Professor Amin Rajan, consultant to asset managers, insurance companies and household name consumer brands, has returned from a series of roadshows in Europe and the US, and the picture he paints is not a pretty one.
The veneer normally coating the North American asset management community has all but evaporated, with fund houses and pension systems left haunted by the speed with which they were engulfed by the financial crisis. Sure, they would like to think signs of recovery are shining brighter, but they don’t really believe it.
He describes asset managers giving an appearance of serenity, floating seamlessly like ducks on water, while paddling frantically beneath the surface, not knowing what will happen. Private pension schemes on both sides of the pond, once seen as pioneers of asset allocation, are now burdened by back-breaking deficits and would probably prefer closing altogether, rather than remaining in the increasingly unpredictable investment game.
Yet play they must, while tying their colours to the masts of those asset management houses that can adjust to the new reality. In order to be able to reinvest resources into performance, these groups must first convert fixed costs into variable costs, by freezing nominal pay and linking bonuses to corporate or investment returns.
The next stage to normalisation is reducing numbers of funds, many of which are sub-scale, expensive to run and confusing for sales teams. This is going on across the board. Even those groups that claim they are expanding product ranges are frantically closing down those lines that are not selling, says Mr Rajan.
Goldman Sachs Asset Management, for instance, backed the launch of whole families of funds in the good times, when markets were infallible and Ucits III launched a new lexicon of derivatives trading terminology in the spiel of the group’s suave sales operators. Moving clients from expensive to run, but low fee institutional mandates into these higher-fee collective vehicles also made excellent business sense. But a renewed bottom line focus will ensure that profitability is not sacrificed to innovation. A sub-scale technology fund was one of the first to go in the recent cull.
In Germany, Europe’s most sought-after fund market for foreign groups, the powerful local triumvirate of Deka, Union and DWS are busy shutting down inefficient funds, reflecting higher cost pressures and lost assets.
“You cannot manage clients’ assets if your funds are becoming too small,” says Frankfurt institutional consultant Rainer Schroder. “If a car manufacturer like Audi finds its A2 model doesn’t sell, they will close down production immediately. The few buyers who like the car just have to accept it.”
Housekeeping of an even more humdrum nature has become a vital discipline in operations. Mr Rajan points to the necessity of outsourcing all back and middle office activities, but on a new variable fee tariff, resembling an electricity bill, where fees depend on volumes of trading and usage of the infrastructure.
The role custodians will play in the new asset management world, after the mist rises, should not be underestimated. John Serhant, former boss of fund management and servicing giant State Street, once said that custody was a “necessary evil”, which everybody needed, but nobody cared about.
This was true in the 1990s and early in the last decade, when even the pointy hats of performance analytics were treated with intense suspicion. But post-Lehman, post-Madoff, asset managers are beginning to realise they need a truer partnership with the back office boys, and a commoditised product is no longer enough.
Hedge funds in particular are under unprecedented scrutiny to meet regulatory and client demands, while remaining focused on investment strategy. Just telling clients they are in a CTA or regulatory arbitrage strategy and providing them with a few charts is no longer enough. The alternatives team at GSAM reports that clients now want to know exactly what happens to their dollar after it enters the once secretive Goldman citadel – which stocks does it buy and for how long? Are the securities lent out and to whom? Risk management, compliance and transparency are becoming as important, if not more so, than actual returns.
“The role of a custodian has shifted from traditional safe-keeping and settlement to more of a risk management and cost-containment function and about reducing the total cost of ownership for a client through the entire investment lifecycle,” says Neeraj Sahai, Citi’s global head of securities and fund services. The old image of the processing powerhouse no longer tells the whole story.
But there is also a further, more profound decision that fund groups must take, once they have got the housekeeping out of the way. How do they position themselves in the market – are they a Credit Suisse-style asset gatherer, displaying a big brand and specialising in allocating portfolios for institutional clients, through a specialist internal team? Or do they see themselves more as an alpha-chasing boutique? Both are required by the deficit-laden, confidence seeking pension schemes.
Yuri Bender
yuri.bender@ft.com
Professor Amin Rajan’s report, “Future of Investment: the next move” is published by CREATE-Research, available to FT Mandate readers from amin.rajan@create-research.co.uk.
