Rajiv Jain is well aware of the immense human and economic toll of the COVID-19 pandemic but from the particular perspective of GQG Partners he sees it as a positive. As an employee-owned boutique asset manager, it is in his view inherently more resilient than many other investment firms. He declines to name names, but he sees the business models of many as under threat.
There are two main reasons why he sees asset managers as vulnerable. First, unprofitable divisions are quickly shut down in many investment firms. “I think that listed entities will really be in trouble because they have outside shareholders who can crucify you,” he says. “A lot of larger shops won’t survive.” Jain adds that this is already a topic of discussion among investment consultants.
Just because firms are large it does not mean they are inherently more resilient. The main attraction from an investor’s perspective, says Jain, that scale can give a sense of security. But it may well be a perception that is undeserved.
To make matters worse for many asset managers, he says, they often have a large number of troubled firms among their holdings. “They own a lot of businesses which are on the verge of collapse,” he says.
If the pandemic-induced financial crisis goes on for significantly longer he says it is “not impossible” that “a bunch of US and European companies could disappear”. Under such circumstances, he says a lot of value-oriented asset managers could also disappear.
To illustrate his point he gives the example of an asset manager with €100bn in assets under management and a cost-income ratio of 70%. That means it is operating on a margin of 30%. So if the markets are down, say, 40% then it is already making a loss.
Under such circumstances, many asset management groups will come under huge pressure to shed their asset managers. They will have to keep paying for most of their fixed costs – such as premises and IT – while the remuneration of sales staff is closely linked to performance. “A lot of shops are in a really tough spot,” he says.
Of course Jain is not pointing to the structural weaknesses of other asset managers gratuitously. His main point is that portfolio managers in employee-owned firms have an incentive to stay on during the bad times. In contrast, those who work for listed companies, or subsidiaries of larger groups, may have a greater incentive to leave.
“If the lockdown continues for a long time are we looking at a meaningful recession that sustains for a long time. That is not a zero probability” - Rajiv Jain
This is a situation, Jain argues, that GQG can take advantage of. “Our view is that this is the time to be on the offensive for talent.”
Jain says his confidence in his own firm’s resilience is also based on the conservative business assumptions on which it has been built. “You want to have enough resiliency that if the markets are down 40-50% you don’t have to fire anyone because of that”.
Although such dramatic falls are not common they do sometimes happen. “This is a cyclical business so we have to incorporate cyclicality”.
Jain may be particularly blunt, but he is not the only one making such claims about the advantages of boutiques. For example, AMG, a global asset management company that invests in boutique investment management firms, published a study in April arguing that boutiques are best positioned to navigate market volatility. The study was based on a trailing 20-year period ending on 31 December 2019 – in other words before the COVID-19 pandemic.
The challenges facing the asset management industry were also highlighted in the April edition of the twice-yearly Global Financial Stability Report from the International Monetary Fund. Although it is normally guarded in its pronouncements, it openly declares that “pressure on assets may lead to fire sales”.
“Asset managers may be forced to sell assets, thus amplifying asset price declines. Since the virus outbreak, investment funds have faced large portfolio losses,” said the IMF report. “This led to concerns about actual and anticipated redemptions, especially in the case of fixed-income funds.”
If the fate of many asset managers is open to question so too is the impact on some of the perennial questions facing asset managers. For example, one of the big claims made by active managers is that they come into their own, relative to passive managers, in a crisis. Active managers can, so the argument goes, move nimbly to take a more defensive position.
Whether active managers will live up to this claim remains to be seen. Jain concedes that as things stand “it is a great unknown”.
That other great investment dichotomy – between value and growth – could also take a new turn. In Jain’s view it is not a helpful distinction.
He points to value stocks as “essentially a call on cyclical recovery”. But there is a distinct possibility that this could be a some way off. “If the lockdown continues for a long time are we looking at a meaningful recession that sustains for a long time,” he says. “That is not a zero probability.”
If it is hard to resist the feeling that the world is still in the relatively early stages of the fall-out from the COVID-19 pandemic. That looks true for the asset management industry as it does more generally.