Asset management is going through permanent structural change driven by the move from active to passive investments, said Jon Allen, head of institutional sales and product development, Asia-Pacific, and head of Australia for Columbia Threadneedle, which has assets of US$454 billion ($609 billion).
“There is no prospect of the trend of passive dominating active reversing,” said Allen, who spoke at the Investment Magazine Fiduciary Investors Symposium, held in the Blue Mountains, New South Wales, May 15-17, 2017. “This has profound implications for asset and industry returns and overall asset allocation decisions.”
He also said there is no net new growth of assets flowing into asset management, which has implications for managers and fiduciaries.
“Many of the issues we are facing across the industry are quite similar for asset managers and fiduciaries,” he said. “The changes in active versus passive, and semi-passive, are large and unprecedented, and will be reflected in consolidation.”
He suggests that an active manager needs a prism to assess itself, as demonstrated in this chart – on the vertical axis is the projected client demand and on the horizontal axis is active investment value add.
From a more general industry perspective, Allen said the quantum of the agency problem in the industry depends on where different players sit.
“There will be consolidation but the flow through to fees will be sporadic, some areas will remain at different price levels for different reasons and agency issues will remain slower to unwind.”
But some costs are not controllable and there are a huge number of costs directed at the industry by government actions around fiduciary standards, such as RG 97.
The industry response will be a scale of offerings – from alpha to mass beta to customised beta and solutions. For providers of asset management services, Allen believes passive, alternatives and solutions will “win”.
“As a fund manager, you need to decide where you want to be; for asset owners, you need to think about whom you partner with,” he said.
In addition, asset owners will continue to insource, but Allen warned that insourcing requires high clarity of objectives.
“Asset owners need to be clear it’s worth doing it and worth sticking to it. We have an enormous difficulty paying our good people and keeping them. You have to keep the culture part right.”
Clarity of intention is critical, he said. The insourcing must match investment beliefs and be aligned to all parts of the organisation.
“Be very purposeful in what you insource. Insourcing alpha, unless in specific asset classes, is more headache than it’s worth. You need to ask does it culturally align to the firm? If you are going to get better at member engagement, and building specific customised portfolios – in decumulation for example – then insourcing makes sense. All asset owners should do that.”