By Bill Kelly, CEO, CAIA Association The adaptation to this week’s title harkens back to late 19th century Scotland where this was a play song more popularly known as “Oats and Beans and Barley Grow.” It was a song of action in a time and a place—where most of the waking hours were spent in the fields. Our modern-day characters are Howard and Larry, and play time is mostly over. The current yield from their field will be grown, harvested, and brought to market in very different ways, even at times eschewing any pretense to growing organically. Last week brought an inversion of the yield curve in the US. As for the rest of the world, the accommodative central bankers there too, have once again kicked the chair out from underneath their own sovereign debt, which saw our friends in places like Germany and Japan post-10-year yields below zero. If you are in the liability management business, this forces you back into risk assets where we have also seen a progressive markdown in the fees that the asset manager charges, and the indexation business has even set a new low-water mark of zero basis points. These same asset managers continue to face even higher costs for doing business as data becomes core to the strategy and digitization has required substantial reinvestments in the operation. It has become a scale play and the large players with strong balance sheets seem to be the disruptors—which brings us back to Farmer Larry and his field mate Howard. In the recent periods, we have seen a growing chorus of strategic acquisitions meant to provide more scale and product diversification. The unofficial kick-off for this latest round was the Invesco/OppenheimerFunds marriage announced late last year putting the combined entity into the rarified air of the $1T AUM club. Q1 of 2019 is most notable for the Brookfield/Oaktree combination that will create one of the world’s largest and most diversified private market asset managers with combined AUM of $500B. Finally, if trifectas are your thing, just last week BlackRock was back in the news with their acquisition of eFront, which is meant to provide a larger toehold in the less liquid side of their product offering. None of this activity should surprise anyone in our space, and any medium-sized manager with limited product or distribution capabilities may soon find their own lethal Kodak moment. A recent Bluepaper by Morgan Stanley Research and Oliver Wyman hammers home these salient themes. In it, the authors note ongoing commoditization of product and anemic growth in industry revenues over the next five years. The bright spots will be the same private markets assets which have dominated the M&A game of late, along with an emphasis on emerging Asia, and the leveraging of technology in the solutions sector. They expect this retooling to be expensive and anticipate that the average asset manager will need to plan on taking out (and redirecting) 30% of their core costs within the current business model. So much for operating leverage for what once was a very peaceful back 40. There is a line in the referenced play song that talks about the farmer “standing up tall and taking his ease.” The stand-up tall part could not be more accurate at this point in the growing season, but the industry farmer who decides to take his ease could soon find himself as fertilizer in the back of a combine harvester. Seek diversification, education and know your risk tolerance. Investing is for the long term. Bill Kelly is the CEO of CAIA Association and a frequent contributor to Portfolio for the Future. Follow Bill on LinkedIn and Twitter.
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