Asset managers will need to run a fiduciary overlay to attract flows from the most prominent sources of new capital – sovereign wealth funds (SWFs), national pension funds, central bank reserve funds and defined contribution (DC) vehicles – finds Professor Amin Rajan of CREATE Research, in a global survey of asset managers overseeing US$29.1 trillion, entitled Exploiting uncertainty in investment markets. “The fund pie will be noted for its subdued growth,” Rajan writes, adding that the next three years will be particularly tough. “Dog fights will be inevitable.”

One manager confides in Rajan: “What if the good times aren’t just around the corner?” To win funds, managers will need to prove they are more than “distant vendors” of products that are financially aligned with clients. This means that in addition to demonstrating their ability to deliver consistent returns, maintain a deep and incentivised talent pool, offer a value-for-money fee structure and superior service, they will need to prove deep nonfinancial alignment. This includes proven riskmanagement processes, including the mitigation of operational risk through carefully designed outsourcing arrangements. It also means viewing clients as a source of ideas as new investment products are built to provide tailored solutions.

This need to add a fiduciary dimension is illustrated particularly well by one quote Rajan gathers from a manager: “We were as remote from our clients as the man on the moon.” Grant Forster, domestic head for Principal Global Investors, says it’s clear that managers “can’t just act on their own account, but in alignment with their clients”. In Australia, alignment usually translates as a more advantageous fee deals for clients. “We’ve seen that in Ripoll, it was fees. And in Cooper, fees again. Acting in the best interests of clients is going to become a stronger theme.” The increasing sophistication of institutional funds – some now staff internal investment teams – means they are now “looking for investment managers to provide a lot more feedback about strategies and risk positions,” he says. In particular, managers’ keenness to raise capital from SWFs will “raise the bar” for risk analysis and reporting.

“SWFs. Australian funds managers should focus on them. We need to try and grow within Asia. Most Australian managers are at the Future Fund regularly, so why wouldn’t you do the same in Asia?” He sees large shifts into passive allocations for traditional asset classes – notably AustralianSuper’s decision to index more than $3 billion in Australian equities last year and QSuper’s recent $10 billion in mandates to passive equities strategies run by State Street Global Advisors – as a “short-term” trend and part of ongoing plans to separate alpha from beta. “For a time, diversification didn’t work, but confidence is coming back.”

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