In the summer of 2009, one big thing was making itself evident to me. Asset owners, the poor cousins in the investment business—the Muppets, in the immortal framing we owe to the publication of a trove of Goldman Sachs emails—were beginning to feel their oats.
This was new, and it threatened to unhinge a long-established order. That order had it that good asset managers did well for their clients, and did exceptionally well for themselves. Good private equity firms and good hedge funds also did well for their clients, but did breathtakingly well for themselves. Mediocre asset managers did not do well for their clients, but did well enough for themselves.
There is no rule that Muppets who stand and wait will get served, and for generations the men and women who controlled the enormous institutional funds that drive asset management sat quietly in the back of the bus. The most ambitious of them simply switched sides and became asset managers; the rest of the flock enjoyed the psychic reward of being wined and dined, not choosing to bother with the unfortunate fact that every salesman who doffed his cap at their door probably earned twice as much as any client they were pitching to. It didn’t help, of course, that many corporations never quite understood the value that good stewardship of pension assets added to the bottom line. Public funds—where too many states treated these asset pools as social policy tools or piggy banks to be broken into as a first resort, and where investment staff were paid salaries which prompted them to leave at the first opportunity that presented itself—likewise guaranteed their own mediocrity. So Muppets they remained.
This began to change in the foundation and endowment world where, seemingly overnight, it became obvious as the century turned that real talent lay in places like Harvard and Yale. It was initially unclear whether—besides the respective CIOs—real careers were to be made there, but you had the sense that these were asset owners who were unlikely to be legged over. You started to hear talk about cutting fees—blasphemy!—and co-investing. Two and twenty, the war cry of both the brilliant and greedy (and who could know which was which?), began to be examined more closely. Sovereign wealth funds began to gradually look less plodding and more deliberate in their investment choices. The Canadian funds began, in fits and starts, to get their corporate governance right. Corporate plans like IBM—for this last decade the gold standard—began to drill down to truly innovative and selective use of managers.
By 2009, the whisper of this promise became more audible. It seemed possible that these asset owners deserved their own voice, their own platform. On this premise, what is now Chief Investment Officer was launched.
We have a long way to go before asset owners take their rightful place in the investment management hierarchy. They need to be paid more and rewarded more for performance. They need to be freed from the constraints of trustees and boards, who should hire and fire investment professionals and have little to say about choosing investment managers. Fees will come down; and where they won’t come down, asset owners will move to different strategies. Co-investment will become more and more common. In some asset classes, asset owners will be manufacturers, not consumers. An executive at, say, KKR or Goldman Sachs Asset Management will always make more money than the person who buys his product—but at least the balance is shifting. We can thank the democratizing effects of information technology: Once the preserve of Wall Street, it spread to asset managers, and now its benefits are accruing to asset owners.
It’s a new world, and what an exciting course this will be to chart. I envy the editor.
—Charlie Ruffel, Founder