OPINION: If Investment Requires Diversity, Diversity First Requires Investment, from The Trade

Chris Hall, editor of The Trade, examines diversification for asset management firms.

Diversification might be the order of the day for asset management firms, but are the skills available to successfully implement such a strategy? Perhaps not, according to veteran buy-side trader Tony Whalley, head of derivatives and dealing at Scottish Widows Investment Partnership, which manages roughly €180 billion (US$217 billion) of assets as part of the UK’s Lloyds Banking Group.

“I know a number of investment firms that have no in-house derivatives experts,” Whalley told The TRADE recently in an interview for a series of articles about that mythical beast, the multi-asset trading desk. Whalley also believes that predominantly cash equities-orientated trading desks don’t necessarily have a strong grasp “of the varied, different exposures of trading in derivatives.”

And the skills deficit is not just on the trading desk. Portfolio managers often have too narrow a view of the markets to devise non-correlated investment strategies in response to shocks to the traditional stock and bond markets. Consider this from John Greenan, global muti-asset connectivity manager at BNP Paribas Investment Partners, which manages €550 billion (US$664 billion) assets under management: “It’s quite rare for fund managers to bring together a trade that involves more than two asset classes. The world of the institutional buy-side remains siloed.”

Sharing the same platform at industry forum, TradeTech Europe held in London in April, Kristian West, managing director, equity trading, J. P. Morgan Asset Management (AUM: €1 trillion, US$1.2 trillion), said the firm had no intention of moving its London-based equities, fixed income and FX traders from their current stations on three separate floors of the same building.

In truth, there is flexibility within the existing framework. Traders at big firms regularly move between desks to develop expertise and some asset managers are actively pushing their equities and fixed-income traders together. But internal synergies and skillsets are only part of the picture. You also need support from technology vendors and particularly brokers to develop and implement the full sweep of investment ideas that are called for in uncertain times like these. Firms that don’t already have flexibility built into their product offering will take little comfort from the old Irishman’s advice to a lost tourist: “I would start from here.”