By Curt Custard, head of global investment solutions, and Matthew Richards, strategist, global investment solutions at UBS Global Asset Management.
A basic premise in the theory of evolution is that species must adapt to survive. This holds true for companies as well as flora and fauna. Eastman Kodak, for example, filed for bankruptcy protection earlier this year after adapting too slowly to the shift from 35mm film to digital photography. In contrast Apple, which was faster and smarter in adapting to changes in computing, telephony, photography and other fields, became the world’s biggest company by market capitalisation this year.
Asset management is no exception. Evolutionary pressures come from three primary areas: demographic changes, endogenous changes specific to the asset management industry, and economic changes. The key demographic phenomenon for the asset management industry is the ageing of the baby boomer generation. The baby boomers are around retirement age, so they are investing less and are more risk-averse following the financial crisis. Industry dynamics have changed too. Consultants have expanded the range of services they offer. Meanwhile, many asset managers have brought in risk managers, actuaries and manager selection teams. Who is getting squeezed? It is the mid-sized manager that lacks the resources to provide a holistic solution but is too big to be a nimble boutique. In investment economics, The ‘Great Moderation’ that began in the 1980s offered steady economic growth and gradually falling inflation. This allowed central banks to reduce interest rates and formed the basis for a bull market in bonds and equities. But the ‘Great Moderation’ is history – and so are outsized returns. The equity risk premium cannot always be relied upon. US equities, for example, have delivered negative total returns in real terms over four periods: 1901-1919, 1928-1942, 1968-1982, and from 1999 to date. For many investors, the 21st century has been a period of shattered expectations. Government bonds are no longer risk-free, yet they offer lower yields than ever. Equities can lose money over a decade or more. Liquidity cannot be taken for granted. Asset managers must therefore work harder to satisfy their clients. That entails new types of product with new measures of success. The primary goal of some multi-asset income strategies, for example, is not to beat a benchmark but to meet clients’ expectations about total risk and return. Investors now have a more global perspective. While a role remains for specialists in subsectors of asset classes, these can be thought of as components. Large asset management firms not only need to provide the components, they also need to combine them into a complete investment portfolio. In other words, they must offer comprehensive solutions to clients’ investment needs – needs that the new regulatory and investment environment are creating and changing with increasing frequency. That requires capabilities in areas including asset allocation, risk management and derivative techniques, as well as specialist investment teams and/or manager selection expertise. Distribution teams also have to change. The emphasis is shifting from selling single products to developing a deeper understanding of clients’ needs, and helping them to develop and maintain strategies to meet those needs. This requires sales and client relationship managers to increase their level of investment knowledge and to develop longer-term relationships with clients and prospects. The investment environment has undoubtedly become harsher since the balmy days of the late 1990s. Asset managers need to help their clients set realistic goals, and work harder and be more innovative to meet them. E v o l u t i o n a r y pressures are not making life easy for the asset management industry. But they are making it better.
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