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Monday, June 20, 2016

El-Erian Warns That Conventional Asset Management Wisdom Will Turn Upside Down

Reported by Neil Anderson, Managing Editor

Mohamed El-Erian predicts that big changes are coming in asset management, thanks to where the world economy is heading.

Mohamed El-Erian
Allianz
Chief Economic Advisor
El-Erian, chief economic advisor for German financial multinational Allianz [profile] (parent of asset managers Allianz Global Investors and Pimco) and former CEO of Pimco, talked to reporters this morning at a press breakfast at the Grand Hyatt above Grand Central Terminal in New York City. He sees the world economy and its low-growth mode approaching a t-junction in the three years, with improving conditions in one direction and being "low growth becoming recession and artificial financial instability becoming genuine instability" in the other direction. And that t-junction, he says, has "huge implications for the financial industry."

"It basically turns conventional wisdom upside down," El-Erian says.

Long-term investors, and the asset managers and intermediaries who serve those investors, have "grown up with certain conventional wisdoms" like the importance of diversification, being focused on the long-term, and about cash not belonging in their portfolios. Now, El-Erian says, investors will be asking themselves, "Do I also need to be tactical as well as strategic." Plus, "correlations are no longer behaving in a rational manner and for good reasons," so diversification may not be as much of a free lunch as it once was. And cash now plays a role.

"Cash becomes a very valuable thing to have in your strategic asset allocation," El-Erian says. "Cash gives you resilience, optionality ... and agility."

El-Erian even weighed in on disruption in financial services, predicting that a loss of trust in financial services and a generational shift will contribute to the rise of both passive management and roboadvisors (which he referred to as "roboinvesting").

"They're still at the margin. They should be taken seriously because they will grow in importance," El-Erian says. "It [asset management is being disrupted but it's starting at the margin and it's going to be strong."

Yet El-Erian also sound a note of caution about passive management, saying that it's "not a good thing for many investors" and "particularly a bad thing for asset classes that are fragile" like emerging market investments or high-yield debt.

"Passive investing makes sense in certain circumstances," El-Erian says. "It offers assurance that fees are going to be lower. That assurance is worth a lot in a world where expectations of returns are lower."

El-Erian also focused much of his remarks on the implications of "the advanced economics inability to grow in an inclusive manner". And when asked what he blames for the low-growth messy politics vicious cycle he describes, he pointed at financial services, and at developed nations' collective forgetting "some basic elements" like infrastructure investment, corporate tax reform, and labor market reform.

"We had a romance with the wrong growth model. We as a society fell in love with finance as an engine of growth," El-Erian says. "We changed the name of the industry [from financial services.] Finance got too big." 

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