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.
The performance of the funds under Aberdeen has been good and all major mandates have been retained. Deutsche still has $18 billion under management in Australian-sourced assets and is in the process of rolling out more products from a vast array of international alternatives. Deutsche has a thematic global equities strategy which is benchmark unaware and a global fixed interest strategy which will be rolled out in Australia later this year.
It also has a quant platform which Larsen says he want to provide in Australia. In the alternatives space, he says, Deutsche can rightly claim to be experts in property securities, direct property and infrastructure. Increasingly it will be developing its private equity capabilities through the ownership of Aldus in the US. “It was a bold decision,” he says. “But we had one of our best-ever years last year because we focused on what we are good at.”
When a firm has a big range of strategies and products, the challenge from the manager’s perspective is to offer only what’s appropriate for the market. These days, when funds are prepared to look at almost anything which has the potential to provide alpha, that is not an easy task. The firm’s global agribusiness product is currently popular, as you might expect, but even things such as a Japanese opportunistic property fund are attracting interest, Larsen says.
To facilitate the process Deutsche has developed a team of “investment specialists”. These are people who have managed money in the past and now act as an intermediary between the portfolio managers and the clients. The regional specialist is Australian Bill Barbour, who recently relocated from Sydney to Singapore. “This is more of an educative role than a sales role,” Larsen says. “It’s an area where we want to plough more resources.”
As super funds spend more effort retaining members into their retirement where possible, structured products will play an increasing role. Traditionally provided by investment banks through closed-end funds, often with very high fees attached, Deutsche is looking to focus on “platform friendly” structured products which are open-ended and with good liquidity. “We built the first platform-friendly capital guaranteed open-ended fund for Navigator, using the van Eyk portfolio and we also have a product for NAB Capital Markets,” Larsen says.
“We’re moving more into that space… We can bring a fiduciary level of care. We make money out of annual fees, so we need to provide ongoing service. We want to bring that traditional asset management fiduciary level of care to the structured products area.” While admitting the alternatives pay higher fees, Larsen believes that this is not an issue with clients when the product is well differentiated.