Posts filed under 'General'
This week, coincidentally two interesting articles hit the press. First, it was reported that Prudential executed a “buy-in” strategy with a corporate pension plan. This transaction essentially insures risks to pension liabilities. As part of the transaction, the investment strategy will focus on core fixed income instruments. If such transactions become more prevalent, the asset management industry will clearly be affected.
The same day I read an article reporting on Phil Duff’s new firm, Massif Partners. The intent of this enterprise is to provide integrated solutions to pension funds through both asset strategies and risk management on the liability side of the balance sheet, integrating the efforts to result in optimal solutions. Again, if this type of service grows in prominence, the asset management industry as we know it will be threatened.
Are these announcements coincidental or do they represent a trend?
JM
June 2nd, 2011
As the markets continue to move up and the economy slowly recovers, it makes one wonder whether we are in the eye of the storm. The fundamental problems which caused the financial crisis, such as excess debt creation, have not been solved. Liquidity has been added to the system but this is only a temporary solution. What will happen if more permanent solutions are not put into place? Will the crisis return?
Some say the economy and markets will heal themselves in time; markets climb a wall of worry. That may be true, but how do we know? The answer is that no one truly knows what lies around the next corner during this unusual period in economic history. All we can do is prepare for unforeseen events by managing our businesses carefully and be conscious of business risks we take.
Asset managers who manage their firms strategically, with an eye toward judicious growth and thoughtful expense management, are likely to be the survivors of a variety of potential economic and market scenarios.
February 3rd, 2011
In our ongoing meetings and discussions with asset managers, a number of themes have evolved during the post-crisis “new normal” environment. One very important and commonly heard theme is that institutional clients are looking for solutions, not products, from asset managers. While some institutions have been harping on this for some time, a good part of the industry is now insisting on it.
Over the past generation, the way to win in the institutional business was primarily to develop consistent and solid performance in asset class driven products, gain the support of consultants for those products, and build product-driven revenue streams. Stable focused asset managers who had demonstrated expertise in specific products could develop growing profitable businesses. Sales, client relations, and consultant relations professionals concentrated on being very knowledgeable about their firm’s investment expertise while institutions and their consultants determined investment objectives, risk tolerance, and asset allocation primarily within a mean-variance framework.
We are now transitioning to the next generation, a process that has accelerated due to the risks that came to the forefront as a result of the financial crisis. Institutions are now questioning conventional approaches to determining investment objectives and asset allocation, challenging their consultants and asset managers to devise solutions which satisfy the risks that they now see in the marketplace. Specific factor risks are being discussed, such as inflation/deflation and liquidity. Downside risk rather than volatility is commonly considered.
The next generation asset manager must provide robust solutions to institutions’ financial problems in order to be successful. It must assemble investment capabilities in such a way as to address current marketplace concerns in addition to, or instead of, providing asset class specific products. Sales, client relations, consultants relations, and investment personnel must seek to understand an institution’s specific problems and needs, then devise solutions to address them. As has been the case with insurance companies for some time, asset managers must understand how their investment capabilities will fit the specific needs of pension funds and endowments. For those that take the time to study these issues and align the investment capabilities of their organizations with their clients’ needs, the rewards will be well worth the effort.
October 5th, 2010
As summer officially ends and one is reminded of fall activity, winter, and even the dreaded snow of the future, we are reminded of the connection between the enjoyable summer vacation and business. When flying, one often encounters the “hurry up and wait” syndrome; passengers rush into the airport, through security, past the gate, and end up in a snail-paced queue onto the plane.
Returning from a restful vacation offers an opportunity to examine the investment business, and to ensure that our firms don’t operate like the aforementioned boarding lines. During the past few years, firms have been too slow to act because of the financial crisis, due to the fear and uncertainty created. Now that we are almost 2 years past the crisis, it is time to take advantage of the end of the summer and move forward. Fall is an ideal time to evaluate a firm’s strengths and unique advantages along with goals, to determine what actions are essential for success. In order to thrive, an investment firm needs to make true investments of its own—not just in securities for its clients—but in growing the business. Planning is essential, but equally important is taking action, whether in hiring staff, or making lift-outs and acquisitions. There is no time like autumn, with the thoughts of crisp air, to plan to succeed, and to succeed by moving forward.
September 3rd, 2010
While a number of large established hedge funds have recovered quite well from the financial crisis, many small funds have continued to struggle. We anticipated this development in the new normal environment where competition is greater and margins are tighter. In such an environment, there is greater differentiation between the strong firms and weak ones; weak firms will have trouble surviving.
As we speak to small hedge funds, we notice a common theme; many are having a hard time understanding why their marketing has been unsuccessful lately since it was so successful when they started a few years ago. Many of these firms are very sophisticated investors, but are quite naive when it comes to marketing. Just a few years ago, they were able to attract clients fairly easily, often without a marketing function at all. If they had marketing resources, they were usually limited to an unsophisticated sales person who simply called potential investors, or they relied on prime brokers for introductions.
In the current environment, hedge funds are being forced to run as businesses, with proper infrastructure and strategic marketing in order to remain competitive. Many hedge fund managers have never had to understand strategic marketing as the business was easy in the past. Now, not only is the business more competitive, but the entire investment industry is converging such that hedge funds and traditional managers look more and more alike. Their products and business structures are converging. In a few years, there is likely to be little distinction between “alternative” firms and “traditional” firms. The sooner the hedge funds understand this, the sooner they will get their businesses on track for the future.
July 21st, 2010
Over several years, we have provided service for, and have been affiliated with, a number of large financial service organizations who have formed their own asset management units. The appeal of asset management is quite obvious: recurrent revenue and generous profit margins. Despite the effects of the financial crisis which will continue to put pressure on these businesses, well run asset managers should continue to thrive.
When set up properly, asset management groups within large organizations can operate quite independently of their parent, yet draw on its vast resources. If they can establish the entrepreneurial culture necessary to be successful in the business, they can also serve as a model for other businesses within the greater organization. In order to do so, there must be separate leadership, infrastructure, and compensation incentives which are aligned with the goals and progress of the asset management effort.
In the best situations, this “intra-preneurial” spirit can not only drive the success of the asset management business, but provide an example of best practices for the rest of the organization.
July 7th, 2010
The often active discussion around how to best compensate institutional asset management salespeople seems to have heated up even more recently, based on conversations we’ve had with managers and executive recruiters. Coming out of the crisis there is a keen focus on business growth. Managers have a sense of urgency around sales, and therefore want to compensate individuals heavily on near term sales.
While it is understandable that managers want to get their client growth back on track, it is always important to balance that need with sustainable longer term growth activity. Also, compensation systems for salespeople are not as simple as determining whether they should be commission based or objectives based. Many factors must be considered to properly balance short and long term goals. These include firm size and maturity, product menu, and the size, breadth and depth of the sales organization.
June 16th, 2010
In the past we have written about the new normal economy, a new reality which will present many challenges to success and profitability. This environment is like the aftermath of a major earthquake where there are a series of aftershocks. The events of the past weeks in Europe are good examples of these aftershocks. Until the world effectively de-leverages, the aftershocks will continue in varying intensity.
In our view, asset managers have begun to adjust to this new reality. Although they are still cautious about the environment, as they should be, they are making decisions and moving their businesses forward. This is a healthy sign. They are not as frightened by these events as they were during the most intense period of the financial crisis. They seem to be looking soberly at the situation before them and trying to make thoughtful intelligent decisions.
The best managers realize that this will be a time when strategic decision making, effective execution of those decisions, and persistence will pay off. They should keep their antenna up for the next aftershock, but stay the course.
May 23rd, 2010
As 2010 gets underway, broad trends toward outsourcing of a variety of services and functions continue. For the foreseeable future, we will be in an era where efficiency and tight execution predominates. Those firms that constantly examine their cost structure and optimize value per dollar spent have the best chance of being winners.
We have written before about the opportunity to outsource various marketing support functions to gain efficiency. There are variable cost solutions in the marketplace for marketing communications, RFP production, and data base management that offer low cost high quality services.
Another example of this trend applied more broadly is exhibited in the insurance asset management marketplace. Insurers are outsourcing asset management in ever greater numbers. It seems they have concluded that their core competency is in insuring risk rather than manages investments. A number of asset managers have noticed this trend, and alertly have started to explore their opportunities in this space. Of course, managing assets for insurers requires specialized capabilities so it behooves them to carefully analyze their potential positioning in the insurance segment before jumping in with both feet.
Overall, firms should continue to look for ways to streamline their operations and narrow their focus. Outsourced resources provide interesting solutions to certain functional areas. Look for this trend to gather momentum in the months to come.
January 18th, 2010
There has been much talk lately of “convergence” in asset management. That is, are alternative and traditional asset management styles and products converging so that there will no longer be much distinction between the two? Some years ago DE Shaw launched 130/30 strategies which are hybrids between the two forms of management. Recently Citadel announced they were launching a traditional fixed income business. There are rumors of other alternative managers launching traditional businesses. Certainly, over the past several years, many traditional managers launched alternative products, although in most cases they were sidelights to their main businesses.
In my view, distinctions between alternative and traditional forms of investment management have always been somewhat artificial. Certain strategies and products have blurred the lines for years. At the end of the day successful investment management strategies need to add economic value to clients and meet the objectives clients set out for those strategies within the context of their overall portfolios. Labeling the strategies alternative or traditional adds little to the understanding of whether they add such value and are proper fits.
Clearly, there are cultural and language differences between firms that have their roots in the traditional vs alternatives sides of the business. But those are inwardly focused dimensions. In order to succeed and prosper in the current environment, asset managers must, more than ever, keenly focus on client needs and respond to them with solutions-based strategies. In their words and actions they must put the client first, which might require massive cultural changes for some managers. In the end, though, we are all in business only to serve our clients.
January 11th, 2010
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