Money managers retool, close core investment strategies

May 27, 2012 @ 12:01 am

By Drew Carter

Growing demand for higher-octane equity strategies is forcing many money managers to retool their old strategies and a few to close them down.

The victims are value, growth and other “style box” managers, according to consultants.

Managers most at risk are those concentrated in just a few investment areas, especially locally oriented ones.

That means managers in Australia, the United Kingdom and the United States that focus primarily on the local market, said Kevin P. Quirk, a partner at Casey Quirk & Associates LLC, a consulting firm for money managers.

Tremulous market conditions, investors' exit from stocks to bonds and alternatives, and years of poor performance are putting the squeeze on these traditional equity strategies in favor of a barbell approach: passive or smart beta on one end, more-active, more-specialized and less constrained mandates on the other.

“The reality is, performance net of fees has not been superior in most cases. We're really getting away from core mandates, and investment mandates are getting increasingly bespoke,” said Cynthia Steer, head of manager research and investment solutions at BNY Mellon Investment Management.

“The asset management industry is realigning itself — renewing itself, in a sense — along this new reality as it gains momentum,” she said.

The trend started in Australia and Europe but is moving to the United States and is a global phenomenon.

“It's clear there is general pressure in the industry today on managers who are not persistently outperforming and/or delivering a very clear value proposition to the market,” Mr. Quirk said. “Those traditional strategies — once the core of investment portfolios — are the same ones that today are under a tremendous amount of pressure.”

Also at risk are managers owned by banks or insurance parents, particularly those in Europe. These managers tend to be focused on running the assets of their parents and lack the alignment of interests needed to attract and retain investment talent, consultants said.

Last month, the Scottish Widows Investment Partnership announced a reorganization of its equity business that included cutting more than half its stock investment team and showcasing its quantitative capabilities. SWIP is owned by banking and insurance parent Lloyds Banking Group PLC.

The partnership expects to lose almost $3.2 billion of its $86.4 billion in equity assets under management.

SWIP is emphasizing lower-risk approaches.

“Clients have been saying to us they want more of a barbell approach,” said Francis Ghiloni, the unit's director of distribution and client management. “They've been moving from the center to the wings because there's far more volatility [than before] in the center.”

SWIP will replace a variety of regional equity strategies, including emerging markets, with fewer global strategies.

“We think our resources are better focused on globalization, rather than regionalization,” Mr. Ghiloni said. “We're not attempting to be doing everything for everyone.”

Aviva Investors, owned by insurer Aviva PLC, is slashing traditional equity strategies in favor of focusing on fixed income, real estate and multiasset solutions.

After a strategic business review, the company exited the fundamentally managed emerging-markets and global equity areas because they lacked adequate scale. Now it is focusing on European and U.K. fundamental strategies, as well as global emerging markets and other quantitatively managed equity strategies.

The firm is looking to move $6.4 billion to quant-based strategies, from fundamental ones, and expects to see about $2.4 billion depart.

The fundamentally managed strategies were “among the smaller-scale capabilities we had,” said Paul Abberley, interim chief executive of Aviva Investors.

“What drove the review was a need to focus,” he said.

Aviva Investors' London unit, where the cuts were made, manages $48 billion in equities.

In the firm's quant strategies, “we feel now we have something ready to be taken to market that wasn't there two or three years ago,” Mr. Abberley said.

He disagrees with the claim that an insurer parent is a disadvantage.

Any parent company “has no interest in having their assets run by a manager that is ordinary as opposed to extraordinary,” Mr. Abberley said.

As a result, Aviva insurance executives asked the manager to compete for third-party assets, a sign that the parent wasn't settling for ordinary.

Aviva's third-party assets grew by a cumulative 33% to $83.2 billion over the three-year period ended Dec. 31.

But the main driver behind the equity refocus is the changing tastes of investors.

As of Dec. 31, institutional investors had pulled $90 billion more out of U.S. large-cap-growth strategies than they put in, and another $29.3 billion net out of U.S. large-cap-value strategies, according to data provided by eVestment Alliance.

A similar trend was observed in global growth and value, according to eVestment Alliance data.

The outflows didn't seem to correlate with performance. The median growth manager outperformed its median value counterpart by 139 basis points over three years, according to eVestment Alliance.

“We've seen some clients getting rather fed up with value or growth or momentum managers and start looking for those unconstrained stock-picking mandates,” said Debbie Clarke, a partner and global head of Mercer Investment Consulting Inc.'s equity manager research boutique. “There's a realization among managers that they have to be active in adding value.”

Despite years of underperformance, value isn't dead, any more than it was in the late 1990s, when underperformance caused some in the industry to question the future of the value premium, observers said.

But how value and growth are defined — and how portfolio construction screens are shaped — is worth reconsidering, Ms. Steer said.

She is beginning a project to examine the economic assumptions underpinning how growth is defined to ensure that the tools used in building portfolios in the past are right for the future.

“How we define growth in developed nations may be a little different than how we define growth in emerging nations, which have a growing role in the global economy,” Ms. Steer said.

Because value has underperformed so long, “we do have to go out and educate, and define it again — not differently, but again,” said Oliver Murray, managing director for portfolio management and client services at Brandes Investment Partners LP.

OPENING WHAT'S CLOSED

Another way that equity managers are reinventing themselves is by reopening strategies that had reached capacity and were closed to new investors years ago.

“We are seeing some products that may have been pretty hard-closed that are now open to select new mandates,” especially small-cap or other capacity-constrained strategies, said Roger Fenningdorf, partner and head of manager research at Rocaton Investment Advisors LLC.

Brandes has been reinventing itself in some ways over the past couple of years with the reopening of all its equity strategies. All those strategies were closed until 2010, some for 12 years.

That has meant transforming the firm from a client service focus back to one with strong global sales and marketing teams, Mr. Murray said.

The firm runs $35 billion, down from a peak of about $120 billion in 2007.

Nonetheless, Brandes isn't budging from its roots as a pure deep-value equity manager, Mr. Murray said.

Drew Carter is a reporter at sister publication Pensions & Investments.

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