In a new white paper, CaseyQuirk has identified four catalysts said to be driving secular change in the active asset management world:
- New buyer demands emphasizing different value propositions for asset managers. Related to this – institutions are losing relative importance to high-net-worth individuals, and these individuals “value different attributes of the investment firms they select” than do institutions.
- Skepticism regarding active management, fueling growth for old and new betas. The skepticism is fueled not merely by a well-publicized body of academic work supporting the value of passive investments, but by “the relatively unimpressive performance of active managers net of fees in recent years,” as practice has illustrated the theory all too well.
- Disruptive technologies slashing distribution costs and reinventing the consumer experience.
- Fiduciary-driven regulation reorienting advice delivery and product pricing.
As a separate but related fact, the report lists the three strongest “headwinds” that the industry faces. First, its returns have been dwindling, as have the returns of underlying assets and expectations of returns ahead. Second, the managers aren’t getting their hands on as many funds to manage as they used to, for a variety of reasons. Among them is the simple fact that populations are aging, which means that pension funds worldwide are paying their funds out to retirees. Also, sovereign wealth funds are deploying their funds in ways the policies of the sovereign dictates, and institutions worldwide more often decide to manage their own money.
The third long-term headwind is what CaseyQuirk calls “fee compression.” Outside of China, the aggregate fee rates in asset management have been sinking fast. In part this shrinkage is due to the third of the above named catalysts, those disruptive technologies. Technology has slashed the costs of distribution. Meanwhile, blockchains are removing redundant layers in transactions.
Five Ways to Reinvent
Yes, this is a report with a lot of lists. After the four catalysts and the three headwinds come the five ways to reinvent the industry, that is, five strategic changes.
These are:
- Optimize resource allocations
Firms optimizing their resource allocations will curtail or even shutter some legacy businesses, and focus on growth initiatives.
- Streamline operations
Asset management is a “notoriously inefficient” space, with a lot of room for streamlining. This means that those disruptive technologies mentioned above should be embraced, not resisted. In years to come, “firms that papered over sloppy processes or jury-rigged technology will no longer be able to grow their way out of their deficiencies.”
- Differentiate investment capabilities
Outcome-oriented portfolios will be multi-asset and multi-strategy. They’ll be designed around cash flow objectives. Alpha-seeking portfolios will be less benchmark oriented than at present, more active, less liquid, and more purposively non-correlated. Managers will have to adopt what the paper calls a “no sacred cows” policy, that is, “few excuses for maintaining outmoded investment capabilities, even if they continue to generate revenues passively.”
- Digitize Distribution
Again, this is a matter of embracing the disruption. Digitization involves, for example, the use of data mining to “parse advisor and client information gleaned from intermediary relationships to build detailed segmentation analyses and develop proprietary predictive analytics.”
But more innovative managers may go a good deal further, for example by owning more of the value chain, using efficiency to build custom portfolio solutions for wealthy individuals. That would also contribute to the final strategic move on this list.
- Build a Customer-Oriented Fiduciary Brand
“As individual investors demand more customized outcomes based on each of their individual cash flow needs, customer satisfaction about outcome delivery will become as important as relative benchmark performance,” the paper tells us.
Final Thoughts
What customers want, along with investment leadership, is another list: trust, the alignment of interests, reliable management skill, innovation, fair pricing, and transparency.
CaseyQuirk concludes the paper with a reference to Morningstar’s Stewardship Rating, 2013-15, which breaks down net new flows (also known as the “organic growth) if according to their customer facing characteristics.
Those funds that kept their management interests closely aligned with shareholders’, built strong managerial credibility, and charged median fees, enjoyed 3 year organic growth of 19%. Those with “mixed” alignment, strong board quality, and median to high level fees, eked out 2% growth. Those saps with weak board quality, poor alignment, and high fee levels, suffered 8% organic shrinkage.