| Dec 02, 2012
"The reason we hire big managers is because, if something goes wrong, they will fix it internally. Its too hard for our Investment Committee to fire a manager, so we rely on our managers to respond themselves" - CRA's pension plan sponsor, 1993. This comment still resonates with me nearly 20 years after the conversation. Back then, there was a clear connection between brand and quality in the Asset Management industry. Can the same be said today?
Probably not. Over the years there have been mergers, breakups, bankruptcies, scandals and illegalities affecting nearly all the major financial brands in the market. Citi, Barclays, Goldman Sachs, Lehman, JPMorgan, UBS, RBS, HSBC, Standard Chartered, Merrill Lynch etc etc roll off the tongue while the rest share the same criticism - just about every major financial institution has had their brand tarnished in some way or another. Financial brands are no longer an assurance of quality.
Those of us in the markets are wary of 'recommendations' from major houses. We are skeptical that fees dominate their motive rather than sound advice. Who can an investor trust?
Quality of advice, quality of process, quality of performance and quality of service are in a vacuum because the major brands have squandered their moral high ground. The Quality Vacuum, however, creates an opportunity for others to occupy and win the confidence of investors. Who is best placed to fill the void?
Alternatives and Boutiques, that's who. This Asset Manager group has hitherto operated outside of the mainstream, since the big brands grip was unassailable. The core-satellite structure is an example where the bulk of assets are managed by a core branded manager while small allocations to 'satellite-managers' might include the odd boutique. Alternative and boutiques needed to distinguish themselves as significantly different from the mainstream to gain attention, therefore pidgeon-holing themselves at the outer-edge of the industry. But the Quality Vacuum that the major brands have brought upon themselves changes this message - Alternatives and boutique can now argue that they can offer the SAME services as the major brands, and do it BETTER!
Quality, quality, quality...one only needs to look at the legions of highly qualified and experienced investment professionals who have voluntarily left the major brands to start their own operations to know that quality is transferable and leaking away from the majors. A small shop with 3 or 4 professionals can offer the same or better advice to a $100m Family Office that one of the majors can - the only difference is that the $100m family office would be considered too small to bother with by a major!
If the Alternative and Boutique sector embraces the quality issue then the opportunity is to collectively own the mainstream asset management space. The following opportunities exist,
1. Despite the scandals and lost respect, people are still getting richer and they still need their money managed. Something like 4% of GDP is spent on financial services in the US, so this represents the size of the cake on offer
2. Fund of funds can re-orient their focus from delivering outstanding performance to delivering quality performance (a subtle but significant difference - top quality does not mean highest return)
3. Alternative asset management funds are surprisingly competitive fee-wise if investors go direct to the manager. There is a role for an aggregator who measures quality and offers a conduit for investors to access managers.
4. Product is perhaps the biggest opportunity. Rather than offering niche structures that are expensive to construct and operate, new products can be simpler and even traditional in structure. The reason being that high quality investment expertise is the characteristic attracting investors as opposed to complexity or obscurity.
The losers from all this will be the three or four layers of management back at the HQ's of the major brands that are responsible for the current state of disrepair...