Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley, I'll be your host. Welcome back, faithful podcast listeners. Thanks so much for joining us. We have a great podcast today, talking about the evolution of technology in the institutional asset management arena. And we're joined by John Gidman, who's the COO of Loomis, Sayles & Company. And also the CEO of their subsidiary services company called NIM-OS. And you're also the president of the Association of Institutional Investors. So John, thanks for being on. Welcome. We're thrilled to have you.
John: Hey, thank you so much for giving me the opportunity to speak with you this morning.
Stewart: Oh, it's great. So we'll start it off like we always do. What's the town you grew up in? What's your first job of any kind? Not the fancy one. And we just talked about, it's... Maybe fun fact is a little bit of a stretch, but you have a very unique fact that is I think, inspiring honestly. So please go ahead.
John: So I grew up in Ashford, Connecticut. Which is in Northeastern Connecticut, just outside of Storrs and the University of Connecticut. It's a farming town. Very small. While there, I met a sweet young lady when we were in junior high. And we started dating when she was in 7th grade, and I was in 8th grade. And we've been married now for almost 40 years.
Stewart: Wow. Congratulations.
John: Thank you very much. It's a credit to her more than me. You asked about the first job. I think the first job that I could remember was delivering newspapers. And when I was in probably third or fourth grade, I rode a bicycle every morning and delivered papers to people's houses. That's how they used to get delivered in our small town. And I would get paid, I think 25 cents a household per week that I delivered newspapers to.
Stewart: Wow.
John: And eventually, the newspaper company went out of business. But it was a valuable lesson for me about the more that you were able to pedal, the further you were able to go, the more quarters you would get. And so it was about working hard.
Stewart: Absolutely. And what's the fun fact that we just talked about?
John: So the fun fact... And I didn't think it was a fun fact at the time that it was discovered, but I'm severely dyslexic. And it's a pervasive form of dyslexia, where I didn't learn to read until just before getting into high school. And it also affects not only how I read, but how I can express myself at times. So I'm a product of special education. And it's given me a great appreciation for the different talents and perspectives that people can bring. And I consider dyslexia a superpower now. It gives me the ability to read things differently than other people do. I can read upside down and backwards now. And it's very helpful for seeing processes, and seeing how things can be made more efficient. And when you combine it with people that have other skills that are different, whether they're quantitative analysts or good at innovation, you can really create some great solutions by bringing a diversity of perspective. So, I consider it a superpower.
Stewart: Wow. That's so cool. I mean, it's inspiring. It's inspiring. I mean, you're a very senior position at a very significant firm. And I think for people who... Whether they have it, or their kids have it... I know you mentioned it's hereditary. That's inspiring, man. Thanks for sharing that. I know it's not something you don't necessarily lead with that, but in this case...
John: I try to talk to the kids in school about it. Because when the kids are younger, they misread social cues. And it's not just academic, but they misread the social cues they get from adults and other kids. And sometimes, it makes them combative. Or it leads to anger management issues, and so on. And frustration. Because, they know they're smarter than they appear to be. And so I try to explain to dyslexic kids that if you can get through this, if you can get through it as a child, it has many advantages in adulthood. And it really is a helpful skill if you can find a good partner. And if you can find a way to maximize the good things that come along with it. Kids are kids. They don't always hear you. But sometimes they do. And I found, it's been a superpower for me.
Stewart: That's fantastic. So you've got a very high bar here. One of your colleagues, Erik Troutman was on with us, and set our podcast page view record of some unbelievable number. So I'm excited to have you on because we're here to talk about something that's very important today, which is the evolution of technology. And I haven't run money live for about 13... Well 2010 was the end of it for me, as far as actual hands-on portfolio management. And technology has gotten so much better. So can you talk a little bit about the evolution of technology, and where we go from here?
John: Absolutely. And just to step back for a moment about Erik. So, Erik is one of those people that represents the best of the kind of people that we hope to have at my firm. And in part, because of the way he connects with our clients. He really embodies this idea of being consultative, and working together on problems for our clients. And he's in significant demand. I mean, his dance card is always full. But he's the kind of person who has really played a key role in developing custom solutions for our insurance clients. And they view him really, as a shared employee of Loomis and our clients. And he's called on to help in ways that we never envisioned when he joined our firm so many years ago.
Stewart: That's so cool. And the other thing about it, the other thing that is so cool is he has a zoo at home. On top of having five kids, he's got a zoo that includes, I don't know what all. Spiders and lizards, and all kinds of stuff. Very cool there.
John: I'm only slightly surprised at that.
Stewart: Absolutely. He shared it on our podcast. So with regard to the technology side of things, what's been the evolution here? And anything surprise you today? Where are we headed? I mean I get ChatGPT and all this artificial intelligence, and all this stuff. And I think like a lot of things, it sounds amazing. But it's not a panacea. But there are substantial advances in... I mean, insurance investors have small teams. They’ve got to cover a lot of ground. And the technology can really be helpful.
John: Yeah. So I think that it's not so much revolutionary as evolutionary. If you look at the trend over the last 20 years or so in the institutional asset management space, there's been some clear things that go along that line. But it's certainly accelerating. And the advent of things like large language models, and the role that analytics can play and even fundamental investment processes are really transformative. Particularly, over the last four or five years. And it's hard to know where the next few years will go, but it looks like the trajectory is coming into focus.
For Loomis, we're an investment management firm. We're not a distribution entity. We're not a sales and marketing firm. We spend almost no money on our branding. Our focus is really on developing customized investment solutions for our clients. So institutional clients are very different than retail clients.
They have unique needs that are driven by their balance sheet, their capital structure, their tax status, their own financial needs. And typically, an institutional client gets management services from six or seven different investment managers. And so you need to be part of an overall portfolio of solutions. And among the most challenging of the client categories really, is insurance companies because, the way insurance companies operate has some unique constraints. Their organizational structure, their capital structure, their demands, their operational needs, their regulatory environment makes them among the most interesting to work with. And we've found that part of the thing that makes it challenging also makes it great relationships because you spend so much time getting to know the client and them getting to know you, that you really build a relationship. And those relationships tend to be sticky. You don't want to switch, because you've invested so much time getting to know each other and getting to build a real effective relationship.
And so we've been focusing really over the last decade, and particularly over the last five years in trying to bring our broader institutional capabilities to the very customized needs of the insurance marketplace. And just in terms of the technology journey, when I joined Loomis, we were at about $40 billion in assets under management.* And for us, growth has come organically in most parts, we didn't acquire significant pools of assets, we didn't merge with anybody. We grew by having a partnership with our clients that as they grew, our relationship with them grew and so our interests were aligned.
But one of the things that happened with Loomis is because we're really an investment-driven shop, our investors are the ones that really lead with the creation of investment strategies and the delivery of those strategies for our clients. And so that led to a need to have customization. And we needed to be very efficient at delivering custom solutions, because we weren't the biggest. There are other asset managers in our space that are 10 times or 20 times larger than us in some cases. And in many cases, we are delivering solutions with these competitors in tandem where Loomis provides part of the solution and some of these bigger players provide other parts.
And increasingly, Loomis is being called on to deliver the alpha or the differentiated part of the solution suite for a client. So we've got at my firm, over 70 distinct investment strategies that we market. And then within those strategies, we have a significant amount of customization. So we've got... I looked just the other day. We've got over 20,000 unique custom guidelines that we get from clients through their investment management agreements, that sort of govern how we put together portfolios, how we implement them, the risks and the constraints that we manage against.
And we identified probably 20 years ago that in order to be able to have a sustainable business, that really focused on providing custom solutions for our clients, we would need to have a technology environment that mirrored that. And so as an investment firm... We're really an intellectual property firm, but we decided to take some of that thinking around intellectual property, and apply it to our technology architecture. And so what we did at Loomis is, we decided on a strategy that we called back to front at the time. And the idea was to make our back office as efficient and automated as possible, and then focus on making our middle office as automated and as efficient as possible. And then spend the rest of our time and the rest of our money on our front office capabilities. And so we've spent the last decade, really, focusing on investment analytics and tools for our investment professionals.
And at this point, we've built up about a quarter billion dollars worth of intellectual property that we have either patented or covered through trade secrets and other mechanisms. We make that available to the 71 or so marketed investment products at Loomis and we deliver it through an integrated architecture of about 16,000 applications. So we have 16,000 applications in production in our environment that we can mix and match in unique and interesting ways, we hope, for our clients. And initially we did this to focus on making sure that when our investors talked to their clients, they could communicate in ways that were exactly matched the investment strategy and how they managed the investment assets. And so that led to very bespoke tools for our portfolio management teams, our risk managers, our trade folks. And then we eventually started customizing some of those tools to deliver to the client - meeting books and reporting in a way that exactly matched the strategy of what was being managed for that particular client. The exact benchmark, the exact analytics, the exact risk characteristics.
As a result, we had to significantly grow out our data environment. So we now have over 3,000 attributes per security in our environment. Many of those are ESG-related, but others are really very bespoke risk factors. And we think that, that gives us the opportunity to provide unique values for some of our clients, where we can tailor the investment product and the reporting, to the client's specific needs. And we think that this is a trend that all institutional investors are likely to demand in the future. And so we thought the way to get good at this was to focus on the insurance space. Because, we thought the insurance companies were the first to have this need. And that if we could be very good at servicing the insurance clients, it would ultimately give us the skills and capabilities to be able to serve other institutional clients in the future even better than we can today. So we see the insurance customers as natural partners in our evolution towards delivering great customized solutions for all of our customers.
Stewart: Yeah. That's fantastic. And I mean I've spent well, a long time... And you can tell by looking at me, it's been a minute, managing money for insurance companies. And I think there's a couple of things that are really, really important to insurance companies. One is the ability to create custom solutions, because they've all got... While they have common set of variables, how those are set depends on a myriad of possible permutations there. And for whatever reason it may be.
The other thing is trust. The fact that they know that you are able to provide a solution and understand why it's important. And as that relationship develops over time, and we talked a little bit about this, it becomes very sticky. And it's, very... You are, I think, institutional in the insurance world, far more integrated as part of the investment team of the insurance company, than you would be in some other institutional sleeves. That's been my experience and I'd ask, is that how you see it as well?
John: Yeah. That's exactly right. So customization is a foundational element, but as you say, it's not sufficient, but it's foundational. And so one of our first patents was on a mechanism for doing inter-application communication. And we call that app talk and it's based on the mathematical concept of factorial combinations of things. And when we looked at the insurance company space, that's exactly what they do. They have a set of factors and they need to combine those in unique ways, to solve particular problems for their business. And so once we started thinking about factors and applying factors in ways that were rigorous, that were disciplined and that were custom, we felt that, that could give us an opportunity to build very long-lasting relationships with our clients.
And it often starts with people like Erik, as you said, who's a very talented actuary but also with the mindset of being a solution provider, and consultative in his thinking. He's got extraordinary level of humility for all the talent that he brings to bear. But what we found with clients is if we can be very transparent about our capabilities, if we bring intellectual property to bear proprietary technology where we don't have to pay some third party, it's ours alone, so we can share it with clients at almost no cost. Which means, it's a value added service on top of the investment management that we provide the client. And in some cases we've been able to provide some of our technology to prospects, where we just try to be helpful. And through our insurance group, we started some relationships with insurance companies where we've helped providing solutions to some of their problems like benchmark snapping, or proprietary risk analytics, that just help an insurance client or prospect think about or solve some of their own problems.
And then that has led to advisory relationships, where we start doing work with an insurance company and then a year or two later, they’d give us billions of dollars to manage. And so having that intellectual property basis, that proprietary technology has been really helpful for our firm in growing our insurance business. And when we look across the landscape of our competitors, there's only one or two competitors that have made similar investments in proprietary technology. And some of those competitors have really focused on operational efficiency and large pools of assets - mutual fund type things. Whereas, the direction that we took on our proprietary technology and intellectual property was really towards mass customization and efficient customization. And so we think it's a very good niche area where we can add value alongside others, and really have very long-lasting and prosperous relationships over time.
Stewart: Yeah. And when I was running money, my analogy was like a silk screener. You go, here's our best ideas. And I want everything that can appropriately fit into the portfolio of this particular client to get in there, and nothing that shouldn't... And that's really an easy concept, but very, very hard to do at scale and consistently over time. The pre and post-trade compliance issues and all the stuff is just, it's a big deal.
But so one of the things that... And benchmark snapping by the way, that we covered with Erik Troutman's podcast is super interesting and really addresses one of the real challenges for insurance companies, which is performance measurement. So I mean there's no such thing I don't think, as a GIPS compliant insurance company portfolio. And then it gets into well, how do I measure my performance? And benchmark snapping is a really, really innovative solution.
But at the top of the show, I introduced you as the CEO of NIM-OS. And I'd love for you to tell me a little bit about what is NIM-OS? Am I saying it properly? And what's the vision for it?
John: Yeah. Thank you. Yeah. So NIM-OS... So Loomis Sayles is owned by a large conglomerate called Natixis Investment Managers. And Natixis Investment Managers is in turn owned by Banque Populaire, Caisse d'Epargne in France. A BPCE group. In any event, in the Natixis Investment Managers group, there's 25 or 26 independent asset managers that are owned by the NIM Group. And they tend to be boutique managers, focusing on specialized areas of asset management. Some are focused on value equity, others are focused on private credit, some are focused on different cycles. And what we've tried to do with NIM-OS is provide a unifying platform that allows our affiliates to be able to operate very efficiently, in terms of their middle and back office. And then also take advantage of this rich data environment and proprietary technology on the front office, with the hopes that we can craft solutions that bring together the best capabilities of our different affiliates, but also allows us to continue to reinvest in our proprietary front office technology and our intellectual property there.
So what we do is, we partner with a number of global service providers. We work closely with some of the largest data service entities, some of the largest custodian banks and technology providers in our industry for the middle and back office. And then we provide access to our quarter billion dollars front office technology and analytics. And then make that available to our affiliate universe, the 25 other firms. And then also, to selected clients of our firm.
And insurance clients are at the front of that, as I said before, as we're trying to really develop a scalable way of delivering custom solutions to where we think the industry's going to be with regard to institutional asset management, which is our core business.
So our insurance business, which we've been focusing on really for maybe a decade, and really seriously for maybe the last 5 or 6 years, we're up close to $20 billion in asset management right now. We found it's had a halo effect, in terms of helping us to be bigger and better in the municipal bond space. Bigger and better in private credit. Bigger and better in terms of able to manage currency and derivatives. So we found it's been a really good way for us to develop capabilities that we think are going to be really important for the future.
Stewart: That's really cool. You've got a great team, and it's highly regarded in the industry. And as a former PM, the ability to do mass customization... I mean, it's challenging. And you've made a real commitment here. Can you give me a sense of the value of owning your own IP in your front office technology? And could you give us an example or two of what that front office technology, how you define that?
John: Yep. So I'll start with the... First of all, you have to have the wherewithal to invest in the front office. And there's only a fixed amount of money that you have. So what we ended up doing is, we focused on making sure that our back office was super efficient and that our data problems were gone. So we focused a lot on data management, data quality, security master management. We spent a lot of time with vendors working on the benchmark constituents and really getting an industrial process around data quality, data management. Not just on the things required to trade and account for securities, but also the risk factors and the analytics.
And then we took that savings that we had achieved on the back office, and we applied that to trading optimizations. Trading and trading compliance. And we worked with some of our key partners to get very favorable economic terms with our licensing. And we invested a lot of money in codifying the investment management agreements in a way that we could systematize some of the processes that normally, would be more manual. And then we took that savings, and we invest all of those savings in our front office.
So when you look at our technology spend as a percentage of revenue, we don't stand out as remarkably different from some of our competitors. But where we do stand out is how we spend the money, and where the money is spent. So the aggregate amount is about on par with our bigger competitors. We're maybe slightly more efficient, but it doesn't jump out. But what does jump out is we spend very little money on our back office. Very little on our middle. And we spend very little on maintaining software. We spend all our money on improving things and really on our front office analytics and front office technology.
So what I mean by that is we spend about 2 basis points of AUM on our technology infrastructure all in. So it's very efficient. Many of our competitors are spending 4, 5, 6 basis points on technology. So our overall spend on technology is very low in part, because of the intellectual property. We're building up a virtuous cycle, a portfolio of assets that stay within the house and don't go outside to vendors and the front office. And then we spend about 4% of our revenue annually on improving that technology environment. And so it's not that dramatically different from what our competitors spend as a percentage of revenue, but what is different is where we spend it.
We're not spending it in the back office. We're not spending it in the middle. We're spending it really, on the things that allow us to offer differentiated capabilities for clients. All the money goes on those analytics and on that infrastructure. And on the ability to provide a customized solution. We're not trying to deliver something that's really efficient for hundred billion dollar portfolios. We're trying to do for pooled vehicles; we're focusing on customized mandates for institutional clients. And really hoping that by being able to deliver something to a client that fits hand in glove with their unique needs, it's going to give us the opportunity to grow as they grow as opposed to needing to grow by adding new clients all the time.
Stewart: That's really insightful and helpful. And it rings very true to me, given my background in the industry. So can you talk a little bit about creative ways that you're engaging with insurers and other clients around your risk analytics or fundamental credit insights? Just give us some examples of that. And then, I've got one more fun question for you before we go.
John: Yeah. So it's interesting... I think of the journey we're on as being, we're on a road. And there's a main road, there's some detours, but there's a main road. And we're all at different points on that journey. And what we found with our institutional clients is many of them are struggling with issues of data management, data quality. Some of them are struggling with big architectural questions about what they want to do, what they need to do. Many are struggling with technology debt, where they have very outdated technology. They have a real need for the regulatory reporting, and the risk reporting that goes along with that. And so it's very difficult for them to make changes without disrupting their existing business. And so they're struggling with big challenges architecturally and in some cases, struggling with operational concerns.
And what we've found is that we've started doing C-level engagements with some of our clients. Where our chief architect on the technology side, our data management people meet with their counterparts at the insurance companies and share lessons learned, including, which vendors have been good partners. We're very transparent about, “We tried this and it didn't work. We did this, and these are the trade-offs.” And we're finding that our insurance clients are very eager to get those consultative relationships that go beyond the investment mandate. And for us, getting to know our customers better in terms of their pain points, their needs, their aspirations, helps us be a better service provider. So we really look to have a deeper relationship than just delivering the investment mandate. And anything we can do to help the client be successful is going to help us be a service provider to them.
Stewart: That's fantastic. I've learned so much. I get a chance to learn, and our podcast audience loves it too. We appreciate that very much. I got a closing question for you. A fun one. Who would you most like to have lunch with, alive or dead? How about that? New for 2023, John. Asked it a couple times, but it's got some... I like it.
John: Alive or dead? What a great question. I would have to say out of the dead category, the person I would most like to have lunch with would probably be Albert Einstein.
Stewart: Oh, wow.
John: So Albert Einstein did some of his best work over a hundred years ago. When he was very young, and working as a patent examiner in Austria. Where he wrote three or four seminal papers in the same year, that took over a hundred years to be proven to be correct.
Stewart: Wow.
John: So all of his exercises were thought exercises. But when I think of Albert Einstein, it's not the three papers that he wrote in 1913 or whenever it was. It's really his playfulness. If you saw him riding a bicycle, if you see any of the old clips of him joking with people and laughing with kids... He was one of those rare minds that could see the interconnection of space, and time, and matter. But also had a deep spirituality and also had the ability to connect with people of all ages and all types.
So I think it's really valuable to sit across from somebody and try to see the world from their eyes. And I think Einstein had the ability to see all different ways in all different people. And it would be great to... It would be an interesting experience to see the world through his eyes. So to me, that jumps out.
Stewart: That's fantastic. That's a great answer. Thank you so much. We've been joined today by John Gidman, chief operating officer of Loomis, Sayles & Company. CEO of their service company, NIM-OS. And President of the Association of Institutional Investors. John, thanks for being on. Thanks for taking the time.
John: Thank you so much. I appreciate it. Have a great day.
Stewart: Absolutely. Thanks for listening. If you like us, please review us and rate us on Apple Podcast. And follow us. We appreciate that. My name's Stewart Foley, I've been your host. And this is the InsuranceAUM.com podcast.
*Loomis Sayles Assets Under Management: US $302.1 billion at 03/31/2023
This podcast was recorded April 25th, 2023
This material is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein, reflect the subjective judgments and assumptions of the authors only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis does not represent the actual, or expected future performance of any investment product. Information, including that obtained from outside sources, is believed to be correct, but Loomis cannot guarantee its accuracy. This information is subject to change at any time without notice.
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