According to a report last month by corporate advisory and research firm Jefferies Putnam Lovell, banks and other “distributors” will continue their recent trend to divest themselves of their “manufacturing” arms, particularly in Europe. There is little evidence of this in Australia as yet, although the bank-owned firms at least now have to compete with other external managers on their parent’s distribution platforms.

What happens to the people at the significant number of hedge funds and funds-of-funds which are predicted to close is an interesting question. They are smart people and it is difficult to see many of them seeking out new careers. They are more likely to reinvent themselves by providing new services and strategies. Super funds will continue to expand their internal investment capabilities and asset consulting firms will probably weather the storm better than managers. In fact, the trend to specialist consultants is likely to continue, providing further job opportunities.

There is a good argument to support the view that 2009 will be all about beta for super funds. Most funds have probably made the decision to get their cash levels back down to previous strategic ranges, but they seem to be reticent to implement the decision just yet.
If this is the case, managers targeting high alpha may struggle for a time longer and will probably need to adjust their fee structures. One and 10 (one per cent base and 10 per cent performance above a hurdle) is already looking more like the norm than two and 20 for high-alpha managers.

Asset allocation skills, if they can be demonstrated, should be very much in demand right now, along with simple long-only broad-market strategies, especially index funds. Coincidentally, both Russell and Mercer have recently issued reports including the view that active managers will again show their worth, at least in Australian equities.

Structured products, synthetic hedge funds and other products involving considerable counterparty risk will struggle for some time. Services provided by custodians will be favoured for two reasons: they are generally banks which have had some sort of government guarantee or backing and they have been beneficiaries of the flight to cash. Custodians should win business away from the prime brokers which have been providing “free” custody to hedge fund managers (if they want it).

The trend to more specialisation will not stop for long. It has been a feature of all forms of economic endeavour since the dawn of time.
The fundamental driver of funds management and its attendant services is an aging population and that certainly has not changed.
Skill will continue to be rewarded but a recently hardened and more cynical client base will demand better proof of its existence. This may well lead to closer and better relationships between managers and super funds, which are now more acutely aware of how important each is to the other.