What are the top market opportunities for consultants and asset managers today?
Michelle Seitz, Chairman and CEO, Russell Investments: The buzzword in the industry today is solutions. There are many ways to come at this from the client’s perspective. It's their choice whether we act as a strategic partner in a fiduciary mandate, or as an extension of their staff. Perhaps it’s leaning into private markets and finding ways to make them accessible, or doing an outsourced search for alternatives, or an overlay capability, or developing personalization at scale for ESG. What we try to bring to the table is everything you could possibly need to manage your portfolio and the risks within your portfolio.
We’re trying to democratize access to those institutional capabilities that the most sophisticated clients around the world tap into and bring them to the middle market. Institutionally, there's only 25% of the addressable market that actually outsources capabilities, so we think there is huge untapped potential.
Jenny Johnson, President and CEO, Franklin Templeton: I agree with Michelle. The complexity of our business and the regulation around it is such that clients often want to work with big firms that have capabilities across many different investment teams where they can do a bit more one-stop shopping.
Most of the time when you're talking to partner firms, they're not necessarily saying, ‘tell me about this or that product,’ what they’re saying is ‘what do you think about these macro themes, where do you think inflation is going to be?’ And so we're taking the expertise in our teams and building opportunities for major partners to be able to hear and participate in that debate.
Another area where I completely second Michelle’s comments is in the democratization of alternatives. Companies are waiting much longer to go public, so those growth cycles now are only being captured by qualified investors. What mutual funds brought to this industry was democratization of access to the markets, and now you're losing out on that growth. I think we have to be committed as an industry to figuring it out. I think the tokenization that comes from blockchain is going to unlock it – it's going to help bring privates to the mass affluent in a cost-effective way.
Dawn Fitzpatrick, CIO, Soros Fund Management1: Having spent the first 25 years of my career on the asset management side, one of the things I’ve learned is that, by construct, products are relatively narrowly defined. And one of the things that I've focused on at Soros is having an appreciation for that and knowing where we can do things that the asset management industry is generally not well built for. The two things that are kind of obvious in that regard are, first, really long duration. We can buy a cash-flowing asset and hold it in perpetuity. We don't need a liquidity event.
And then at the other end of the spectrum is being super nimble. When we went into February of last year and realized COVID-19 was going to be a monumental crisis, the S&P 500 was down 33% but then fully recovered by August. It was similar to the Global Financial Crisis, but the speed at which it happened was incredible. The ability to be really nimble and buy assets when there were forced sellers was really important. We had another version of that with the short squeeze in January, and then we had the big value/growth rotation. So that nimbleness is a huge opportunity. Post the Financial Crisis, market structure is really rigid in ways that I'm not sure are fully understood.
I totally agree with Jenny on blockchain. Blockchain will allow for a less procyclical clearing system in the US. All of that is going to happen and I think it's going to accelerate, and the asset management industry and Wall Street generally will be very different because of it.
Michelle: I think the thing we all agree on is that the plumbing and the business model structure has to evolve as quickly as our product innovation does. And that's what's going to unlock the potential value for clients. But it also means we need to have more flexibility and be more nimble to customize at scale for the end client at lower price points.
Suni Harford, President, UBS Asset Management: It is customization at scale, there is something to be said for the consolidation you're seeing in the industry. As margin compression continues for a lot of our clients, they are outsourcing more. But we have to be nimble, we have to have invested in this tech to make sure that we can take advantage of all these things that are happening on the infrastructure side for our clients. So I think that's one of the big trends we see as an opportunity - more outsourcing to professional money managers, especially on the corporate and institutional side. Clients that used to have a staff of 15 might have a staff of five now.
We also talked a little bit around the edges of ESG. One of the trends I see is that impact investing is going to come to the fore, and it's very specific. You're going to pick the cause you like, and your returns might be different than just the financial returns. Most people think of ESG and integration or a passive format, but I think there's a whole other trend coming with impact.
One of the trends I see is that impact investing is going to come to the fore, and it's very specific. You're going to pick the cause you like, and your returns might be different than just the financial returns. Most people think of ESG and integration or a passive format, but I think there's a whole other trend coming with impact.
What challenges do you worry about?
Jenny: At the 30,000 level, if you look in the past, the times where you've had massive technological disruptions like the industrial revolution, rarely did the incumbents do well, because incumbents only marginally improve, they don’t disrupt because there's too much on the line. I think that is a potential challenge. Fees are only going to come down, and the regulatory environment is going to continue to get more complex. That means our back office gets more expensive to manage. And you need to invest in the business, in things like data, data analytics, machine learning, AI, as it applies to not just your investment capability but also the customization that you provide to clients. I think that's a challenge.
And then you have to keep your eye on the wave of FinTech disruption. A lot of it is noise, but the ones that are going to win are going to win big. And so it’s not just focusing on getting the job done today, but also focusing on where the puck’s going to be, as Wayne Gretzky said.
Dawn: We can't have this call without mentioning SPACs (special purpose acquisition companies). Not all but many are showing spectacularly undisciplined processes in terms of their asset purchases, and I worry that at the end of the day, there are going to be some that are well done, undoubtedly, but the majority I don't think will end well for investors.
Suni: There's a vacuum that was created by all the regulation that's come out and one of the things that means is you can't become private without all sorts of hoops to jump through. In SPACs, you’ve got to be careful, like everything there's never only one direction for any product. You have to be smart about what you're getting into.
Michelle: Clients need us, more than ever, to fulfill our fiduciary responsibility to them and add as much value to the equation as they expect. And I think the problem is speculative behavior, which is not surprising, given the huge amount of liquidity that's been pumped into the system and real yields being driven ever lower. I think trust within our client population is going to be tested when you get these speculative bubbles that then burst. It’s not exactly the same as the Global Financial Crisis, but I think we have to be careful to keep that voice of reason constant in the front of people's minds so that they aren't caught frozen at the wheel again.
What about ESG investing, is it a fad or a fundamental shift?
Jenny: I definitely think it's a fundamental shift, but you have to unpack it a little bit. Remember, ESG started out saying, we should consider these risks when we’re investing – environmental, social and governance – because we've seen how they can factor into investment returns. Whether it's through regulatory or climate, these risks can be very real. I also think that it's an opportunity for companies to talk about their value proposition in a much more mission-based way.
And then, finally, let's face it, the data is very inconsistent out there. According to a University of Zurich survey, the top five ESG providers only correlate 57% of the time – but it's going to get better, there's pressure on companies to start. And we also know that millennials, very clearly, care about ESG, and they want it to be part of their portfolios. So, I think as they evolve and have more money, they're going to demand it. And in regards to impact investing, there is absolutely going to be plenty of opportunity for products where people say, ‘I want to do this, I want gender equality and sustainability.’ We’re seeing it already. Europe has led the way, and Asia is starting to copy, basically, the rules that Europe has come out with. In the US, institutional investors all want to talk about it as well.
Suni: Michelle, you talked about it, the holy grail for all of us is that customized portfolio, because as we say there are 17 SDGs (Sustainable Development Goals), and each one of those probably has clients on either side of it so you could call that 34. So what do you think, fad or foundational shift?
Michelle: Absolutely a foundational shift. This is a factor, like any other, and factors influence stock prices. The trick is values customization at scale - and allowing clients to understand what's material and what's not. One topic Jenny didn't touch on, so maybe I'll just amplify it, is materiality. So, for a bank to lower their carbon footprint is one thing, but for an airline, it’s completely different.
I think the hot topic is greenwashing, because ESG is actually very hard to do well, and to do it in a way that has a meaningful impact. To help clients manage risk within their portfolios, or expose them to value factors they consciously want, takes a lot of hard work, and it takes understanding materiality as well. It's not just, as we all used to do, excluding a bunch of things. This has to be much more impactful. Suni, as you said at the outset, we're going to be held to standards that can be measured and performance attribution that is clear.
Dawn: I think ESG is a secular trend that is self-reinforcing because the cost of capital is going to get cheaper for companies doing the right things and more expensive for the ones doing the wrong things. When we're allocating to an asset manager, we do want ESG to be front and center. As Jenny mentioned, the data is lousy. But the more you ask for it, the better it will get, and I think transparency is a really important first step.
Suni: One of our focuses in the alternatives space is trying to drive some of that ESG data collection. Right now, what drives a lot of it is the proxy vote or the annual meeting. On the private side, there is not that same pressure. It has to come from the asset owners or partners or co-investment firms like ourselves. I think this will hit privates very quickly.
One of our focuses in the alternatives space is trying to drive some of that ESG data collection.
What opportunities are we missing in asset management?
Michelle: The markets are missing risk allocation. With this much liquidity coming into the system, we get speculative bubbles. I think the thing that our industry is missing is making sure we keep the clients as the touchstone. It's not about relative performance, - it's not about benchmarks, it's about enabling financial security for people. It's about making sure we understand their needs, holistically and we're managing them and their portfolios in a manner that doesn't create yet another huge problem.
Jenny: I'll follow on what Michelle was touching on, which is the evolution of the industry. In our efforts to measure what we do, we can get really benchmark-focused which may mean nothing to our client. But what I think is exciting is what's happening in FinTech as I mentioned earlier. What we've talked about in customizing investment solutions is actually going to bring wealth management through the financial advisor, in a way that the financial advisor can provide to the mass affluent almost the kind of customization and wealth capabilities that used to be preserved just for the ultra-high net worth.
So you'll see not only customization of portfolios but financial planning and estate planning, because you can leverage technology to deliver those capabilities on scale.
As a client, what aren’t asset managers providing that you'd like to see?
Dawn: We continue to want to see more alignment. I do think in the asset management industry, active investing is really valuable right here and I think it's being proven if you look at some of some of the active returns that have been driven over the past 12 months. They're really spectacular.
How has the pandemic changed the way you look at the industry?
Michelle: I would just say the lesson of the last year to me in a word, is perspective, I believe we've all gotten crystal clear on what the towering strengths are that we bring to the table for clients, and what parts of our culture shine and what parts needed to change. Embracing technology and embracing flexible work structures are good things, but at the end of the day, people do want to be with other people. Adaptability is here and we've all gotten an enormous dose of perspective. And I think that extra focus and that clarity will make a difference to the industry and to our clients.
Please note, all views expressed are panelists own and should not be relied upon as investment advice.