How do asset managers position themselves? Five years ago, the fashionable answer was philosophy, process and people. The idea was that managing funds, and tailored segregated portfolios in particular, was some kind of noble art. Educated men and women had apparently opted not to join the ranks of the investment banking barbarians, but to skillfully and responsibly manage our assets for the day we are eventually taken over by old age.
Self-styled proponents of this discipline got down to work in their comfortable enclaves of Edinburgh, the UK’s newly-thriving investment outpost, and west coast America. The ones who could demand the greatest level of peer-group respect were those who could combine a nerdish, quantitative background with an aesthetic appreciation of the patterns of the universe. The “quants with culture” commanded a premium, and were regularly poached by rival managers.
This concept of science as art, pioneered in the sun-kissed Californian quant shops during the caring-sharing 1970s, revived briefly in the 1990s and early in this decade, seems to have had its day, for now. Compare the announcements made by asset managers in 2000, and the announcements made today, and there is a stark difference. At the turn of the millennium, groups such as Gartmore, Aegon and Crédit Agricole, were constantly re-engineering their ‘process’ and putting ‘people’ in place, who were in line with some sort of ethereal ‘philosophy’ which hovered over the headquarters of the group in question.
This often pretentious search for the elusive combination of emotion and logic has now retreated, in favour of a much more industrial approach. Announcements today are more likely to be about a group re-structure rather than changing a process. Performance and profitability are no longer dirty words. The new focus is on manufacturing almost industrial streams of returns, with an admission that most asset management is a commodity.
Those free spirits who can generate investment ideas and alpha are housed in slightly more comfortable surroundings and apparently given better conditions, without too much interference, to prevent them from defecting to hedge funds.
Enter the specialists
The reasons for the trend are two fold. Firstly, the uniform adoption by institutions of a core-satellite approach, with a highly commoditised, near-indexed core, augmented by limited allocations to hedge funds, high yield and emerging markets, has been mirrored by the structure of fund houses.
Secondly, the open architecture trend towards selection by banks and insurers of ranges of external funds has meant each group needs a specialisation, a raison d’etre, if it is to succeed. There is no need any more for every fund manager to offer full ranges of global products, with star managers in each category.
This has been the story behind the restructure of HSBC’s funds operations, with bluff Frenchman, Alain Dromer at the helm. He says assets enjoyed a “glamourous, double decade of growth” during the 1980s and 1990s, particularly in European equity, where fund management firms sold performance of their products as their own performance. “In reality, their performance was coming from the markets, not the managers. Many fund managers were not clear enough about what was beta and what was alpha. They were paid at a price commanded by alpha delivery, when it was only beta, or worse, they were delivering.”
HSBC decided to restructure its model accordingly. Those parts of the business such as money markets, and even multi-management, regarded as a commodity, which the group considered completely scalable, have been bundled up into HSBC Investments, running more than $150bn (€125bn). All the high alpha stuff has been hived off to HSBC Halbis Partners, overseeing $70bn. Addressing scepticism surrounding the ability of large financial services groups to develop an environment to attract people capable of generating alpha, Mr Dromer has tried to inject a different type of belief and value system into Halbis, where workers are given the rewards they deserve for extra performance.
In this group rests the New York-based fixed income team, which combines high-yield emerging markets with structured, asset-backed investments. Managers have been poached from elsewhere to beef up this team, including a team of seven from Credit Suisse Asset Management. Those who trade markets for a living are clearly excited by this sort of structure.
But the question which employees and clients of diversified financial services providers need to ask is whether groups with a strong corporate identity can resist meddling with things that are working well, but go against the grain of the established culture.
Sinopia, another HSBC unit, has been lifted from inconsequential boutique status in 1989 to become a major provider, running $19bn in quantitative strategies today. It’s a very good example of a team, which has unquestioningly toed the line.
Framlington, on the other hand, recently offloaded by HSBC to Axa, refused to change its more individualistic approach to blend with the HSBC ethos. The same happened with Banque du Louvre, forcibly absorbed in 2003, after its leading lights had jumped ship. “HSBC is like any other big group,” says the CEO of one leading French funds house. “Whatever the management says, it must be done by all the employees. There is no compromise or debate.”
If this top-down attitude pervades an organisation, and there is no room for ideas or innovation from below, how can a restructure generate alpha over the long-term?
Yuri Bender, editor-in-chief
yuri.bender@FT.com
