Asset management as an industry is becoming increasingly important for a variety of reasons.
The world is getting wealthier, driven by growth in emerging markets. The burgeoning middle class in China and India mean that millions of people are purchasing wealth products, while new dollar millionaires and billionaires look for high net worth wealth solutions from private banks such as UBS and Julius Baer.
Entitlements and pensions in the first world are faced with unfavorable demographics and low interest rates, as well as higher demands from voters.
This bodes well for our readers who look to work in financial institutions – this means many more investing and support jobs at global traditional giants such as Blackrock and Fidelity, alternative managers such as Blackstone and Apollo, the Big Banks such as RBC PH&N and TD Asset Management as well as boutique outfits.
Here are some trends that are good to keep on top of:
Funding Shortfalls and Prescriptions
Public sector pensions do not have enough assets to satisfy their obligations under any realistic expected return measures. Pension service (which rating agencies and most good credit analysts consider pension obligations to be a debt-like liability) and spending above taxation creates a deficit, which must be funded by debt. In Canada, there is an implicit backstop for the heavily indebted provinces – most investors expect the Federal government to bail out provinces should they run into difficulties with their payments. In the US, no such implicit guarantee exists, and several States are on watch. Asset managers are increasingly given new mandates to take on more risk to meet returns that are required to match the cost of liabilities.
In the US, the municipal bond market (cities issuing their own debt) is gigantic – cities do default when they fail to raise enough funds through taxation and grants to service debt. Muni bankruptcies are not new, and a famous recent example is Detroit. Most investors are now looking at Chicago as the possible next domino to fall.
Shifting Global Landscape
Sovereigns are also looking for more aggressive growth and diversification, especially when a large source of country wealth and taxation is derived from a particular industry (noticeably Saudi Arabia and Norway, where oil production plays a large part in each economy). Sovereigns are increasingly turning to best-in-class asset managers from both a traditional (Blackrock) and alternative (Blackstone) background to help achieve these goals. This strategy, paired with structural changes driven by government policy (education, power) is designed to position a country for the next generation.
Smart Beta and Robo-advisers
A host of alternative investing options have appeared alongside improvements in technology.
- Smart Beta is an adjustment to beta exposure (replicating an index) by looking for efficiencies to add value (alpha) or meet a mandate. A simple example could be taking the S&P 500 and taking out all of the high volatility stocks.
- Robo-advisers automatically adjust an individual’s portfolio based on configurations set by the individual. Generally, most of them use asset allocation strategies that will shift the portfolio based on how much risk it deems the portfolio can take. The major players in this space are Wealthfront and Betterment. These are tailored towards US tax and legal structures. Canadians do not have a prominent roboadviser yet, but banks are looking to get into this space (BMO).
As we discuss in our investing section on this site, money has been flowing in large volumes out of actively managed funds (the average mutual fund) to passive index investing via Vanguard and Blackrock. More investors are questioning the justification of mutual fund fees when holdings do not vary that far from indexes and alpha is not generated or is negative (the average mutual fund does not outperform the stock market index). Additionally, the cost of holding an index becomes cheaper and cheaper and Vanguard and Blackrock continue to reduce fees as they can make money from lending holdings to short-sellers and collecting carry (securities lending).
However, given that stocks are starting to move in tandem due to this trend, the opportunity to outperform using active management will become easier in time. There will be much more bleeding from the active management sector and shutterings of firms and mergers before this becomes obvious (a recent example being Bill Gross of ex-PIMCO fame having his Janus Capital Management consolidate with another hedge fund for cost and network synergies).
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