Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Asset managers’ confidence in the status quo ‘misguided’: Northern Trust
Traditional long-only equity managers are facing a tumultuous time, with 57 per cent of the 151 surveyed in a new report from Northern Trust and Coalition Greenwich citing volatility as the top industry challenge. But while that should “provoke a sense of urgency” as managers look to protect their existing franchise and set it up for further growth, 82 per cent say that volatility hasn’t impacted their growth plans and that renewed competition from “substitute” competitors like private equity and hedge funds will pose only a minor threat.
“When combined with only 19 per cent of respondents also acknowledging competition from other long-only managers, the relative lack of attention on competition could lead to some surprises down the road, as convincing asset owners to stay in long-only funds may become more difficult,” the report says. “Competition will continue to increase, and firms will need to differentiate their offerings from both traditional and non-traditional strategies.
“As such, the confidence asset managers have in their status quo may be misguided. The depth and breadth of structural shifts in the investment landscape that have been somewhat obscured by market chaos suggest the status quo won’t work for much longer. Retooling or at least re-examining current operating models is increasingly key to keeping up with (and staying ahead of) peers.”
Aside from volatility, regulatory change and shifts in client demand topped the list of worries for the industry at large, while managers burned by the Covid-19 pandemic and invasion of Ukraine are also fretting more frequent black swan events. The top internal challenges that fund managers cited for the next three years are performance at 59 per cent, talent management at 50 per cent, and rising costs at 44 per cent – but they’re still not looking to shake things up.
“Our research indicates that managers appear ready to double down on existing strategies,” the report says. “Forty-seven percent state that to achieve alpha, they will implement a more disciplined investment process, and 41 per cent will focus on high-conviction ideas. The last few years certainly had unusual events, but it is noteworthy that managers do not plan to make significant strategy changes to address performance concerns.”
Managers with less than $10 billion in FUM said that they would focus more on cost-cutting than creating new products, but 52 per cent of respondents have made new strategy or product launches their top strategic priority, with 37 per cent focusing on improving sales and distribution and increasing market share in current products.
“For many, the past few years have felt like one massive effort to extinguish pop-up fires, and asset managers did well in their immediate responses to those challenges,” the report says. “Of course, there is no rest for the weary, and as the industry moves ahead, the necessity of longer term strategic plans becomes more important.
“Indeed, the investment industry will continue to rapidly change even if the tumult decreases. Yet, according to our research, some asset managers are comfortable with their existing platform, despite concerns that it is perhaps not optimized for the future.”
