Rebooting the global asset management industry

Rebooting the global asset management industry 43 Turning to improving distribution capabilities (Figure 4.1, lower panel), forging alliances with premier distributors and asset gatherers tops the list (60%). Of course, fund performance matters, but exceptional distribution is now becoming part of the winning formula alongside relationship management . Providing a suite of predictive analytics for self-directed investors is essential (51%), as is having a proprietary D2C platform (49%). In all the line items covered in Figure 4.1, scale players have a distinct advantage. Their size gives themmore resources and stronger bargaining leverage. But what small and medium-sized players lack in size, they can more than make up for in excellence in two other areas: client relationships and asset returns. Unsurprisingly, most of the respondents covered by the upper panel in Figure 4.1 were small and medium-sized asset managers. They believed that whereas scale brings a lot of benefits, especially in passive funds, it also suffers from excessive bureaucracy, managerial silos, corporate inertia and unrealistic expectations: all to the detriment of innovation and alpha. These small and medium-sized managers recognize that they need to up their game with investment performance and client service. Those who have done that are now propelled into a virtuous circle where stellar performance has earned valuable shelf space with prominent distributors who are keen to attract 5-star funds to burnish their own brand. This, in turn, has attracted new inflows for the alpha managers. Thus, alpha–beta barbelling will increasingly define the investment universe. At one end will be mega players with hyperscale production and distribution focusing on low-cost passive funds and active funds with acceptable levels of returns. At the other end will be specialist managers carving out a niche around their core strengths, using a deep talent pool and cutting- edge technology to deliver alpha, lower costs and scalable client experience. Alpha–beta barbelling will increasingly define the investment universe. Insights Personalization of risk requires a higher level of financial literacy Experience shows that retail investors often act in seemingly irrational ways owing to greed and fear cycles inherent in the human psyche. The result is short-termism that violates the basic principles of sensible investing. These investors engage in market timing that often hurts investment returns and jacks up costs. There is a pronounced tendency to chase yesterday’s winners. Herding is commonplace: it converts the conventional wisdom of buy-low/sell-high on its head. Such procyclical investing is evident here in Hong Kong. The average holding period for mutual funds is 6-9 months due to overtrading. Buying the dips is ripe, no matter its intrinsic merit, as are ‘wrong time’ risks. Digitally savvy does not always mean investment savvy. The stock market is the only place where buyers flock when prices are rising and flee when they are falling. The personalization of risk should not just be a polite abdication of responsibility by employers and governments but an opportunity to promote a high degree of financial literacy. Asset managers too have a role in raising awareness of the key principles of investing, key risks that can hurt the portfolio and key techniques that minimize the downsides and maximize the upsides. With Asia’s intergenerational potential wealth transfers nearing $30 trillion, we offer objective, jargon-free education on investment basics as part of our thought leadership offerings. It uses simulations that engage the users to make decisions in real-life scenarios and use results as learning points. This empowers them to ask the right questions and make more informed calls. A Hong Kong (SAR) asset manager “Some of the largest asset managers are good alpha generators; others are merely asset aggregators riding the passive wave.” “As a small player, success is all about being really good at what you do. We have large pension plans as our longstanding clients.” Interview Quotes