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Asset management, but not as you know it

Business as usual is not a long-term success strategy for asset managers.

In general, the expectations that investors have of asset managers are fairly simplistic. What they want is performance.

This is almost always related to some sort of benchmark – whether that is a market index, inflation or other managers. Investors want their fund to outperform.

There is some sense to this, of course. The reason for giving any asset manager your money is for them to grow it over time, and high growth is usually preferable to low growth as long as the risks are well managed.

However, speaking at the recent Alexander Forbes Hot Topics Seminar, the head of the Alexander Forbes Research Institute, Anne Cabot-Alletzhauser questioned whether these expectations are appropriate. Could asset managers not be doing a lot more for us, for our money, and for society as a whole?

She argued that the potential of the industry has actually been stunted by an obsession with short-term performance. And if investors and asset managers could look beyond that, the industry could create significantly more value.

This is not, however, some theoretical ideal. For Cabot-Alletzhauser the industry is already having to face the reality that business as usual not a long-term success strategy. This is because of disruptive forces that are changing the way investors think about what they want from asset managers.


Probably the greatest of these is technology. Already computer models are able to isolate and extract the market factors like value and momentum that account for the majority of returns. They have also been able to identify which start-ups are most likely to be good private equity investments. They can do these things cheaper and more systematically than human professionals.

That must lead asset managers to question what they can offer that a computer can’t. And just as importantly, they have to ask what artificial intelligence might help them to do, that which is currently beyond their own capabilities.

“Funds treat investors as if they are a big homogeneous entity,” said Cabot-Alletzhauser. “But if you look at things like life stage and income you realise that every individual in that fund is having a different ride and different experience of that fund.”

Technology allows asset managers to look at each individual and create a solution that works for them.

“And you have to ask whether those aren’t better answers than the ones we have traditionally been looking at,” Cabot-Alletzhauser said. “The bottom line is that if we could shift the investment industry’s focus away from chasing short-term returns to meeting client-specific investment goals, we could have a significant impact on client’s assessment of the value provided by the industry.”

Parallel worlds

Another important area of disruption is that asset managers are being asked to demonstrate the role they play in society. South Africa has an incredibly evolved financial market, but Cabot-Alletzhauser argued that we are underutilising the asset management expertise that we have.

“The travesty is that we don’t use our insight to solve South African problems,” she said. “Because we get caught up in the search for performance we don’t look at the fact that we can use asset management to solve very specific problems like educational funding.”

This is not a matter of asset managers becoming charitable, but of aligning their own long-term interests and those of their clients, to those of the broader society in which they operate. Their own success is directly related to the wealth of the country, and playing a role in building a more prosperous society simply makes sense, especially when the long-term financial returns are attractive.

Purposeful capitalism

Cabot-Alletzhauser added that the world has moved beyond the point where asset managers can decide whether to be responsible investors or not.

“It’s an absolute no-brainer,” she said. “It’s integral to everything. The most powerful tool investors have is the money that represents their life savings, and asset managers must do something meaningful with it.”

Asset managers are being challenged not just to consider environmental, societal and governance factors because of some ideal of making the world a better place, but because of what it can mean to the lives of investors.

“We have a choice,” said Cabot-Alletzhauser. “We can either move into an area of complete distrust of this industry, or we can move into a professional industry, that is trusted, value-focused, ethical and sustainable. If we do that, then the investment industry and society ultimately flourish.”

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I would have thought it better for individual analysis, and financial advice arising from it, to be independent of asset management as far as possible.

Asset managers should indeed be focused on optimising the returns from their products, within their mandates, and with explicit investment horizons, be they long or short. I agree though that responsible investing is non-negotiable.

But the purchase and/or mix of investment products suitable to individual circumstances needs to be objective.

There is huge scope for personalisation at say, pension fund level, but I don’t think asset managers are necessarily the right people to implement it. The legislative framework of the retirement industry is built on homogeneity – the long-term vision should – my opinion – be personal retirement accounts rather than institutionalised funds, and while the technology could probably handle that now, the general level of financial education and awareness clearly can’t.

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