Todd Ruppert, CEO & President,
T. Rowe Price Global Investment Services
From a fund management corporate perspective, is the crisis unfolding worse or better than expected? Are you more or less optimistic now about the business outlook until the end of 2009 than you were in December 2008, and why?
The global economic/financial crisis is still with us, make no mistake about that. And, its various impacts have been and will be both widespread and lasting. The surprisingly positive financial market movements over the past several months mask a global economy that is still suffering. The all important embillical cord of confidence has been sorely, sorely damaged and it's not healing well yet. Those that relax and assume we are well along on the road to recovery may simply be wishful thinkers.
Four primary conditions precedent are required for a sustained recovery. Each is necessary but not sufficient on its own.
- Credit markets must stabilize and begin to function so that enterprises can finance their daily operations smoothly;
- The pace of deleveraging must slow - both balance sheet and velocity of money;
- Monetary and fiscal stimulus packages must be coordinated globally and begin to make a lasting difference in both liquidity and aggregate demand;
- The deflationery mindset must not set in and take hold.
While progress is being made on all fronts, much more is required to get us on the road to recovery. I am more optimistic today than in December, but from a corporate perspective we remain cautious. Despite cost cutting, there is still a revenue/expense mismatch and we can't save our way out of this, we must grow our way out of this.
However, investors - both retail and institutional - are still very cautious in their asset allocations. Organizations that were overly bloated and generated a disproportionate percentage of their revenue through promoting hyped, trendy products to retail investors are not in a good place right now. They will have to conduct more cost cutting and it may be more difficult for them to grow as retail investors will be slow to come back to embrace risk.
How do you feel the reputation of fund managers has been affected in the eyes of institutional clients and retail investors?
Reputations have been damaged if product performance and service deviated substantially from what was expected. Satisfaction equals reality minus expectations, and since reality is the visissitudes of the market, over which we have no control, we must do a terrific job of managing expectations in order to have satisfied clients. I fear that many in our industry focused more on salesmanship - putting their own interests first - than stewardship - putting clients' interests first.
Their projections of product outcomes were far rosier than what ultimately occurred and they promoted some products that shouldn't have been promoted. In those cases reputations have been damaged, and justifiably so. We all must remember that we are fiduciaries and fiduciaries are supposed to protect the financial interests of those to whom they owe an obligation.
Our most important mission is to assure clients that their assets are secure in our care and that they can trust us to do what's in their best interest. Investment managers that did this, and that provided realistic, not inflated, expectations, that conducted their business with integrity and transparency, that communicated often and honestly, and that remained stable throughout this crisis should not suffer reputational damage, but rather gain share.
Are product development and pricing reflecting changes in the financial and economic environment? How do you see this evolving?
At the margin, product development and pricing are reflecting changes in the financial and economic environment. Note the introduction of certain products that have and are taking advantage of anomolies in the market, as well as fee reductions by certain hedge funds. Note also the decline in new product introductions from the torid pace of the past few years.
I hope that the learnings from this current crisis, on the back of the TMT crisis earlier this decade, may result is less new product development simply for the sake of selling the "new, new thing" to capture short term flows, but rather more measured, thoughtful, road tested product introductions that have greater long term durability. If this occurs it will be beneficial for investors.
How do you view regulatory developments so far and how would you like to see regulations change? Will regulatory developments help create a more level ‘playing field’ between fund products and bank products?
The crisis of confidence that ensued after the TMT bubble burst in 2000 resulted in greater regulatory scrutiny. The most recent crisis is far more widespread and profound in many respects, including dramatic use of taxpayer money, misselling, multiple cases of fraud, and the severity of market declines. The regulatory response will likewise be more broad based and harsh.
While we are supportive of regulatory enhancements that improve transparency and other protections for investors, and hence their confidence to invest, I worry that there may be some protectionist practices at the individual country level by regulators and politicians that will impede broadbased reforms, drive up costs and alter buying habits, all of which likely may ultimately hurt end investors.
I think it's too early to predict what regulatory changes will, in fact, end up being enacted. I think our industry needs to do a better job of educating and lobbying, however. As for regulations that help create a more level playing field between fund products and bank products, that would be very welcome and useful to investors, but I'm not holding my breath.
The Turner Review in the UK wishes to see risk officers occupying a more visible place at the forefront of investment firms. How do you feel about this? Will the CRO be a main board appointment in the future?
I am not supportive of a "requirement" for a chief risk officer. There are prudent alternative ways to establish a successful risk management culture. We have voluminous risk detection, management, monitoring, avoidance, etc. processes and procedures throughout the firm and at all levels. Proffering the CRO "solution" may be politically attractive and expediant, but in practice may actually backfire.
Has remuneration of senior fund management executives been affected by the bonus controversy within the banks? How do you see executive and manager remuneration changing?
For a US based independent asset management firm not receiving TARP funding, there is no connection to nor impact on compensation due to the bonus controversy within banks. For an independent asset manager headquartered somewhere in Europe there also should be no impact. However, there quite likely will be talent flight from asset management subsidiaries of financial conglomerates. This controversy highlights yet another benefit of being an independent asset manager.
Compensation in the industry will be down, and understandably so due to revenue declines. That said, those organizations in strong financial condition have the staying power to continue to pay competitively to retain talent.
How do you see the players in the industry and the landscape changing in the future? Is there more scope for M&A going forward or will development be through organic growth?
There will be M&A activity as banks and insurance companies under financial pressures seek to monitize their asset management subsidiaries. They are in the difficult situation of being forced to sell to raise capital or being pressured to sell for a higher price now than what they may be able to generate after significant talent has departed. Boutiques under financial pressure will also seek captial infusions from private equity or other players. While there will be further consolidation, barrier to entry in the industry are such that there will always be room for boutiques. Independent firms with organizational, financial and professional stability will be well placed.
In the current M&A activity how will clients’ interests be balanced with shareholders’ interests?
Most, if not all, M&A is driven by scale, cost reduction, revenue expansion, share price accretion, product proliferation, capital raising, etc. considerations. Ego an play a big role, too. I can't think of an M&A transaction where "improving performance and service for our valued clients" was the stated overarching reason for the deal. Clients typically lose out in M&A transactions. An anticipated rise in bank and insurance company asset manager sales will be for capital generation, not doing what's best for the clients.
Do you anticipate any changes to distribution structures? Will banks still want to sell funds and will distributors be as supportive of mutual fund products in the future as they have been in past years?
I see more sub-advisory arrangements coming out of the current crisis. Open architecture fund sales may be down for quite some time. It would be nice to see some dimunition in the bank stranglehold over distribution in Continental European markets. The potential for this is greater today than ever before, but regulatory reaction to the crisis will play a big role in whether or not this has traction.
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