By William (Bill) J. Kelly, CAIA, the President & CEO of the CAIA Association.
The summer season is upon us in the northern hemisphere, and the populous here is turning their attention to holiday plans. In many cases, it is the serenity of the sea that captures the imagination. This harbingers long lazy days of devouring a good book, taking in the sunshine, or simply unplugging from a cacophony of devices and demands that seem to both own and direct us, in this new post-pandemic world. Day’s end often brings a departing approach to the shoreline and maybe even some reflection, as you contemplate nature, life, and what is or what could be. In this reflection calculus who amongst us has not imagined spotting that quintessential bottle bobbing in the water as the tide pushes it toward us with an important message from a stranger in some far away land?
We did get a holiday postcard recently from the workaholics at The Boston Consulting Group (perhaps from Cape Cod?) telling us that The Tide Has Changed. Given the fact that the lunar rotation and related forces create tidal shifts every 6 hours, this is hardly a breakthrough observation until you realize that they are writing to us from WaikiGP Beach where a dangerous riptide has disrupted the world order, and indeed it has! 2022 saw a 10% drawdown in global AUM; the second single largest decline since 2005, pushing us back below the $100T marker. Net flows were also anemic relative to recent trends, clocking in at only about half of what they had been averaging over the prior five years. Operating leverage cuts both ways, and profits are down, too.
Not to worry, because on WaikiGP Beach there is a plan, but we will not give away the ending to avoid spoiling your summer read. There are however, five tidal ‘Pressures’ that are threatening the halcyon days that were perhaps taken for granted. To state the obvious, challenge #1 is that growth is no longer guaranteed. The client seems to only want passive funds (#2), and that is causing fee compression to accelerate (#3). If that is not enough, costs are rising too (#4), and attacking with new offerings no longer seems to work as well (#5), with ‘less than 40% of all new products launched a decade ago still being viable today’. Wow … not exactly a day at the beach. But what if you marched to the shore before taking your leave for the day and spotted a sea-polished bottle bobbing in the eddies desperately trying to make its way toward you?
The culturally minded bather at WaikiGP Beach will be different and daring enough to snare that prize. The message within will define a path that cannot rinse away any pressures or risks but can reorient a balance of the GP challenges with those faced by the client. The message begins with their pressures which starts with a retirement that is no longer guaranteed (#1). The defined benefit days are over, and the client is “scared to death” as to how she will navigate the investment, geopolitical, and longevity risks that have been thrust upon her, absent any sustainable education or advice. She also “wants and needs the alpha” that can only be found in active management. She equally understands that “capital formation and value creation are now almost exclusively a private markets matter”, but where is the trusted guide as she thinks about stepping off that ledge of indexation (#2)?
Fee compression and costs (#’s 3 and 4)?!?! “Tell me about it,” she writes, as “her income is not keeping pace with inflation and average tuition costs have tripled in just the last two decades”, bringing the message to Client Pressure #5. Shiny objects are no longer as attractive and she just wants to “trust you with solutions she can understand, within a long-term plan that stands a reasonable chance of working” … for her!
Investing will never be a day at the beach, but with such a long-term plan in place, demarked by true diversification within an agreed upon tolerance for risk, there is a far greater chance of meeting those liabilities, hopes, and maybe even some dreams on the liability side of her balance sheet. What’s under your umbrella on WaikiGP Beach?
Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.
About the Author:
Bill Kelly, CAIA, has been a frequent industry speaker, writer, and commentator on alternative investment topics around the world since taking the leadership role at the CAIA Association in January, 2014. Previously, Bill was the CEO of Boston Partners and one of seven founding partners of the predecessor firm, Boston Partners Asset Management which, prior to a majority interest being sold to Robeco Group in Rotterdam in 2002, was an employee-owned firm. Bill’s career in the institutional asset management space spans over 30 years where he gained extensive managerial experience through successive CFO, COO and CEO roles. In addition to his current role, Bill is a tireless advocate for shareholder protection and investor education and is currently the Chairman and lead independent director for the Boston Partners Trust Company. He has previously served as an independent director and audit committee chair for ’40 Act Mutual Funds and other financial services firms. He is also currently an Advisory Board Member of the Certified Investment Fund Director Institute which strives to bring the highest levels of professionalism and governance to independent fund directors around the world. A member of the board of the CAIA Association, Bill also represents CAIA in similar capacities via their global partnerships with other associations and global regulators. Bill began his career as an accountant with PwC and is a designated Audit Committee Financial Expert in accordance with SEC rules. Follow Bill Kelly on Twitter @CAIA_BillKelly
