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2 comments December 6th, 2009
What Does Dubai Mean?
Much has been voiced already about the events coming out of Dubai. Are they small and contained, and will pass from the headlines in a matter of days? Or, are they indications of an ongoing pattern of debt defaults that will continue to spread for an extended period until global deleveraging runs its course? What does this all mean for industry, the economy, and asset management?
While, in absolute size, this event is not large, it seems to be reigniting some fears of contagion. As I wrote recently, market sentiment moved from fear to greed quite quickly in less than a year. This creates an environment which is ripe for disappointment. Further, since we do seem to be experiencing an extended period of deleveraging globally, Dubai provides a reminder that there is much work to be done before we get the all clear signal that conditions are relatively normal again. Indeed, as I’ve written before, we seem to be in a “new normal” environment which will be unlike the recent boom times.
For asset managers, as well as managers of other businesses, the events of Dubai remind us that we must manage our businesses with the very best practices in order to succeed in the “new normal” environment. We need to move forward, but in a cautious way with great respect for unknown risks and events which could appear without warning. A well managed business is the best way to overcome such events without losing significant momentum.
5 comments November 30th, 2009
Stairway to Heaven
Led Zeppelin had nothing on these markets. They seem to be climbing a stairway to heaven. We have gone from extreme fear to greed in less than a year. Am I wrong? Should we expect this advance after the extreme oversold condition in March? Are others as unsettled as I am about this?
Add comment November 23rd, 2009
Still Not Business As Usual
Investment managers are still not operating as if this recovery will have legs. Budgets continue to be tight, and hiring, while picking up some, is being done judiciously. In past downturns, some forward looking firms spent, while others didn’t, and gained a leg up during the recovery. I don’t see that happening this time. There seems to be a sense that we are going through a transformational period which creates uncertainty about the future. Uncertainty always causes firms to slow their decision making.
What will change this behavior? Continued market rallies? Clearer economic recovery? Just more time? Or, will we be in a new environment, one in which industry dynamics continue to be sluggish for a prolonged period? In any case, managers are being forced to be more strategic in their decision making as they navigate through uncertain waters.
Add comment November 18th, 2009
“Something’s happening here…”
“…what it is ain’t exactly clear.” Those old lines from Buffalo Springfield describing political and cultural changes of the sixties (I’m showing my age!) could easily be applied to the current economic and market environment. What exactly is happening here??? Equities and commodities are off to the races again today. The bond market has been relatively stable of late. What does gold know that bonds don’t, or is it vice versa? When will the declining dollar no longer be good for stocks?
Unemployment continues to rise while earnings improve. Is this just the typical productivity led recovery, or is something else happening here? Is it possible these jobs won’t come back and technology will pick up the slack? What are the global implications, and where will the U.S. land on a relative basis?
As I talk to asset managers, I get the feeling that things are picking up a bit. Many are beginning to grow again, and they are hiring judiciously. But there remains a high degree of caution. Most that I talk to don’t quite trust what is happening, but they can’t explain it. There remains a high degree of uncertainty.
Is this the usual wall of worry that the market is climbing, or is there something else truly happening? What about all of that debt??? What are your thoughts?
1 comment November 9th, 2009
Is the Recovery Real?
Is the economic recovery real? Last week we received a rather strong report on the economy for the third quarter. The question is: what caused it and will it continue? We know that government stimulus played a major role in the bounce in growth that we’ve seen. Nevertheless, this result is surely better than continued economic contraction. The issue becomes how the economy will perform in the inevitable absence of such extensive stimulus.
We are transitioning from a secular increase in leverage and debt to a secular reduction in such leverage. This transition will ultimately override shorter turn moves in the economy and markets. Such a transition does not occur in a few months or even a couple of years after the previous secular trend took place over a generation. It will dictate the “new normal” in the economy and markets which will be characterized by muted growth and uptrends, depressed profitability, and false starts.
In this environment, companies and their executives will need to differentiate their performance from their competitors in order to succeed. The best firms will excel. Many of the rest will struggle. Best practices across all functions will need to be adopted if firms are to grow and prosper.
Add comment November 2nd, 2009
Is it Just the Halloween Season or…..
The spookiness of this environment is just too much for me! Are we recovering, or is it just a head fake? It seems to some (including yours truly) that we haven’t felt enough pain yet for all of the excesses we enjoyed for decades. Maybe that’s just the martyr in me. Some feel like we are climbing the proverbial wall of worry, recovering from a severely oversold condition, so the economy doesn’t have to look so good for the markets to rally.
Somehow it just doesn’t feel right, though. Everything seems a little out of whack. Aren’t we just propping up the system with all of this liquidity? The market crashed because of too much debt, right? Aren’t we just creating more debt? When will we create real things again? I think I will feel better then.
Someone tell me I’m wrong!
Add comment October 27th, 2009
Investment Management Deal Activity is Picking Up
Everything seems to be picking up lately. Markets, bonuses, manager hirings. Even deal activity in the industry is picking up (ie BGI, Van Kampen, TCW??) Does all of this represent harbingers of robust recovery, or another version of irrational exuberance?
My view is that we are still moving toward a “new normal” characterized by a steady state of narrower profit margins, lower fees and compensation, and generally tougher business conditions. It is amazing how a few short months after crawling away from the cliff, many are feeling really good again about business prospects. I believe we have had a dramatic snap back from the abyss that will run out of steam soon. Hope for a repeat of boom times does not produce them. We still have not flushed out all of the excesses created in the past decades. I don’t believe we will revisit the conditions of a year ago, but what we are currently seeing is just way too far too fast.
Investment managers must continue to prepare for the new normal. They need to be thoughtful and strategic about their businesses. They must focus on crisp execution. They must manage their costs carefully, including examining outsourcing options, and aggressively target growth opportunities.
Add comment October 20th, 2009
Managing Insurance Company Investments
Since I posted comments earlier in the week about insurance companies trying their hands as asset managers, a few people have asked me to comment on a related business: managing money for insurers. This is something I know quite a bit about, having spent a good part of my career focused on it. Recently, it seems, a number of asset managers are looking at this segment, either for the first time, or to reexamine their current efforts. The pool of assets is large, so it is certainly worth considering as a target segment.
Insurance companies hold assets in two very different pools: their general account; and their accounts held on behalf of others, technically called the “separate account” of the insurer. Variable annuities and mutual funds are often part of the “separate account.” Unaffiliated asset managers often manage funds within the variable annuity or mutual fund family, or subadvise to these fund families. To the asset manager, this business is very similar to the mutual fund business in terms of asset classes, pricing, and manager selection.
The general account constitutes the insurer’s own funds. This is the pool of assets most managers think of when they consider the specialized segment of insurance companies. Largely a fixed income portfolio, this pool also often contains some equities and alternatives. The fixed income frequently includes specialized fixed income sectors.
The business of managing insurance companies’ general accounts is quite competitive, demanding very specialized knowledge and capabilities, and is often fee sensitive. However, for those that make the investment, asset growth can be substantial. In addition, the use of specialized asset classes allows for greater fees.
The key to being successful in this business is carefully thought through business and marketing plans that are consistent with the strengths of the manager and the market opportunities. Missteps are easy to take, resulting in either failed efforts or unprofitable business growth. Caution is wise, but with proper expert strategy, the business can be quite successful.
Add comment October 14th, 2009
Insurance Companies and Asset Management
Many large insurers over the years have tried their hand at asset management. With significant in-house investment capabilities and resources, on the surface it seems like a natural fit. However, the results of these efforts have been mixed at best. Having been directly involved in a couple of these situations, and having seen many more from the outside in serving them as clients, I know first hand what it takes to be successful and the pitfalls to avoid.
While many of these firms invest their own assets quite well, the business of managing money for outside clients requires additional skills and resources. Investment capabilities that were built for the insurer’s needs must align with the needs of other clients or be augmented. Other requirements include reporting, client servicing, and marketing.
In addition, outside clients need to feel that the organization values their investment needs as much as it values its own. Conflicts must be anticipated and addressed. Finally, many firms simply give up on the business too early. They underestimate how long it takes to build an asset management business. If they do not commit to the business for the long term, other priorities may crowd it out.
Add comment October 12th, 2009
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