“A different playbook”: top-tier Milken panelists assess ‘mega-trends’ shaping asset management

Global ESG Investing

 

Nick Evans writes that rising interest rates and inflation, intense market volatility, the crypto boom, democratisation of alternative assets, talent and culture management, customisation, and the accelerating tech revolution in the investment industry were among the key themes at an all-star panel of asset managers and owners at this year’s 25th annual Milken Institute Global Conference in Beverly Hills.

Moderated by Prosek Partners founder and managing partner Jennifer Prosek, the panel – entitled ‘Mega-Trends Shaping Asset Management’ – comprised five top figures in the investment world: Joe Dowling, global head of Blackstone Alternative Asset Management and the former CIO and CEO of Brown University’s endowment; Kim Lew, president and CEO of Columbia Investment Management Company, which runs the Columbia University endowment; Todd Boehly, co-founder, chairman and CEO of Eldridge (and head of the front-runner bidder in the hotly contested race to buy the UK’s Chelsea Football Club from sanctioned Russian oligarch Roman Abramovich); Julian Salisbury, global head of Goldman Sachs Asset Management; and Kamal Bhatia, COO of Principal Global Investors.

Outlining the “huge headwinds” facing investors in 2022 and beyond – with global equities down by around 12 per cent and fixed-income down by 10 per cent so far this year – Dowling said: “The mega-trends that were happening for a decade are reversing. Interest rates are going up, inflation is going up, and we have quantitative tightening of USD95 billion a month starting.”

He added: “It’s great to be an investor when interest rates are going down, when multiples are going up, and when the Fed is giving you an implied put every time the market goes down. But the next decade is going to require a much different portfolio. There are a lot of headwinds and investors are really going to have to have a different playbook.”

Pointing to the heavy falls in both equities and fixed-income so far this year, Dowling said: “That’s a tough place to be for investors.” And he cautioned that things are likely to get more difficult as central banks battle to fight inflation. “If you study inflation, once it goes through 5 per cent, there have been four cases since 1960 where the average duration is 50 months. We’re in month 11.”

With investors confronting “a changing world,” Columbia’s Lew said asset owners needed to identify and allocate to managers with the skill set to thrive in what is likely to be a very different environment ahead – both in terms of economic backdrop and societal/generational change – rather than simply continuing to rely on historical track records.

“I’m looking for managers who’ve been very thoughtful about the need to have a diverse team that has some experience and knowledge of all the different things that will be part of the world that we are going to experience over the next 10 years – and not what has existed over the past 10 years.”

Boehly – whose Eldridge organisation’s investment activities span a wide range of sectors from insurance to sports and Hollywood – said: “We are starting to see the evolution of asset classes that are starting to explode.” Pointing to tokenisation and digitisation as just two examples of the rapid changes in asset management, he said the key was to build diversification and lock in what he described as “structural advantages”. “The key is how do you compound at the best possible rate of return and not be exposed to any single thing?”

Goldman’s Salisbury identified three mega-trends ahead: ESG, which he described as “very early innings”; fast-growing demand for customisation, among both institutional and retail investors, as evidenced by trends such as the switch out of mutual funds into ETFs and the growth in demand for separately managed accounts; and the rise of wealth channels as a capital-raising source.

On ESG – where he noted a growing focus on the S and the G as well as the E – he said: “It’s very early on. People are still confused, they don’t want what they want, they don’t know how to measure it. We’re in the very early innings of ESG and sustainability across people’s portfolios.”

And he described the democratisation – or retailisation – of alternative assets, such as private equity, private credit and private real estate, as “a real mega-trend right now” with huge potential to transform the access of new sources of wealth to alternative asset classes,  adding: “It’s amazing that you are going to be able to put bitcoin in your 401k plans and yet it’s very hard to buy things like private credit or private real estate – which you would think would be very well suited to that kind of plan.”

Principal’s Bhatia – an engineer by background – said the asset management industry was “ripe for more design thinking” as it entered a rapid phase of evolution and change. “Asset management is a simple business of talent and technology management,” he said.

He added: “For the last 10 years there has been an assumption that scale is the success formula in asset management. In my view, scale is not relevance. Relevance is what wins. Scale doesn’t win.

“To me, relevance is geographical diversity, mental diversity, having the breadth to be relevant to your clients. Just having a lot of assets with low fees doesn’t translate to relevance to clients.”

Columbia’s Lew said the increasing focus on values and impact within the investment world was having a major effect on the appeal of endowments and foundations as places to work for talented, committed individuals.

“There was a period of time when the foundation and endowment community was thought of as sort of a nerd community,” she said. “But the young people have changed and we are the cool club now.”

“Increasingly when people are trying to marry their commitment to their values with their commitment to their work, foundations and endowments have become increasingly more attractive. If you place a lot of value on impact and doing good for the world, we win.”

Both Salisbury and Dowling pointed to the importance of expanding the access of a broader range of investors to alternatives at a time when traditional assets are likely to remain under pressure in a much-changed macro-economic and geo-political climate – with Dowling pointing to the endowment model of investing as a rationale. “Endowments and foundations are overweight alternatives – and they are out-performing.”

In terms of crypto and digitisation, GSAM’s Salisbury believes the pace of change in the industry will be rapid and far-reaching. “There is a huge amount to be done just through digitisation of workflows in the industry,” he said. “You’re going to have to do in order to be cost-competitive and service-competitive.”

He added: “In crypto, you see the ease with which you can set up an account that enables you to trade in real time 365 days a year, 24 hours a day. The asset management industry is not there yet – but it’s going to need to get there.”

 

 

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