Cracking the US
In order to compete with the giants serious minded Europeans chasing a substantial sum of assets must be well equipped, reports Rachel Oliver
IS the US a hard market to crack for non-US managers? The players themselves have always been divided on this. It is the land of opportunity with an estimated $7trn in institutional assets alone there for the taking; there is without doubt a need for international investment expertise as pension plans see the benefits outside of the S&P500; and US plans are always open to new ideas, or new angles on old ideas, depending which way one looks at it. However, if you take out from the equation, the managers who have bought their way into the market such as Dresdner, UBS and most recently Allianz, one would be hard pushed to come up with a non-US manager who has really made a successful business there on their own merits.
One of the reasons for this seems to be the emphasis placed on structures and processes – not from the managers but from the clients. The US pension plan could fairly be called the toughest and most demanding kind of client for global institutional asset managers. Much of the reason behind this is that in a market the size of the US, money managers need to be able to clearly identify themselves from the competition. With strong competition from passive managers, there is pressure on active players to be able to account fully for their actions, to be able to be measurable, and precise in what they do, and to be able to stand up to various quant tests that measure attribution and style.
There are many different kinds of buying patterns in the US, but in order to compete with the giants, serious minded Europeans who are chasing a substantial sum of assets, need to be well equipped to cater for all of them. And this seems to be the key to the US. Anything can happen, there are no set rules in the RFP process, but managers are expected to adapt to any situation, and should expect to undergo just as detailed investigation of their firm when bidding for a $20m mandate as they would for a $200m.
And the emphasis on structure and processes does not change if you are passive even if you are not promising the client that you will beat the benchmark. “Not too many years ago, the idea of indexing fell into a ‘dumb’ category,” says Mike Fisher at indexing giant BGI in San Francisco. “But the degree of sophistication that is applied today to create an end result that has the best odds of meeting the benchmark at the lowest possible risk to achieve that requires far more tooling than anybody could have envisioned a decade ago.
“If you look at our systems here and the way they are developed around the use of passive products as the core and the use of satellites around them, that as a trend with the passive element continues to increase in terms of its portion of the total because there is no denying that the price of trying to beat the benchmark with so-called active traditional strategies is an expensive one, and that is increasingly recognised and not just in the institutional segment.”
Taking an extreme example of how a plan sponsors investigation of an asset manager works, Theresa Snyder, head of marketing at SSBCiti Asset Management in Stamford explains: “There are pension plans that ask for holdings, not only in their own portfolio but will ask for the holdings for your representative account, as an unmarked account. And they will then do their own analytics. And they will grill you on why exactly you bought this stock and why did you sell this one when it was going up? And sometimes it is because they simply don’t understand why you bought or sold that stock and sometimes they ask you because they want to feel that you did it because it was no longer in your style, because it no longer fits your process. So it is not a right or wrong answer, but they are the kinds of questions that tell them about your style. Are you doing what you are paid to do?
“They then get very, very detailed and really look at what you paid, what you sold for, how long did it take you, how are you timing your transactions, it is amazing the details some people will go into. In some more complex asset classes you may have to spend five or six hours with them before you are awarded the business, and they will spend five or six hours with several managers.”
This attention to detail has typically come from the DB corner, but DC plan sponsors are now becoming increasingly aware of their responsiblities, albeit slowly. Over the past five years a group of DC sponors particularly the large multinationals funds and certainly the large public funds, have become more interested in how their money is being run. The driving factor behind the focus on structure and process has stemmed not surprisingly from the rapid growth in DC assets, and the realisation of the levels of responsibility now landed firmly on the shoulders of the human resource professionals.
“They are looking for a clear, methodical style, a fund that will complement their menu,” says Snyder. “US plan sponsors are incredibly sophisticated and perhaps that reflects on how the role of the consultant has changed. Many consultants do a lot more searches than they do asset allocation studies, simply because the plan sponsor already pretty much knows exactly what they want. But there are so many high quality managers in the US that want to be evaluated that often the consultants role is to sift through them and not just find out whose good but find out whose style is going to match with the style of the plan sponsor.”
Recent studies carried out by the likes of fund rating agency Moody’s Investor Services has shown discrepancies in some European, notably UK, managers’ approach to style investing. Basically, fund managers have not been managing money in line with the style they have been professing to be. You cannot under any circumstance get away with that in the US market and that is one hard lesson some managers will have to learn on arrival in Wall Street. That is an evolution that the US market has already gone through.
“That’s why in the US market we use a lot of peer universe comparison because sometimes everybody is under the benchmark. Unfortunately, we don’t like that but if a style is out of favour, it is really up to the plan sponsor as to how they want to rotate and how they want to allocate the funds and they want control over that. They don’t want you to make style decisions for them, so for managers that are not used to operating that kind of an investment culture, it would be a new thing and it is hard to believe that you won’t be fired for doing that.”
However, all is not so regimented in the US market. The consensus is that there is a trend emerging with some plan sponsors who are giving more asset allocation power to the managers in its stable which includes switching styles if the manager believes the need is there, bringing true meaning to the term discretionary account. This less stringent approach appears to favour those multi-talented, multi-product managers with a couple of universities currently looking at money managers who have a broad based capability in terms of managing money.
Jo Rubarsky, director of marketing at Dresdner RCM in San Francisco, admits that the increased sophistication of plan sponsors means US managers do tend to find themselves with a bit of an edge, but insists that perseverance is all that is necessary for Europeans looking for assets. “I think there may have been more pressure to have been more innovative in things like portfolio construction and portfolio analytics so there can be much more transparancy to what we do.
“On average a lot more US firms have been more successful, but at the end of the day, how long does it take to learn how we are doing it? US people are being hired all the time by foreign firms, I just think it is a matter of time before things level out – the secret won’t stay that way forever.
“Foreign managers can break in,” say Bill Cvengros CEO of PIMCO in Newport Beach. “It is far easier for them to break in here than it has been for companies who have been trying to breaking into the UK.”
Bank of Ireland Asset Management has been a key European flag waver in the US and has stood out in the US industry’s minds as an outsider who has truly cracked the market. “They have had a real story to tell, they come in thinking somewhat differently, they are thinking professionally and they are thinking of performance,” says Cvengros. “To make a big impact here, someone who wants to get a meaningful market share, $25bn or more US-based assets, you probably have to buy somebody. It is too hard, it takes too long to do it yourself. There are just so many other competitors.”