People before brands
A brand name is not enough to guarantee asset manager performance – it is people that count, says Watson Wyatt’s European investment consulting head Kevin Carter. “A brand name for brand name’s sake is not a sufficient condition to obtain outperformance,” he told the World Cup of Investment Management in Barcelona.
There were several factors that mark out the ability of firms to attract and retain talent, Carter told delegates.
These included the leadership in control of its own destiny, a stable corporate structure, the management of asset growth and the alignment of client-manager interests.
Carter said that these typically are not likely to be found in the large firms and certainly not in the large unitary ones. The kind of firm that does deliver these things needs to be more aligned with the client’s interests
“These are usually niche firms,” he said. But he noted that just having a niche firm does not guarantee performance. “But if you do want performance you may need a niche firm constructed in such a way that helps you deliver it.”
Employee ownership and commitment are typically regarded as being supportive of fund performance, as is having a smaller number of clients. Another factor he referred to was being more willing to adopt fixed fees and performance fees.
The traditional argument in favour of large firms - size of assets, higher IT spend, distribution power and in-house synergies - are no longer valid. “You should ignore brands for brand’s sake when picking an investment manager,” he reiterated. There are some areas where brand would be of advantage, he said, referring to liability matching, passive investment and enhanced indexing where size actually helped.
As to what firms would attract talented people in the future he though the boutique model would be the winner but some boutiques could be within larger firms, he pointed out. “The best firms will be those with the best people.”
Enhanced indexing managers are continuing to attract assets, but it was too early to judge the performance of those managers offering international products, said Margaret Stumpp, chief investment officer of New Jersey-based Quantitative Management Associates told the conference.
She said that there are not that many international participants. An analysis she undertook of the international managers covered 15 investment firms offering 19 strategies with tracking error of 0.25-3.50, where figures were available for at least three years.
The international strategies were for managers using an EAFE benchmark. The assets they had under management came to $76bn (E63.7bn). “This is a figure that was virtually zero three years ago,” said Stumpp.
In a separate study of the US domestic arena she covered 50 strategies from 40 investment firms covering £222bn (e323bn) in assets. One difference she noted between the domestic and the national managers was that the cash management approach used in the US was not being offered. In her view there are “significant conceptual advantages to enhanced indexing”.
Managers generally were performing well regardless of the approach they took in their investment processes which included quantitative, derivative- based traditional or cash based. As international and global products emerged with similar attributes she noted, that the cash approach was not being offered.
She emphasised that for US products “there is a lot of ground to be made by combining different managers”.
Institutional investors were put into the dock on their approach to commodities indices, at the conference.
“If the institutional investor is a hammer, all investment problems are supposed to look like nails, and we force commodities into indices, for better or worse,” said commodity expert Howard Simons, who is a strategist to Bianco Research and president of Rosewood Trading, both US-based.
“We have seen widely divergent approaches to the construction of commodity indices, which indicates we have no a priori knowledge to construct one properly,” he said. All approaches, in Simons’ view, were no more than “ad hoc responses” to past performance as they seek to attract investment funds.
He thought that commodity index funds were handicapped because, among other reasons, commodities tend to be mean reverting over time. “Neither they nor anyone else can promise a long-term bull market in commodities due to the self-correcting nature of commodity price cycles,” he added.
He pointed out that just as indexation can produce absurdities in stocks, it can also produce “crowding effects” during the monthly roll. “What worked with $5bn may get awkward at $70bn, when everyone knows the dates and quantities of the trade.” This invited front running in his view.
He warned about the care needed when investing in commodities, pointing out that in contrast to equities, fixed income and real estate, commodity futures are by design a “zero-sum game”.
“The cyclical and mean reverting nature of commodity prices and their observed declining constant dollar prices overtime should give pause to those seeking this as a source of return,” said Simons.
However, he said that petroleum markets might be an exception here, as crude oil is produced without replacement and there is no recycling, as there is with gold and other metals.
He pointed out that higher commodity prices will encourage future production and discourage demand, which was a self-defeating strategy.
“We are in a self-fulfilling bull market at present wherein higher prices attract new funds. This is referred to as a ‘bubble’ in other walks of life.”