Column: The Death of (Most) Asset Managers

From aiCIO's November Issue: “I seen the future, but I got nothin’ in my hand.” —Die Antwoord

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For a generation and more in asset management, a rising tide (more assets, more asset classes, stable fee levels, tolerance for underperformance) has rewarded players of every stripe. Occasionally, firms imploded or hemorrhaged assets—but only on the margin.

In a handful of years, we have rocketed into very different territory. The margin has become the mainstream. Most asset managers are looking into an abyss. For most managers, stagnation will replace prosperity. To survive, let alone thrive, radical rethinking needs to replace complacency. We are about to see a great concentration of institutional assets in a handful of firms.

Much of the change stems from the radically different demands of the ultimate consumer, particularly institutional investors. Many large asset owners, corporate defined benefit plans in particular, no longer require what the vast majority of asset managers purport to be selling, which is the ephemeral promise of alpha. Instead, they want strategies that are heavy on risk mitigation (alternatives, overlays, and liability-driven investing [LDI]) and are on a path to risk transfer, which means termination. In short, they want solutions, not product.

Public funds face a different challenge, but their ultimate resolution will be no less kind to most asset managers. The big winners here will be private equity firms, a handful of large hedge funds with no capacity issues, and, most importantly, the handful of large multi-class asset managers with the ability to create and service strategic relationships.

Foundations and endowments will increasingly move into the alternative space; they have specific risk/return needs that simply can’t be met by the long-only community. Outsourced CIO solutions will continue to thrive.

The defined contribution marketplace is also moving away from the traditional asset manager. As 401(k) plans become increasingly target-date centric, which they inevitably will, a handful of providers will enhance their dominance. These target-date solutions will evolve, but the winners (again!) will be risk-mitigating strategies like LDI, hedge funds, and retirement income overlays.

Retail is the last refuge of the stock-picker and, indeed, of long-only. But even there the future is about ETFs and not mutual funds, and about passive rather than active. The dirty secret is, of course, that few really believe any longer in active long-only management. There are no more Bill Millers or Peter Lynches who, year after year, produced alpha and hoovered up assets. No doubt they’ll come back into favor—after all, everything does—but not for decades to come.

How many asset managers are relevant to this new world? Perhaps 10 out of the top 50 asset management complexes in the US. And exacerbating this ruthless winnowing in the asset management community is the evolution of client service. The investment world has become so multi-dimensional and complicated that most asset-owners can no longer get by as decision-makers, even with the help of a consultant. The rise of outsourcing is, in large part, a function of the growing understanding that asset management has become too complex for plan sponsors. Going forward, the top tier of asset managers are going to have to bring to the table a whole new level of intellectual capital, analytic tools, and client service mechanisms—as well as an ability to offer open-architecture investment outcomes—to properly serve their institutional customers.

Few asset managers can even pretend to play in this space. Which, of course, is why this reality will be denied for some time yet to come. Even if you can read the writing on the wall, it doesn’t help you if you don’t have the product, culture, or capability to thrive in a new environment. For many, like Die Antwoord’s Ninja, you might well be able to see the future, but you’ll still have nothing in your hand.

Charlie Ruffel, the founder of aiCIO and Asset International’s other media brands, is a global authority on retirement, asset management, alternative investments, and securities services issues. He is now Managing Partner at Kudu Advisors, which provides M&A and strategic advisory services to institutional asset management and global asset servicing businesses.