One theme recurs in our new study*: change will be endemic. Like fractals, fund management industry will fragment and regroup while it acquires greater complexity in its evolution.
Capitalising on the emerging opportunities will create different challenges. Successful fund managers will have to play their old game better. The rest will have to navigate through fog to invent a new game far removed from old connections and causality. The new game will be as much about trust as performance. Many fund managers and pension plan sponsors alike have suffered a huge erosion of trust from their respective stakeholders, as a result of the sheer size of losses in the bear market. New rules on ‘duty of care’ will be adding to their fiduciary burdens.
As a result, the critical success factors will be the time-honoured basics of investment management. Both fund managers and pension funds have identified similar sources of success (see chart below). Each were asked to identify five out of a possible 20 inter-related factors.
When this information from our two surveys is combined with what emerged from our face-to-face interviews, the sources boil down to three basics:
Trust = credibility + synchronicity + stability
Taking them in turn, credibility is about track record: delivering what it says on the tin. It’s about matching words with deeds. Clients will no longer accept promises at their face value.
Synchronicity is about the alignment of interests between clients and their fund managers - akin to a partnership in a three-legged race, where the runners in each pair rely on the other’s cooperation to win.
Stability is about ensuring the continuity of the investment culture and talent pool, which raises confidence that past successes can be replicated. More than ever, organisational stability will acquire a holistic orientation that will subsume a range of factors which differentiate an excellent business from an average one. Clients want decent returns. But they also want sustainable returns. They will look out for talent; but more than ever, they will also be interested in the work environment in which talent is nurtured and deployed. The feast and famine mentality of the past is no way to plan for the future.
Thus defined, trust will become synonymous with brand. Either successful managers will have it, or they will have to acquire it. In turn, these changes will require a giant leap forward in execution skills.
Doubtless, for the majority of fund managers, the identified trends will cause tensions between guarding existing revenue streams and developing new ones against the backdrop of rapid change. Nurturing trust in a changing environment will be like climbing a wall that is leaning towards you.
Many fund managers already have appropriate strategies in place. However, in a zero-sum world of absolute returns, what will differentiate winners from losers will be the quality of execution skills in the transitional phase. In this context, four areas have been singled out for special attention:
a. Strategic focus
As the value chain becomes ever more fragmented, three things are vital in developing a clear differentiation:
■ a judicious evaluation of core strengths
■ continuous improvements in the sources that underpin them
■ widely acknowledged reputation in core capabilities that enhance the leverage in the value chain.
b. Client focus
The prerequisites for retaining and nurturing trust with clients will be:
■ regular client perception studies or real-time feed-back
■ greater involvement of clients in the product development phase
■ inclusion of product specialists in client service teams who can straddle the divide between clients and investment professionals. Such specialists may well be experienced investment professionals with the multiplicity of skills that will enable them to understand and anticipate client needs, and orchestrate the necessary solutions.
c. Innovation focus
Product innovation will increasingly require:
■ creating dedicated incubators where ideas breed new ideas, producing solutions for long-standing client needs in areas like risk, liquidity, volatility and service quality
■ setting medium-term revenue targets for new products that encourage the business to become more outward and forward looking
■ creating a fast-track process that encourages people to file new ideas regularly in their part of the value chain, assesses the viability of those ideas, and escalates those worth pursuing
■ encouraging a culture of learning in which people learn by experimentation and share information with colleagues within a team culture.
d. Leadership focus
As in the past, leadership will remain a major challenge. In a period of change, few plans survive reality. Many CEOs are ex-portfolio managers. They confuse the buzz of the investment function with leadership. Business leaders will need to be more savvy at improvising, influencing and listening when:
■ formulating a business strategy
■ subjecting it to reality checks by key stakeholders
■ communicating it to all staff and receiving the necessary emotional buy-in
■ allocating resources and key accountabilities
■ monitoring outcomes and doing course corrections.
Fund management will remain a quintessential craft business. But the next stage of its evolution will require a strong professional overlay - of skills and infrastructure - to exploit opportunities and complexity generated by the inflection point created by the last bear market.
Amin Rajan is CEO of CREATE, a research consultancy. Todd Ruppert is president and chief executive of T Rowe Price Global Investment Services.
*Tomorrow’s Products for Tomorrow’s Clients is available free of charge from www.create-research.co.uk
Keeping a finger on the pulse
The biggest problem that our industry has is that it is the victim of its own propaganda. It is riddled with fads. At best, these say a lot about nothing. At worst, they conceal long-standing problems and give us an excuse to do nothing. The industry always relies on the markets to bail it out. In this house, we eschew hype: we say what we mean, and mean what we say. In practice, that means delivering four things that we are famous for.
The most important one is performance. We have always been in the business of delivering absolute returns in long-only space and we have an impressive record. Many of our alpha funds don’t scale so we close them. Isn’t that what all asset managers are supposed to be doing anyway?
Second, we provide excellent service. Our client service teams are known as external fund managers: they advocate and protect client interests. Their proximity to our institutional clients is so close that they can anticipate client needs before the clients can. The proximity also helps us to fix problems as and when they arise. We do regular client perception studies on top of real-time face-to-face feedback.
Third, our brand means ‘a promise kept’. All our staff have internalised this strap line in their day-to-day conduct, no matter what jobs they do.
Finally, we have a strong debating culture, which provides a strong reality check on all major decisions. This allows us to put anything on the table for discussion and resolution.
Business has grown four-fold over the past 10 years and we have diversified into new strategies. But we have had few growth pangs because all the major issues got de-personalised via debates. Once decisions are made, results are monitored and people are held accountable. The top team walks the talk a lot in order to do regular ‘pulse’ checks.
Because of our partnership structure, we’re seen as a cautious player. That’s far from true. What has helped us is that we apply an unusual degree of common sense to all that we do. As a result, our senior executives are savvy at taking simple ideas and implementing them in a complex environment. “
A US asset manager