Three currents vital to success in asset management are reflected in a fund manager's recently launched strategy for smaller pension schemes, argues Nick Fitzpatrick, after gauging views about the industry's future.
Finding success in asset management is going to be harder than ever as the rest of the decade plays out. The road through the low-return world is uphill and asset managers will struggle along it.
They must win back the trust of clients, who are increasingly professional at what they do.
They must also find revenues when fees are more likely to fall than go up, and what is also blatantly obvious now is that asset managers must achieve all this under the eyes of fiercer regulators.
So what, then, might the Schroders Flight Path Swift strategy, which is a low-cost product launched in May and designed to help smaller pension schemes control funding levels, tell us about achieving success in the years ahead?
First, asset managers must deliver clients results that are more than just investment returns relative to benchmarks. In other words, the future is about outcome-led investing.
“Much of what we hear from clients,” says Richard Phillipson, principal at consultancy Investit, “is about investors taking back some of the advice role they have usually given to consultants and, instead, asking fund managers to produce outcome-orientated funds and mandates which have return goals like Libor +3%.”
Second, asset managers must keep fees low – especially as index-tracking investment rises. Smart beta providers, in particular, offer an alternative to pricey active management in some areas.
Worse, fees are only the sharp end of financial strain. Rory Gage, director in financial services at Navigant, also a consultancy, says the company has found that changes in the UK’s retail funds industry mean asset managers will have to reduce costs by 29% or increase assets under management by 25%.“Those are really scary figures,” he says. “It leaves asset managers with a huge dilemma about where to cut costs.”
Far from cutting operational centres – usually the first area of an asset manager to suffer – operations may need to grow to handle increased regulation, says Gage.
The third important current within successful asset management is reflected in the type of client the Schroders fund is aimed at. The company has clearly decided it can make money out of smaller pension funds, an often under-served community, and this says a lot about how asset managers should change their whole approach to sales, marketing and operating models.
Client segmentation – an understanding of how to make different client types profitable by using appropriate operating models – is a necessary process for all asset managers if they are going to make money from clients and not waste it.
“In the old world, it was difficult to work out the profitability of a client,” says Dean Lumer, a consultant and co-founder of Knadel. “But it was always scary when asset managers did. Some would find that even pet clients were not bringing in the revenue they expected.”
Should success in asset management mean a whole new way of working with clients, the industry might be surprised to find acceptance. This is because the financial crisis changed investors and today – or so it is suggested – clients are more educated, informed and receptive to well-articulated ideas.
In short, there is a higher level of professionalism, says Robin Creswell, managing principal at Payden & Rygel, an asset manager. This is signalled through the larger number of professional qualifications, such as the Masters in Finance and the Chartered Financial Analyst (CFA) certificate, found on CVs these days.
“There has been a huge increase in people on investment boards and in consultancies who have passed the CFA and this raises the game to a whole new level of professionalism. The CFA is an incredibly demanding qualification to gain,” says Creswell.
The CFA Institute says 2012 paid registrations were up 24% in both Europe and the UK compared with 2008.
Creswell says the effects of higher education are palpable in discussions that asset managers have with some of their clients.
“The discussion is no longer just about performance. It will take in subjects as broad as risk tolerance and risk management, performance attribution, and corporate governance.”
He adds that protecting an investment strategy from losses due to, for example, unintended risks or fraud through poor corporate governance, is more important to investors now than hunting for a high return.
The greater level of knowledge among the client base is something that might help managers sell the kind of sophisticated products that are needed to deliver outcomes.
Products designed with specific challenges in mind, such as funding levels, or with certain risks, like volatility, will be in more demand as clients see that fixating on benchmark-related returns, as in the past, is poor asset management.
Useful to asset managers in future will be a multi-asset capability.
Opinion may differ about whether multiasset expertise implies full ownership of the means to invest across the asset spectrum – listed equities to real assets – or not. It could be just as acceptable for an asset manager to offer a complete list of solutions within one asset class.
Either way, the value of the multi-asset capability is in taking asset allocation decisions for clients. Successful asset managers in future will be able to respond to clients who want either more dynamic daily asset management from them, or even advice on longer term asset allocation.
“The specialist mandate does not get the client anywhere these days,” says Nick Lyster, chief executive at Principal Global Investors (Europe). “To be a true asset manager, you have to be involved in the bigger picture.”
He explains that Principal’s recently bought stake in Liongate Capital Management, a hedge fund investor, was partly about increasing the capability to face down clients’ challenges. “Our interest is as a solutions provider. With Liongate we can create a hedge for clients who might be, for example, overweight in credit.”
Some people might see multi-asset investing as merely balanced management revisited, but they are wrong. Asset managers will be expected to more dynamically and decisively allocate between or within asset classes than was the case with balanced investing.
Phillipson says: “More managers do now back their moves with bigger convictions. In the past, asset managers would have rebalanced just 2% to 3% – what they call ‘a touch on the tiller’.”
Phillipson says outsourcing some of the asset allocation decisions to asset managers helps pension schemes overcome slow decision processes. Similarly, Creswell adds that this “new active” would mean an active manager could react to structural changes in markets and help clients take risk and be rewarded.
Investing for outcomes, lower active fees, and client segmentation might only be three drivers made more important by the low-return world, but they are important ones.
Another factor in success will be smart acquisitions of whole businesses or poaching of teams as managers gain control of these business drivers. But that’s another story.
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