The US asset management industry is at the eve of a great reshuffle, where the war for talents will play a crucial role both for companies offering services and for institutional investors. To take advantage of the opportunities raised in the new environment, investment industry veteran John Casey has just set up a new firm, Casey, Quirk & Acito LLC, based in Darien, Connecticut. His partners are Kevin Quirk and Christopher Acito. The three founders and partners were all executives of Barra Strategic Consultant Group, the consulting branch of Barra, which has decided to focus its activity on the analytical tools it sells.
“Our new firm will be more like a merchant bank than a consulting firm,” says Casey. “Within Barra we worked on projects as advisers and were paid by the time, as it is the standard. Now we will be able, not only to operate with clients, but also to become their partners with long-term economic goals. We already had the opportunity to do so in the past, but we could not exploit them”.
Casey is the chairman of the new firm, with 34 years of experience in the sector. He started as a director and head of manager research at Callan Associates, was a founder of investment manager research at Paine, Webber, Jackson & Curtis and, in 1976, co-founded RogersCasey. This he did with Stephen Rogers, with whom he had worked at Dreher, Rogers & Associates. Then RogersCasey was sold to Barra. Prior to joining Barra Strategic Consulting Group, Quirk worked for Coopers & Lybrand and for American Express. While Acito worked for Booz-Allen & Hamilton and served as an economist for the President’s Council of Economic Advisors in both the Bush and Clinton administrations.
“We are in a very dynamic period for the asset management industry,” explains Casey. “We are likely to see a reverse of the consolidation trend that took place in the 1990s. The trigger is the growing awareness among big financial groups that pure asset management is not as profitable as they had anticipated”.
In the past, common sense was that the asset management industry was a great business to be in. Operators thought that the economy of scale would work and make huge profits, with costs of back-office, technology and money managers remaining more or less the same for $1bn portfolios or $10bn ones, increasing assets under management would mean more management fees and thus more earnings.
“Actually, it turns out that in average asset management (not including private banking services, ie, advice to clients) contributes only 5% of big financial groups’ earnings. That is because, after the market boom, growth in the asset management industry has slowed down, while people have become very expensive. We can really talk about a compensation inflation,” Casey continues.
“Big financial groups are realising that they cannot have portfolio managers in-house any more and they’d better focus on relationships with clients,” says Acito. “The open architecture business model is already a reality, with big groups’ financial brokers and private bankers selling products made by different ‘factories’. On the other hand, it looks like large entities are not the better environment in which asset managers can thrive. Money managers need independence and to be linked to long-term results through stakes in their firm”.
That’s why, recently, a lot of smart people have been leaving large organisations and setting up their own investment companies, which are very often hedge funds. “In 1979 there were only three hedge funds in the US,” Casey points out. “Now, there are 6,000, managing around $500bn. It is remarkable. It shows how low the barriers are to enter the industry and how much the market hungers for talents. Maybe a few of these independent managers will be around in three or four years, but the good ones will easily outperform the big firms”.
Among the ideas Casey, Quirk & Acito is going to work on include setting up new investment companies and helping with management buyouts: “We can assist a big firm’s asset management department becoming private,” elaborates Acito. “Venture capitalists could finance the operation, which can be very friendly. The old group can indeed keep a stake”.
“The current environment of low returns is very favourable for the success of innovative strategies and innovative firms,” says Quirk. “We have fantastic opportunities of finding good businesses to become partners with.”
“It reminds me of the mid-1970s, when the industry was enormously concentrated,” recalls Casey. “In those days, 85% of assets were managed by only 16% of the organisations. Big firms performed so poorly, that in the next few years they lost most businesses. New boutiques came up and smart people took advantage of new opportunities. Institutional investors, namely pension funds, drove this trend.”
According to Casey, pension funds will welcome the new tendency to smaller and independent firms. “They have always preferred them, because they are more stable. Money managers stick with their firms if they have a stake in them. There is nothing more upsetting for pension funds, than hiring an investment company and discovering after a while that the smartest money managers have quit.”