The need to curry favour with influential investment consultants – often more concerned with process than performance – creates conditions that discourage innovation, imagination and a willingness to go against the crowd.
At the same time, the high costs associated with genuine active management, interacting with fund management group business strategies, discourages individual managers from departing too far from the benchmarks by which they are judged.
The difficulties active asset managers face in generating above-market returns on a sustained basis in these conditions is reflected in the surge in popularity of passive index-tracking strategies.
With this business background, a macroeconomic environment of low investment returns and little to no inflation, it is only to be expected that the majority of active asset managers struggle to deliver significant outperformance. But asset owners want and, in most cases need, something more.
Those with particularly long time horizons – sovereign wealth funds being a case in point – are devoting ever more of their money to illiquid and unlisted investments in order to capture a higher return by harvesting the illiquidity premium.
At the same time they are becoming ever more aware of the unrewarded risks they are taking because of the developing impact of climate change, demographics and water shortages, all of which could have material effects on the value of portfolios in years to come.
Amundi, the French firm which has risen in the last few years to be Europe’s largest independent asset manager has a particular approach to these challenges and sees its future at least in part in developing new products in partnership with its clients rather than simply as a supplier to them. There are already a couple of examples.
One of the difficulties with illiquid investments in areas such as infrastructure is that few asset managers have any idea what to do when something goes wrong.
They cannot easily sell out because by definition the assets are illiquid; but they cannot improve the asset’s operational performance because this is usually an area where they lack the required skills.
One solution last year was to form a partnership with EDF, the French energy utility to raise a €1.5bn fund to invest in renewable energy strategies and projects.
Amundi has the clout and track-record to raise the money; EDF provides the credibility and expertise to be able to assess the merits of projects from the operational perspective.
Earlier this year came a second and similarly innovative idea which saw the firm partner with the International Finance Corporation (IFC), part of the World Bank, to create and seed a green bond designed to channel finance into environmentally-friendly projects in emerging markets, thereby providing funding for projects in countries that currently could not support a bond issue.
IFC has provided $325m towards what ultimately, when it is fully invested in about seven years’ time, will be a $2bn fund.
In addition, the bank has also put in place an arrangement where it will absorb the first loss on any of the projects as a further way to reduce the risk profile associated with investing in these difficult markets.
Meanwhile, Amundi will provide training and technical support for financial institutions in these emerging markets to give them the skills to be able to launch bonds that would be suitable for the fund to buy.
This is quite a stretch beyond traditional asset management but that is the way the world is going.
If the mainstream becomes commoditised the specialists have to move into ever more sophisticated areas in order to add value. In this, asset management is no different from any other business.