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?
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.
As asset managers try to meet client needs in the “new normal” environment, they will have to provide specific investment solutions more than ever. The best investment firms have always approached their client needs in this manner. They first seek to understand those needs in great depth, then provide solutions to meet those needs based on their investment capabilities.
Other managers approach the marketplace with a menu of defined products which may or may not meet client needs. If there is little or no flexibility around those products, in terms of investment design, packaging, or pricing, there must be a very close match between client needs and product features for a sale to be made and relationship to be built.
The “new normal” will be defined, in part, by greater buying leverage and less selling leverage. In this environment, clients will demand even greater flexibility around investment solutions so that their specific needs are met. Firms that have historically approach the marketplace in this manner will be in the best position to succeed.
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