The Allusivity Premium

The Allusivity Premium

By Bill Kelly, CEO, CAIA Association

Since this What About Beta column started about two years and almost 75 entries ago, the goal has always been to take a CAIA article, a relevant news story, or an industry trend and amplify it, replete with an occasional catchy title, and maybe even a touch of witticism á la Alan Abelson. Our very best ideas have always come from our community and this week we want to thank Michael Underhill, a friend of CAIA and a bit of a provocateur himself, for tossing us a fat pitch courtesy of Boston Consulting Group’s (BCG) recent report entitled Global Asset Management 2020: Protect, Adapt, and Innovate. Perhaps this piece doesn’t break a lot of new ground, but these forward-looking tomes should always be taken  as an opportunity to level-set your strategic outlook and expectations as an investor, and even more apropos here, as an asset manager.

BCG pegs global AUM at $89T as of the end of 2019; seemingly low(er) when compared to other reports, but certainly within the friendship circle of gimme putts. The most notable follow-on is the breakout of retail vs. institutional representation, where the former has crept up to 42% of the pie and grew at a rate of almost 50% more than the shrinking majority maintained by the institutional asset owner during 2019. Parity and then dominance of the retail investor is a near term inevitability.

The split across asset classes was quite notable as well, especially as it relates to alternatives which represent just about 16% of global AUM. Interestingly, as indexation and cheap beta continue to dominate the flows in the traditional space, that small piece of alts AUM will soon represent almost 50% of the total revenue pie. No wonder the defensive asset managers will be “focusing on their core business and reducing costs” while the others “play offense” into this “potential growth engine.”

Topping the list of expectations for most investors (and certainly the need in the public pension plan space) is heightened performance which typically means high absolute return. This is not a commodity that can easily be bought at any price. Those seeking on-demand beta exposure akin to the public equity markets will be lost in a sea of performance dispersion and likely disappointment, as asset classes morph into complex and often opaque industries requiring the keen eye of an informed professional (#CAIA). Other observations about the dawning of the age of the retail investor are even more sobering.

The BCG report clocks in at 27 pages and a word-count of just over 10,000, but not once will you find the words education or literacy. No wonder they can speculate about the wants of the retail investor and why they should be “thrilled at the prospect of collecting an illiquidity premium,” which is just laughable enough to inspire our title… And, that same investor needs to carefully read and understand The Next Wave in Distribution section beginning on page 18 where you will learn about the retailization and weaponization of client (read: YOUR) data. When predictive algorithms are being unleashed to “target new customer acquisition strategies to deploy wholesalers at scale more effectively,” the client-first concept becomes as allusive and laughable as the siren song of the illiquidity premium.

Seek diversification of portfolio and people, education, and know your risk tolerance. Investing is for the long term.

A Note from the WhatAboutBeta Editors: Our standard column sign-off has been permanently changed this week and the accompanying photo was chosen with purpose. These small things matter, even on the margin; be passive when accessing beta but increasingly active in owning the societal inequalities that are upon us. The Cover Story in Saturday’s Barron’s might be all the motivation you will need.

Bill Kelly is CEO of CAIA Association. Follow Bill on LinkedIn and Twitter.

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