since market lows in early 2009, earnings growth at U.S. companies is certainly capable of leading to a continued appreciation of risk assets. We think there are opportunities in emerging markets, especially those ones that have less of their debt denominated in U.S. dollars. This is not going to be a tide lifts all boat market as a dispersion in global and U.S. markets will pick up. We are already seeing this dispersion in hedge fund returns. We know that the market is becoming more interesting when hedge funds are generating positive returns on their long and short books. On the long-only side, we should start to see more of our funds outperform the benchmarks. Fixed income returns and asset managers have been especially interesting this year with the amount of movement that we’ve seen in rates.
Despite the additional volatility in equity and rates market, we still think we've got at least a couple of years for markets to run, but we are certainly preparing for the next big opportunity to purchase risk assets at cheaper prices. As I stated earlier, we’re definitely paying attention to both signs of inflation and the shape of the yield curve to inform views on the timing of the next potential downturn.
Trusted Insight: Insurance companies manage over $10 trillion, globally. What role do you see insurance company investment offices playing in the markets over the next decades?
Christopher Graham: After 2008, increased regulatory requirements on the banks caused a bit of disruption in their business models. Some of the larger investment firms have diversified their business models to take advantage of this disruption. Insurance companies and pension funds could step into some of the areas where banks have reduced focus. Insurance companies will be challenged by some of the cultural aspects and increased regulatory hurdles in entering these new markets, but, these are certainly opportunities that insurance companies and pension funds can step into. In addition to the larger asset managers, we’ve also seen some smaller and medium size asset managers fill that role, but insurance companies have the capacity to participate in this area of the market as well.
Trusted Insight: You’ve served an insurance firm for over a decade of your investment career. What attracted you to investing through an insurance firm as opposed to other institutions?
Christopher Graham: The buy side of the investment industry has always been appealing. Being a good investor means understanding social, economic and political dynamics of everyday life and marrying that understanding to both economic cycles and private/public markets. Insurance companies allow this type of focus as the fundraising responsibilities of asset management are minimized. Insurance companies tend to have plenty of investment capital and allow those that want to focus on investing the opportunity to spend more of their time figuring out how to put that capital to the best use for stakeholders.
Trusted Insight: Is your role as chief investment officer a newly created one?
Christopher Graham: There was a CIO in the mutual fund company from 2009 to 2010. The position was not immediately replaced after their departure. Nationwide Funds Group was originally headquartered in King of Prussia just outside of Philadelphia. Two years ago, the decision was made to move the mutual fund company closer to the businesses that it supports in Columbus. Our retirement plans, annuity, and property and casualty insurance businesses are all here along with our investment team that manages the general account. In addition to being closer to our internal distribution channels, there are additional areas within Nationwide that we can now leverage much better.
There are a lot of synergies when you are near your distribution channel. When Nationwide moved to Columbus, that's when the decision was made to re-hire a CIO. At that time, I was working with Nationwide Asset Management investing general account assets. During my 12 years managing general account assets, we built our manager selection capabilities across long-only assets, hedge funds, private equity and private debt. The move to IMG, Nationwide’s mutual fund company, was a natural progression for my career as IMG is an entire sub-advised investment model and really presented an opportunity to leverage much of our institutional investment discipline within retail channel.
Trusted Insight: What sets your role as an insurance CIO apart from a CIO role at a different institution type such as a public pension fund or university endowment?
Christopher Graham: My specific role is CIO of Nationwide Mutual Funds, while Harry Hallowell is the CIO of the general account assets. At an insurance company, and more specifically at Nationwide, we have mutual shareholders of our larger company and we have shareholders in our mutual funds. Our priority is to make sure that both of those groups of shareholders have a positive investment/customer experience with Nationwide as a mutual fund advisor and/or insurance company. General account assets are there to make sure that we have the ability to pay claims when our customers come under difficult circumstances and our mutual funds are here to provide the necessary returns to help shareholder reach their retirement goals. In an insurance company, the investment positions serve a role that satisfies multiple objectives depending upon the pool of assets on which one is focused.
Trusted Insight: Is there anything that our LP community should know about you, Nationwide or insurance investing in general?
Christopher Graham: In terms of strategic partnerships, insurance companies like Nationwide should be thought of early on when deploying assets. We can partner with asset managers that are looking to enter into the '40 Act space. We are open to partnering and offering solutions, and I think we have a level of market knowledge and flexibility here that can be very powerful when coordinated correctly.
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