Authored by John L. Bowman, CEO
In traditional economic theory, the “great convergence” suggests that lower income economies will grow faster than wealthier economies, eventually limiting output dispersion between countries. Proponents have argued that technological innovation, modern telecommunications access, and global transport of goods and people would be accelerants to solving for the income gap and prosperity inclusion.
This original premise has been left wanting for now, particularly in the West, but after a series of false starts, a new form of the great convergence has emerged in investment management. And as it has progressed from avant-garde to mainstream in recent years, it’s poised to reshape the foundation of our industry and those serving it, including CAIA Association.
We define the contemporary form of the great convergence as the blurring of lines between conventional and alternative assets, private and public securities, and institutional and wealth management solutions. It’s a new era in which everything is an alternative and investors are demanding diversified, long-term portfolio solutions to achieve their multifaceted investment objectives. The 60+ year CAPM epoch embodied by hyper-bucketed, benchmark-fragmented, liquidity-obsessed industry apparatus is on its last legs. We’re witnessing a paradigm shift away from narrow, single-lane firms and products, and asset owners, asset managers, intermediaries, and educational bodies must rewire their organizational ethos to meet the challenges of tomorrow’s capital markets. In our view, this rewiring has four facets:
At a Crossroads: Adapt or Obsolesce
Asset managers are transforming into multi-strategy hypermarkets. Specialist or single-strategy investment firms that still exist in only one lane are finding themselves marginalized or risking obsolescence as those lanes blur or disappear completely. In recent years, industry icons like Wellington, T. Rowe Price, Franklin Templeton, Russell Investments, and Blackrock have all aggressively built and bought private capital capabilities to exploit healthier margins, higher AUM growth, and cross selling opportunities. We devoted a recent episode of Capital Decanted to the modern asset manager, which dives into much more detail.
A Holistic Revolution: Embracing the Total Portfolio Approach
The endowment model is giving way to a Total Portfolio Approach (TPA). An increasing number of asset owners have begun questioning the common wisdom of strategic asset allocation, citing shortcomings that include a tendency to breed silo behavior, unhealthy competition for resources and attention, unrecognized duplication or disjointed risk exposure across the portfolio, and difficulty in managing the capital pool around a holistic view of the future. TPA requires every marginal dollar to compete for allocation and earn its place in the portfolio. This ensures the capital pool is invested in the very best collection of ideas, instead of being bound by arbitrary asset class constraints. Mercer recently published a report that builds on our seminal piece on the subject from last year.
Product Mashup
Product offerings themselves are moving towards hybrid public/private structures versus pure plays. With nearly 90% of global companies already private, and debt financing increasingly sourced and serviced from non-bank lenders, access to broad global economic beta is impossible without private market exposure. Investors are eager to find multi-asset solutions that provide access to the faster-growing new economy, diversified risk premia, and a range of return drivers. State Street’s recent ETF filings with Apollo and Galaxy Asset Management, and Capital Group and KKR’s strategic partnership on interval funds are just a couple examples. Apollo’s CEO Marc Rowan articulated convergence brilliantly in a recent interview with CNBC. While we think his timeline is somewhat aggressive, we wholeheartedly agree with the imminent crumbling of historical barriers that defined the previous decades.
From Institutional to Two-Legged Asset Owner
And finally, the wealth management vertical has become the new frontier for private market access. To extend Rowan’s interview point, individual investors don’t think in arbitrary constructs like asset classes. Instead, they are rightly concerned about tangible implications like growth, income, inflation protection, and capital preservation; goals that private capital can contribute to handsomely. By most accounts, the typical high net worth individual has allocated only 3-5% of their portfolios to private capital. Now that wealth management clients hold over half of global investable assets, even a modest increase in this allocation will produce a multi-trillion-dollar tsunami of capital flowing towards alternative strategies. Consequently, marrying product manufacturing, product solutions, and retail distribution has become the holy grail for this next chapter. Bain & Company recently penned a very good summary of how to ride this wave.
To outline how we’ll chart these new waters in the coming decade, CAIA Association has kicked off a strategic planning process called Vision 2035. Our ambitions are to not only take advantage of and serve this generational convergence, but to build the most energized community of investment professionals around the world. These objectives will require both continuous fortification of our existing model and enhanced durability through purposeful, ongoing innovation. We’ll continue to share our progress and invite you to join us in shaping the future of our industry.