A money manager must do all of the technical jobs at an acceptable level
just to get in the game. At a minimum, investors require money managers
to be able to deliver risk-adjusted alpha at lower cost. We see possible
disruptions where funds are highly leveraged, high volatility and highly
concentrated. These funds cannot meet the minimum level of technical
proficiency and cannot withstand withdrawals during significant down
years. We see the average lifespan of a hedge fund is
5
years;
within a
three-year
period
about
one-third of hedge funds disappear.
The cookie cutter approach to money management is no longer adequate.
Today’s investor base is global and diverse along culture, gender and
demographic lines driving unique investments needs. As a result, money
managers will have to be able to adapt their business models and offer
appropriately scaled service levels at the right cost.
Jobs at the emotional level create a deep connection with investors and
lead to enduring relationships and improved economics through lower
churn for managers and allocators alike. The ability to do the emotional
jobs well can transform an asset manager into an institution - likely to
scale and to stay in business for the long-term. We have found that
customers may not clearly express or even openly admit that they value
“emotional jobs” at the same level or higher to well known functional
jobs. However, the money managers that perform these jobs well - jobs
that may be more “social” or “experiential” - will consistently
attract more assets.
-
Customer service is critical for both retail and institutional
investors.
Investors look for money managers with ability to make sense of the
cacophony of information and disparate investment advice. Further, they
need highly customized and often personalized help to shape their
investment strategy, sorting signal from the noise. The high importance
money holders place on customer service, therefore, calls into question
the viability of technology-only investment platforms and the black box
hedge fund model of
“give
me your money and wait for your annual
report.”
In the institutional space,
Bridgewater
has a “bend-over-backwards-for-clients” internal culture. Bridgewater
offers both large, highly skilled client service teams and a proprietary
analytics team. The client service teams are staffed with professionals
capable for being portfolio managers in their own right, while the
analytics research is provided to clients at no extra charge. In the
retail space, in addition to expertise, investors value empathy in their
financial advisors:
“An
empathetic financial advisor is one who truly listens to clients,
ensuring they feel understood and who demonstrate that they care.”
Joseph
Reilly Jr., a private wealth advisor in Greenwich, Connecticut, says
that advising people about money is being “part financial expert, part
shrink, part friend and confidant, and part entertainer.”
-
Investors want transparency into what is actually happening
with their money. As the Millennials begin to invest their own funds
or become CIOs at asset allocators, they will expect the same “at
your fingertips” accessibility to their portfolio that they now have
from their Facebook account. Some money managers are beginning to
adjust:
ARK
Invest offers several ETFs with near-real-time exposure of their
individual trades. Goldman Sachs recently announced that it will share
some of its
secret
trading sauce with its clients.
Regulatory requirements and painful past experiences in money management
(e.g., Madoff and other high profile frauds) have put transparency high
on the priority list for institutional investors as well. According to
the
New
York Times, “Earlier this year, a senior executive of the California
Public Employees’ Retirement System, the country’s biggest state pension
fund, made a surprising statement: The fund did not know what it was
paying some of its Wall Street managers.” The investment agreements
that institutional investors often give enormous leeway to managers to
pass questionable costs on to their investors.. Recently, the Carlyle
Group passed on their limited partners the cost of
a
$115 million settlement of a insider trading lawsuit - clearly a
failure of its own internal management. The opacity of these
arrangements creates an opportunity for companies such as
Vitrio,
Novus,
and
AcordIQ
which provide technology platforms to institutional investors for
systematic oversight of fund managers. Scott Evans, CIO of the New York
City Retirement Systems, one of the largest public pension systems in
the US, and other industry leaders are beginning to establish best
practices around a revamped due-diligence and ongoing governance process
to increase their insight and systematically build transparency in their
investment programs.
-
Money holders want to learn how to be better investors: The
under-resourced and often “relatively” underpaid institutional
investor, the family office, and the smaller retail investor all find
it difficult to keep current with market trends. They may have little
understanding of the arms race around esoteric asset packaging rampant
on Wall Street, or how high frequency trading actually affects the
market. It falls to money managers to educate investors on how new
strategies work, although potential conflicts of interest abound. The
fastest growing sector in investment research for the last two decades
are
expert
networks, e.g.,
GLG. These
networks displace what some managers considered their investment edge
– a proprietary group of expert relationships built up over years in
the business. The expert networks offer direct access to experts on
any possible category for on-the-fly education. Northern Trust’s
private wealth practice has built an analytical platform that educates
high net worth individuals about designing customizable portfolios
specific to their unique circumstances. Both these companies are
strengthening the decision-making capabilities of their clients.
-
Investors increasingly desire to put their money where their
heart is - whether it is based on social consciousness, religious
views or a hobby: According to Patrice Viot Coster, COO of AXA
Investment Managers Research: “People may want to express openly who
they are through their investments: I am what I invest.” We do not
mean the philanthropic activities of hedge fund billionaires, but the
general desire of the average investor to positively impact the world
through their investments. Social impact or “green” bonds offer a
creative way for investors to invest in companies offering returns
linked to achieving certain defined social impacts. Religious
institutions (e.g., the Catholic Church and Mormon Church) and
religious individuals/family offices look for investments that are
compliant with their religious views. For example, consider Omar
Bassal, head of asset management for
MASIC,
a shariah-compliant family office based in Saudi Arabia. He structures
investments in public equity, private equity and real estate to comply
with Islamic restrictions regarding business activities and interest,
among other things. At the hobby end of the spectrum, some investors
buy Berkshire Hathaway stock just to get an invitation to their annual
meeting. This is also true of those who put money into art, wine,
jewelry, antiques, stamps, or even a sports team. These investments
are often more for personal utility than financial investments. We see
empty nester Baby Boomers in the West and nouveau riche in Russia and
China driving up the value of these
“passion
investments.”
That is not to say that all disruptive opportunities exist only in the
emotional realm. In the retail space, investors have technical
requirements - from wealth transfer to estate planning - that are
broadly served by the private wealth managers. Interestingly, we found
three specific functional needs that stand out as an underexplored
opportunities for emerging disruptors:
-
Retail investors increasingly care about how much money they
take home, not the gross return - before taxes & fees - reported on
their investment statement. Poorly managed taxes and transaction
costs can
kill
investment returns. As protection, robo-advisors provide automatic
tax loss harvesting to help investors minimize taxes. Some specific
investment instruments also aim to minimize taxes, e.g., life
insurance for inheritance planning and municipal bonds are
tax-advantaged products. An emerging manager,
Greenline
Partners,
offers
a risk parity model not common among money managers serving
institutions. The Greenline solution focuses on tax minimization by
understanding the long term impact of deferring taxes and overlaid
with a unique tax loss harvesting methodology.
-
Helping savers apply self discipline is also a simple but
effective way to add differentiation. Just as with losing weight,
there is no shortcut to amassing investable assets. Money holders need
to start by putting money aside, which requires discipline. There are
business models that encourage such discipline, including certain
retirement pools, e.g., 401Ks, which charge penalties for early
withdrawal. This has two benefits: it allows the money manager
responsible for the 401Ks to make long-term investments, and it also
increases the likelihood that the retail investor will have more money
for retirement. Many advisors automatically withdraw each month an
investment allowance from their customers’ bank account.
-
Thematic investing takes the guesswork out of the equation:
Traditional investment consultants offer very granular tools to
diversify along the investment spectrum. Today, some money managers
offer highly targeted funds for money holders who want carefully
defined target sector exposure. For example,
Motif
Investing enables individuals to invest in a given theme (a
“motif”), e.g., all stocks that benefit from a theme of the
‘connected car’. Investors can effectively custom-design their own
fund according to any theme that they believe in. Investors may also
look for target exposure to markets that they cannot easily trade,
such as frontier markets which may not be open to regular investors.
for example,
Himalaya
Capital offers access to Chinese Equities. Shehzad Janab’s
Daman
Investments hedge fund provides access to the UAE market. These
targeted opportunities can, at times,
outperform
developed markets. However, investors should be prepared to accept
local economic risk, political risk, low liquidity and well as lack of
diversification within the themes.
At the institutional level, separately managed accounts and special
purpose investment vehicles are gaining popularity as two ways to meet
allocators technical or functional needs. For this group of investors,
often with substantially divergent investment needs, we note two
pressing needs:
-
Pension funds and endowments struggle to match liabilities and
obligations. Institutional investors, in particular, do not care
about the highest return per se, but want assurance that they
can meet their financial obligations. This is particularly true for
retirees as well as many institutional investors such as pension funds
and endowments. This functional need is dominating internal
conversations at investors that are working to meet long term
obligations. Bond funds, a traditional source of cash flows for asset
& liability matching, clearly struggle to offer critical returns in
low or near-zero interest rate environments. Alternatively, commercial
and multi-family real estate funds, which provide a blend of annual
dividend-like payments and opportunity for appreciation at exit, have
also become a popular investment for liability matching.
-
Political and “public good” goals rank high on the agenda of
government-owned money managers. Special interests, preservation of
power, and economic development goals can all be part of government
investor agendas at city, state and federal levels. Such investors may
have defined public service goals, e.g., invest in companies in their
home state or support minority owned businesses. Similarly, sovereign
funds in the Middle East look for ways to invest locally in industries
that decrease their dependence on the energy sector. Yet, we see few
money managers that specifically target the unique needs of these
public or quasi-public managers on these dimensions.