Some investors and industry experts have questioned whether multi-asset investing represents genuine innovation or a reincarnation of something already tested and found wanting, namely balanced management. “Balanced died out as tactical asset allocation proved not to be as easy as people believed. It might be called something different today, but it is no easier than it used to be,” says AMG’s Dyson.
Vested interests
Some commentators point the finger at consultants and asset managers, who, they argue, are financially incentivised to increase complexity to drive fee revenue.
“Consultants and asset managers tend to peddle products or strategies at the worst time for the clients, but at the best (i.e. highest) fee for themselves,” SCM’s Miller argues. “There is nothing wrong with diversification, but keep it simple and make sure you understand what you’re investing in.”
Bob Maynard, CIO of the Public Employee Retirement System of Idaho believes the higher cost of more complex strategies will also see them underperform more conventional investment. He says: “To the extent multi-asset also comes with much higher fees, they will do worse than conventional investing.”
In a highly competitive and arguably overcrowded asset management market, how can investors identify genuine innovators from copy cats?
If it feels like an education, it is more likely to be genuine innovation. As a result, the product development and adoption cycle is longer.
This is advantageous in two regards. In the first instance, the manager has a greater need to prove they can successfully implement the product before its launch. Secondly, it suggests the product addresses secular, rather than cyclical, issues extending the useful life of the offering.
“The more innovative a product is, the longer the development cycle will be,” argues Christoph Hofman, head of distribution at Ashmore. “That can be a differentiator between genuine innovation and where products are just being repackaged.”
Other investors are also important, but this is more about who than how much. Looking at the client base of an asset manager can be a useful identifier of a genuine innovator and can be particularly interesting for smaller investors or those lacking the governance structure to be early adopters.
“Innovative managers tend to be teamed up with early adopter investors,” Bluebay’s Read says.
Investors with the expertise and governance framework to be innovators themselves can be best served by ignoring what is currently popular among asset managers and other investors altogether.
The London Borough of Waltham Forest Council pension fund recently invested in caravan parks, for example. Chairman Nick Buckmaster says: “How many times can we reinvent the wheel? You have to look through the hype. It’s better to be contrarian. Look at the world around you and not at what fund managers are pushing. Caravan parks are completely uncorrelated. Others initially sniggered, but are now looking at this.”
Those with the governance to do so, can reap the first-mover premium to enter an asset class or strategy before the sweet spot is reached. For those who don’t, outsourcing is a popular option, but it is critical to ensure innovation is genuine and the manager is capable of doing what they say, even if that strategy is not currently in vogue.
Embracing the march of innovation can be highly beneficial for institutional investors, but capturing a sweet spot means carefully considering who exactly is beating the drum and why.
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