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Asset managers must change gears

Those who simply keep doing what they’ve always done could find the world moving past them.
Some things that were expected to take years and years to play out have now already happened. Image: Shutterstock

Asset management is generally a conservative industry. Most investors have liked it that way.

“We as investors tell asset managers that we don’t want them to change,” said Gyongyi King, CIO at Alexander Forbes Investments. “It’s a positive and a benefit if they keep the same processes and same people.”

Reality, however, may be catching up with this approach.

For a number of years, investment returns have been poor, and the economic implications of the Covid-19 crisis are only going to exacerbate this. Asset managers who simply keep on doing what they have always done could find that the world has moved past them.

Read:
The role of asset managers in the Covid-19 crisis
What are asset managers delivering?

“The economic landscape for an asset manager has changed quite dramatically,” said King. “The old business models were very much performance and investment-return driven. But, going forward, you are going to have to be clearer what your value-add is.”

Put another way, asset managers can’t rely on investment returns to be a differentiator when performance is extremely hard to come by. This is particularly the case in a world where passive investing continues to increase its market share.

The asset manager of the future

King believes that to be successful, asset managers need to position themselves to meet a particular market need.

There are four areas she identifies where this is likely to happen:

  • Distribution: asset managers that are able to provide access to a wide range of products and investment options.
  • Solution providers: firms offering innovative solutions to specific client needs through asset allocation and portfolio construction expertise.
  • Beta factories: companies that can leverage scale to offer low cost market access.
  • Alpha shops: specialist asset managers with particular expertise in either traditional or alternative asset classes.

“Historically, all of these things could be grouped together,” said King. “But now you have to be very clear that you have chosen one of these routes.”

She believes that managers who fall between these models are going to struggle as the market shifts.

This could be a particular concern for mid-sized managers. A potential solution for them lies in consolidation.

“That is a trend globally, and we are seeing a bit of it in South Africa,” said King. “We think you will see a pick up in consolidation because that does allow you to get to scale. In the US, for instance, the big are just getting bigger and it is much harder for others to compete unless they consolidate.”

Imperatives for fund selectors

This also has implications for those responsible for picking fund managers.

“Investment performance is a crucial aspect of choosing any asset manager,” said King. “But what you need to be looking at is not just the probability of being successful from an investment perspective. You need to be asking very long term questions around business models.”

Read:
SA’s largest asset managers’ market share is decreasing
Has your money been better off with a big manager, or a small one? (Dec 2019)

In other words, conducting an analysis of an asset manager has to look beyond just their investment process and their current approach. It needs to ask whether the firm has considered its future positioning within a changing industry.

“Even if they don’t have all the answers, managers should at least be thinking about it,” said King. “They can’t just be replicating the same old model going forward.”

Because even a conservative industry like asset management is unlikely to escape the disruption caused by the Covid-19 pandemic.

“Some things we thought would take years and years to play out in the asset management context have already happened much quicker, such as engaging with people on online platforms,” said King. “Disruptive trends are playing out much faster. And if we as investors are asking for these requirements from asset managers, that will only speed up the change even more.”

Read: Platform profiles best-of-breed boutique asset managers

Patrick Cairns is South Africa editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Absolutely spot on article.

However, most asset consultants and “multi-managers” still rely too heavily on ranking tables or some kind or risk/return matrix to choose asset managers. Both of which are back-ward looking!

Agree but asset consultants must ensure that they have the relevant skills to assess skill vs flashy marketing.

Otherwise they will pension funds into fads like big data, AI etc. that may not address the fundamental requirement to manage risk.

Agreed. A mixture of quantitative and qualitative measures needed. Just like asset managers state ” past performance is not a reliable indicator of future performance” ..it stills the reliable way to gauge over long time periods how systematically the investment teams generate alpha. U need to put a filter on the marketing as many of them are “all fur coat and no knickers”…especially the BEE managers

Nice article.
What should also be highlighted is never chase past returns.
A many advisor placed money on for example Contrarius Global Equity fund, due to the well accepted Raging Bull Award.
Where is this fund today??
Patrick, please warn investors to not follow short term returns. balance is everything.

End of comments.

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