By Claire Sawyer, Associate Director of Content Development, CAIA Association
We know life can get busy, and sometimes you just can’t find the time to tune in to every episode of the Capital Decanted podcast. In this blog post, we’ve summarized our latest episode, giving you all the leading insights without the lengthy listen. Whether you’re on the go or just prefer a good read, we’ve got you covered. Read on to explore the valuable perspectives shared in the podcast!
In the second episode of Capital Decanted Season 2, our hosts are joined by Jean Hynes, CEO of Wellington Management and Jenny Johnson, CEO of Franklin Templeton to explore the emergence and evolution of multi-strategy investment firms, pros and cons of converging investment “lanes,” and how these changes impact investors.
Market Segmentation: Evolution of the Industry
We all know that the Global Financial Crisis marked an inflection point for many aspects of our industry, to such an extent that one might view it as a kind of widespread reset button. Prior to the GFC, the founding of many firms was an extension of their previous work – a new chapter in the same book, if you will. After the GFC and its ensuing regulatory changes, the emergence of new firms was more akin to the start of a new book, sometimes a sequel and sometimes a brand new series. Firms that survived the culling and came out the other side began to acquire other firms, expand their product lines, and position strategies as diversifiers for investors. Sticking with the analogy, they began curating an anthology that encompassed multiple authors and genres, and they were no longer operating within the boundaries of their prior works.
Explaining the Convergence: Why Pursue this Strategy?
This cross-pollination and expanding library of public and private offerings has multiple potential drivers:
First is the appeal of a one-stop shop for the LP. With benefits like convenience, multi-asset-class solutions, and the potential for consolidating administration, due diligence, and (perhaps wishful thinking) fees, the advantages are clear.
Second is the drive of asset managers to maintain a competitive edge and capture some of the sizeable revenue that alts can potentially offer.
And third is the effect of retail and HNW investors wanting alts and the subsequent pressure to package alternative strategies for mass consumption or risk losing those clients to a competitor.
Considering these factors, the pursuit of a multi-strategy approach that spans not only multiple asset classes, but that includes both public and private markets, makes sense from a firm perspective. But what does it mean for managers and clients?
Manager Skill: Changing Competencies in a Changing World
It shouldn’t come as a surprise to anyone that the fundamental differences between public and private markets assets necessitate a distinct (overlapping in some ways, but certainly not synonymous) skillset for managers. As Jean remarked:
“I think if you want to be a successful investor on the private side, you have to have two skills. Not only the deep analytical skills to understand and analyze fundamentals and companies and the financials, but you also have to be a networker… In order to get deals, you need to have a certain level of EQ for the companies to trust you to want to partner with them. You don’t need that skill on the public side.”
Private markets are simply a different animal. You could be the best lion tamer on the face of the planet, but that doesn’t mean you can convince a grizzly bear to do tricks, and ignoring the difference may come back to bite you. Expanding further on the difference between active and passive managers, Jenny commented:
“If I said to you, ‘Go buy the cheapest car that you can get to get you from point A to point B,’ and that road was well paved and straight, you’d get a car with no extra whistles. But if your journey includes a mountain pass and a snowstorm, you’re sure going to wish you had paid up for those extra safety features on a car, and that is what risk-adjusted returns are. That’s how an active manager is thinking. People’s investment journey and savings journey doesn’t always include a straight road.”
Active management and private markets require a different skillet to deliver a positive investment experience and help clients achieve their financial goals on what may be a winding and bumpy road.
Investor Impact: Fulfilling Promises or Falling Short?
Which brings us to what we always believe is the most important part of the conversation: what this industry sea-change means for the end client. We outlined some potential advantages of multi-strategy firms for LPs above, but are the investment solutions on offer actually fulfilling what the average LP wants and needs? There’s an argument to be made that, while we’ve seen a lot of innovation in recent years, there’s still much more to be done. As Jenny described:
“When my grandfather got in this business, the average person couldn’t access the equity markets, until the innovation of a mutual fund. We are at that same point today, where we have to come up with the innovative vehicles to be able to responsibly deliver access.”
We’re still in the early days of private markets opening to the wealth management space, and that process will likely proceed in fits and starts. But navigating that path forward, challenging as it may be, is increasingly necessary to deliver on the promise of financial stability and the ability to retire with dignity. Jean articulated this, saying:
“When you think about 20, 30 years ago, almost everyone around the world had access to the economy to invest, and that’s not the case today... So, when you think about fairness to people who are trying to save for retirement and their ability to have returns, I think that it’s going to be inevitable that everyone should have access to privates.”
The Path Forward: Fairness and Fluidity
There are valid concerns around the pursuit of large, multi-strategy firms and what they mean for client outcomes. Who is communicated to first in a larger organization? Which funds will get the best deals? Will a parent company encourage a short-term, profit-maximizing mindset, forcing investment teams to focus on asset-gathering rather than long-term returns? Can you really be a fiduciary if you also have shareholders?
These concerns are not misguided, and all these questions (and more) should be asked of any larger firm. But the need for broader access to private markets remains, and the ability of larger firms to support operations, due diligence, deal sourcing, etc. may be necessary to responsibly deliver access to the broader retail market. We shouldn’t put the cart before the horse, but we also shouldn’t force the horse to drag a cart with malfunctioning wheels. If the lackluster performance of the traditional 60/40 portfolio persists, it’s not a question of whether private markets should be more broadly accessible, but when and how. As John emphasized towards the end of the episode:
“This is simply about fairness in the retirement promise and in the return promise for beneficiaries of having access to the global economy, and I think people forget that.”
To hear more about how some asset classes and the industry more broadly might continue to evolve to meet the demand for alts, check out the full episode.
About the Contributor
Claire Sawyer is Associate Director of Content Development at CAIA Association. Prior to her current role, she served as Program Manager and Relationship Manager for the UniFi by CAIA™ learning platform. She holds the Sustainability and Climate Risk (SCR) certificate from GARP and is a Level 2 CAIA Candidate. She earned a BA in Legal Studies from UC Berkeley.
Learn more about CAIA Association and how to become part of a professional network that is shaping the future of investing, by visiting https://caia.org/