There might be light at the end of the tunnel, but it ain’t here yet.
How to keep fund buyers happy in a falling market
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It will be news to no-one that 2022 has been a largely terrible year for active asset managers.
In the US alone, active funds have suffered net outflows of $500bn through to the end of September and are on course for their worst year in a decade.
And even the occasional corner of (relative) outperformance, such as in large-cap value, will not be doing enough to offset these outflows and wider declines in assets and fees.
What’s a firm to do? In short, don’t make it any worse.
To help with this exercise I caught up with three of the most influential fund buyers in the US to find out what managers can do to keep them happy in a falling market.
Don’t dash to cash
As mentioned, there have been some areas of relative outperformance in active management, and one easy way of doing this is to hold a little more cash than the benchmark you are trying to beat. Funds have not been afraid to do this. But while it is tempting for its short-term gain, long-term it is likely to annoy fund buyers.
‘In this kind of market environment, cash becomes this fight with managers,’ Merrill Lynch’s head of due diligence, Anna Snider (pictured above), told me. ‘They will say, “I’m always in cash up to the limit that I can be”, and our response is, “Well I don’t pay you to manage cash, I pay you to manage assets.” It’s [happening] in every asset class, private markets, equity markets, fixed [income],’
And if you are a manager whose already committed this sin, what can you do to appease investors?
‘The best answer I’ve got is: “We only did it once,”’ said Adriana Rattinger, senior vice-president at Citi Private Bank.
Don’t let execs cramp your style
Managers are under all sorts of pressures in this market. One that due diligence analysts are particularly wary of is overreach from the firms’ executive teams, whose agenda might differ from that of investment managers.
‘How much are [PMs] getting messed with by the asset management business and the concerns of the business?’ asked Snider. ‘We have all seen the pressures on the business become the pressures on the investment teams.
‘[I want to know], is everything around this investment team allowing them to navigate this crisis in the best way they could? [Because] that’s who we have trusted the money to, not the CFO.’
In short: Hey, directors, leave those managers alone.
Don’t pretend to be ESG
As has been well documented, during the sustainable investment boom, asset managers from all stripes were doing anything they could to squeeze the letters E, S and G into the names or prospectuses of funds.
In the US, there has been a degree of backlash against ESG this year, led in part by efforts on the right to make it a political talking point. While the last thing the country needs is more things to disagree over, one upside to the politicization of ESG has been the realization that it’s OK for funds not to label themselves as such, that there is an appetite for other kinds of investing and that in some instances it may benefit managers not to extol their sustainable bona fides if they don’t really have them.
‘The good thing about the ESG politicization is that it’s telling people it’s OK to not be ESG. It gives asset managers the confidence… if they don’t want to do it, don’t do it,’ said Sarah Bewley, who heads Canadian due diligence at RBC Wealth Management.
Rattinger, who leads ESG manager research at Citi, agreed.
‘We have seen a lot of managers who just claim to be ESG for the sake of it and some of them are actually backtracking on what they had named their products. We welcome the debate and if you are not going to be ESG, don’t be,’ she said.
Have good answers in good times and bad
It may not be a problem for many funds right now, but managers who want to keep due diligence pros happy should have good answers in the good times and the bad.
‘We judge on the downside, but we also judge on the upside when they are outperforming,’ said Bewley.
And many a growth manager who enjoyed the highs of 2020 (and the years prior) could have brought themselves some much-needed goodwill now had they prepared well for the end of that rally.
‘I’ve not fired an outperformer, but it’s a good time to judge if their risk constraints have just been blown out the water… if they are just going to go for broke,’ Snider explained. ‘You want to see that they have a plan for how they are going to deal with mean reversion. And that scares managers when you ask them that because they don’t always have a plan.’
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