There is possibly no other industry that spends as much time and effort looking at itself than the funds management industry.
There’s a lot of money at stake, fortunes can be made and lost in a fairly short space of time, and many of the best brains in the country are involved. Whether or not the industry adds value in society is not something which is often discussed. The assumption is that, while fees and salaries may be high, the end result of professional money management must be better for the consumer than having none.
This subject at least is currently being looked at by the Paul Woolley Centre attached to the London School of Economics, along with Australia’s University of Technology Sydney. A range of papers prepared over the next few years will address the “dysfunctionality of markets”. What is also uncertain, despite the money at stake and the great brains involved, is what a good funds management business should look like.
It is sometimes said that funds management businesses make a lot of money, but not for their shareholders, unless the shareholders also work in the business. The boutique phenomenon, especially in Australia, has ensured that an array of new managers has emerged in the past 10 years and mostly that they have prospered. This is a natural outcome of the realisation that specialists will over time outperform generalists.
As a former head of Russell Investment Group in Australia, John Bowers, once said: there has always been and will always be a march to specialisation in every form of economic endeavour. Russell, it should be remembered, brought the specialist manager concept to Australia via its then client MLC in the 1980s.
The evolution of specialisation has meant that even within one asset class, say Australian equities, what used to be thought of as “core” managers are being spurned in favour of those which have more chance of generating alpha. On top of these trends, there appears to be a permanent shortage of talent. The talent that is available wants not only more money but also more control through equity in the business.
So, what does a large firm do? What may be an interesting case study is what the Deutsche group has done in Australia. Deutsche Asset Management sold its Australian equities and bonds business to Aberdeen Asset Management in the middle of last year. Chris Larsen, the head of Deutsche Asset Management in Australia, says the deal was good for Deutsche, Aberdeen and investors – a win win win situation. And the early scores look like he may be right.