Times are a-changing, and they’re changing fast, so asset managers need to adapt to the new demands of investors, globalization, heightened regulatory concerns, a lower return environment and rapid advances in technology.
Top executives from Dodge & Cox
, T. Rowe Price
, Lord Abbett & Co.
sat down at a panel on “Serving Investors in an Evolving World” at the 2014 ICI General Membership Meeting
to discuss just how they’re going about it.
On Alternative Investments
Given the proliferation in liquid alts products, Ed Bernard
, vice chairman at T. Rowe Price and the panel moderator, asked the other panelists to weigh in on what exactly alternatives are and whether they’re useful. The consensus on the panel was that investors should proceed with caution and a lot of education is needed, still. But the speakers also agreed that alts do ultimately have a place, although a small one, in an outcomes-oriented portfolio.
“It started as a niche product for niche audiences that were seeking alpha, then it morphed into a strategy for lower volatility and lower correlation to traditional investments,” Bernard said. He asked whether “liquid” alts are really reasonable and whether they can be scaled for mass audiences.
, president and CEO of Dodge & Cox, said some strategies, like global macro, for example can be scaled, while others should remain niche and illiquid. Daria Foster
, managing partner at Lord, Abbett & Co., added that “Some of them are easily understood and some are very complex. Some sound good, but do investors really understand what they’re buying?” She asserted that it’s “our responsibility to make sure investors understand what a product is designed to do and how it’s supposed to perform in different market environments.”
Having a global mindset, even if you’re only managing U.S. strategies, is important from an investing and research perspective, the panelists agreed, as no economy exists in a vacuum and events in other countries will affect investments here. BlackRock
’s Larry Fink
also told the audience yesterday that “You should never stop being a student.” He keeps tabs on world events by reading the papers online after 10:30 pm and then again in the morning at 6-7 am. While he admits that the press puts a lot of “noise” out there, he still needs to know what the noise is in order to be an astute investor.
On today’s panel, speakers agreed that they all need to be mindful of what’s going on in the world, but that distributing in countries outside of America is tough without a clear business strategy, resources and staffing.
“From an investment perspective, we’d all say that it’s critical to have a global point of view,” Foster said. Distribution is harder, though. “From our own experience, when our products had international interests, you had servicing requirements and unless you’ve really thought about it, it’s going to be reactive,” she added. “If you don’t have the proper infrastructure, it’s not sustainable.”
, chairman and CEO of OppenheimerFunds noted that, as U.S. managers, “We think of the world as being divided into U.S. and international, but the rest of the world doesn’t see it that way,” so you have to understand the client base and position your marketing that way. When Oppenheimer tried to take its large-cap value and growth products to clients outside of the U.S., they couldn’t sell them.
, president and CEO of Invesco, added that the regulatory environment is challenging, and getting even more so, in the U.S., so it will be even harder to get to know the regulatory requirements well enough across a multitude of other countries to be able to successfully set up products and sell them there.”If you put one toe in the water, you won’t be successful,” he said.
Speaking of regs, Glavin said that the U.S. has been thought of as a leader in regulation for a long time, by having the biggest and deepest market, but that changed in 2008. “The world believed that it was a U.S.-created crisis, so the U.S. is no longer in a position to lead.” Therefore the environment is much more fragmented and regulators around the world are, in a way, competing with one another. “The environment is much more fractured than it’s ever been,” he said.
Investigating asset managers as potential SIFIs (Systematically Important Financial Institutions) is a hinderance that’s maybe well intended but not well thought out, the panelists said. They echoed Fink’s remarks from yesterday, where he said that money managers are agents that act on behalf of their clients, and therefore don’t pose systematic risk. The money belongs to the clients and the regulatory strains put on asset managers will ultimately affect the end investors badly.
“We act as agents for our clients, not as principals,” Dodge and Cox’s Emery said, adding that especially in a ’40 Act format there are already a lot of limits put on money managers, in terms of the amount of risk they can take, use of leverage, derivatives and shorting.
Speakers also agreed that even if a couple of large firms wind up taking the heat, it’ll be bad news for the rest of the asset management industry. “Even if they’re potentially regulating a couple of firms, it will have a massive effect on the rest of the industry,” Oppenheimer’s Glavin said. If they’re deemed to big too fail, they’ll become an example and the rest of the asset management industry will think of it as an “implied contract” for everybody else. To think that we can have two big guys fall under the bus is a misnomer,” he said. “It will mean pressure for the entire industry And since it’s not our capital, but our clients' capital, they will have to pay for it.”
On Risk Management
Your money managers are definitely thinking about risk all the time. From stress testing the portfolio, to coming up with a number of market scenarios and how they’d affect investments, to cyber security risk, to enterprise level risk, to disaster recovery, they’re on it.
Oppenheimer’s Glavin said the firm’s executives hold “table top discussions” every month where they outline market scenarios and see how they’d impact liquidity, return outcomes, correlation, etc. In one of these discussions, they talked about what they’d do if they had a cyber attack and couldn’t price their funds on a given day. “Well, we said we’d call the SEC
and tell them, but then somebody asked, ‘who’d make the call and to whom exactly at the SEC?’” So they’ve sorted it out to that level of granularity since.
Cyber security is a big risk in any industry, and Glavin said his firm is working on segregating its networks, so that if one goes through a cyber attack or breach, the others don’t get affected as well. He made the analogy of a submarine: “We’re working to figure out how we can close off certain compartments, so that if one gets flooded, all the other ones don’t as well.”
Some asset management firms use external consultants for network security protection, and T. Rowe’s Bernard said one of the strategies they use is fake “phishing,” which he admits he failed at once. “I opened an e-mail and it was an invite to a picnic, and I clicked on it and it said, “oops, you failed!’”
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