Fighting for position in a new world
In an economic market that is characterised by risk, fund managers are under severe pressure to find alpha in order to grow investments.
This is more pertinent now than ever because clients are getting more educated when it comes to investments and what drives them. They know about the risks that are inherent in the market, they know that active fund managers are not able to consistently beat the benchmark, and they know that there are many ways to find alpha.
So how does one survive in this new world? This was the topic of discussion at the recently held Sanlam i3 Summit where a number of high profile speakers provided some insight into navigating this new world.
Severe lessons
Nicolaas Marais, President of Wells Fargo Asset Management and Head of Multi-Asset Class Solutions, said that any company operating in this new world needs to focus their attention on clients, or they will learn severe lessons.
“Clients are becoming educated and they are becoming outspoken in what they expect from their advisers and fund managers. If we are not able to live up to these expectations, clients will merely take their business elsewhere or will turn to disruptors such as robo advisers. Can we afford for this to happen?” asked Marais.
Smart beta and the world of disruption
These challenges have kept fund managers on their toes looking for ways to increase their skills set to offer clients full value.
“We are good at offering building blocks. However, we are less skilled in combining them to offer what clients actually want, which is a good return on investment,” said Marais.
He added that as building blocks become more granular, it is harder to outperform any benchmark, which is what active managers are paid to do.
This means that active managers need to look elsewhere for ways to grow capital. “Traditional alpha, as we know it, has shrunk dramatically with the emergence of smart beta,” said Marais.
Profiling smart beta
If you are not beating a bench mark with alpha, you are using beta to track the benchmark. This is the world of passive managers. However, smart beta are beta investments that have some elements of alpha inherently built into them. They don’t beat benchmarks like alpha investments do, but they don’t track the benchmarks like beta products do.
Quantum
So how much is smart beta worth? “According to the FTSE Russell 2017 Survey, global adoption of smart beta strategies now sits at 46%. This is up from 26% in 2015. There are also fund managers that use alpha products alongside smart beta products. These multi-factor combinations are up to 64% from 20% in 2015,” said Marais.
This means that smart beta is slowly eating into areas where alpha were the top dog. Fund managers who ignore smart beta are automatically on the back foot. The world of fund management now is very different from how it was ten or even five years ago.
So where to from here
We have already indicated that smart beta is having an increased impact on the fund management world, and we have also pointed out that technology is having an increased impact within the industry. So how do we tie this together?
“There will be a significant shift from outcomes to solutions. This means that fund managers will have to move from stock selection to portfolio construction and asset allocation. The days of pushing products are over; it is now about investment solutions. The fund manager’s viewpoint must also change. It’s not about how all of the funds under his care are performing, it’s about how specific individual funds perform,” said Marais.
Editor’s Thoughts:
If fund managers have not at least considered smart beta and the value that it can add to their business, then they are seriously dropping the ball. The industry has changed and a new normal has been established. How do you fit into this new world? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
