The crisis of 2008 and the resulting actions undertaken globally by governments, central banks and regulators contributed to the emergence of new factors that are changing the face of investment management for years to come.
To the pro-active money manager such winds of change are not coming by surprise and established themes such as efficient market hypothesis and investors’ rationality had already been questioned and tackled a long time ago. However new trends are coming to light which will have an enduring effect in the way investors position their portfolio in the future.
The state of the industry globally shows the following breakdown among asset managers in a sector with approximately $80 trillion in assets under management:
- $29.9 trn for Pension Funds
- $24.7 trn for Mutual Funds
- $24.6 trn for Insurance Funds
- $4.2 trn for Sovereign Wealth Funds
- $2.6 trn for Private Equity
- $1.8 trn for Hedge Funds
- $1.3 trn for ETF
Mutual Funds are in constant decline as the aggressive growth of ETFs seems unstoppable; Hedge Funds are growing but their success may be undermining their long term viability and their profit margins. In other words, as Hedge Funds grow bigger and bigger they resemble more and more leveraged Mutual Funds and their ability to arbitrage anomalies disappears making it difficult to achieve their mandate of superior and absolute returns; such identity crisis is already leading toward a discount of their management/incentive fees and in some cases of funds being returned to investors by the managers. Sovereign Wealth Funds should continue to grow in size and influence; as the most politicized player in the arena, their investment mandate is often ruled by different inputs than the typical investment funds; such approach combined with their very long time horizon will have deep implications in the way liquidity will be provided to the capital markets. This should have significant implications for Emerging Markets. If EM can continue to grow above the rates produced by Developed Economies (a very reasonable expectation) their need for long term capital will continue to increase and Sovereign Wealth Funds will become major suppliers.
As far as Emerging Markets, HSBC in a recent report highlights a probable change in investment dynamics in Asia; Asian markets have been historically dominated by foreign investors and local speculators but as the Asian economies grow so does Asian wealth. This growth story also brings about a need for diversification of such wealth into different financial assets. The McKinsey Global Institute also commented on the changing EM capital markets quoting a need by EM investors to triple their allocation to equities to avoid a liquidity crisis for enterprises in the emerging economies.
The uncertainty of financial markets in the last few years and the often inarticulate response by governments and central banks has created the conditions for a clear future trend in low volatility strategies and sophisticated asset allocations to include multi-strategy approaches that may help investors mitigate systematic risk. Combinations of low volatility and value strategies, high dividend screens and heavy utilization of derivatives as a mean to tactically adjust risk profiles is an active approach to portfolio construction and management that will continue for the foreseeable future.
At THALASSA CAPITAL we have made a significant bet on infrastructure investing for quite some time and we feel this sector will continue to expand in ways that may even go beyond our vision. HSBC highlights that with governments fiscally constrained and banks still undergoing deleveraging, opportunities will emerge for private asset managers to participate in public/private deals for infrastructure investments. Such deals should be low volatility, focused on income generation but structured at a premium to compensate for the illiquid factor.
Another clear trend (also actively embraced by our firm) is the success of Exchange Traded Funds as better tools for portfolio construction than Mutual Funds. Their increased utilization may create opportunities for the implementation of more beta neutral strategies and in aggregate may continue to contribute to a rise in correlations among risky assets.
The future of investing is here…