Surprise, surprise. While money managers of all stripes extol the virtues of new investment strategies like portable alpha, pension funds remain skeptical. Could money managers be trying to pull a fast one on the pension community or are pension managers hopelessly out to lunch?
A new study sponsored by Citigroup and T. Rowe Price, reveals that portable alpha, hedge funds and liability-driven investments (portable alpha’s second cousin), are recommended by 60% of institutional money managers as being best suited to meeting pensions’ needs over the next 5 years. Yet these types of products didn’t even make the top 5 mentioned by pension managers overseeing more than $30 trillion of assets in aggregate.
What gives? According to the study’s authors, Create, a UK-based consultancy, institutional investors want these products to be, “more understandable, more transparent, less risky, more liquid, less volatile, and/or more customized.”
While institutional investors may prefer a more prudent approach to “new” products, they understand the future is alpha-centric. Say the authors:
“Clients want to go back to the basics: they want absolute returns and liability matching products, backed by a value-for-money fee structure that clearly separates alpha and beta.”
And the traditional money management industry is responding with a focus on “absolute returns” (e.g. hedge funds).
“Asset managers are seeking to enhance their research, investment and assembly capabilities as part of a strategic thrust towards generating absolute returns…”
The report also suggests that investment advisors will eventually use sophisticated “institutional” tools. This challenges the commonly held belief that techniques such as portable have no place on Main Street/High Street.
“Retail distribution will be increasingly dominated by a new breed of professional buyers of funds with an oath of allegiance to their clients, deploying institutional quality tools to deliver customised solutions.”
To do this, the report says that money managers will need to morph into a sort of meta-boutique, housing large numbers of quasi hedge funds each focused on producing alpha.
“Large houses will promote high conviction investment strategies by creating in-house product-based virtual boutiques in which investment professionals will have autonomy, space and accountability for generating new ideas and executing them. Some of these boutiques may have their own fiduciary structure. Either way, they will be used as one of the avenues of attracting, retaining and getting the best out of top talent, especially post-mergers. This trend will spread to medium sized asset managers as well, as they grow organically.”
Of course, this will make the job of communicating to investors all the more challenging – requiring a go-between to help with the manager/investor relationship:
“The prerequisites for retaining and nurturing trust with clients will be…product specialists in client service teams who can straddle the divide between clients and investment professionals.”
This is a comprehensive and wide-ranging report on the future of money management that also goes beyond the scope of this blog. Still, it paints a picture of an alpha-centric world and illustates the impact of the coming paradigm shift on the structure of asset management organizations and the shape of the money management industry as a whole.