Governance Today
(Dec. 2018)
Mr. Trump has now been in office for almost 2 years. It is hard to remember a more tumultuous period in American politics from a securities markets, administrative staff, foreign relations, and media standpoint. Everything is shifting, being upended, and (perhaps) evolving. Tariffs and administration policies are creating inequities amongst industries. Unbridled market enthusiasm is being questioned. Frankly, I pity the portfolio manager for very few inputs appear to be sacred, stable, or even remotely predictable. Investing models are clearly being tested and retested – perhaps some should be tweaked or re-conceptualized. Boards should be glued to the (real and verifiable!) news, asking lots of probing questions, and expecting diligent market monitoring by their advisors. The peeling back of Board duties has not become a reality, to any great extent.
Despite the regulatory, general oversight and social volatility in DC, many aspects of today’s funds business have not changed. Equity markets continue to be strong and reasonably optimistic, albeit with some caution now. The US has mostly recovered from the 2008/2009 market contagion and appears to not be looking back. Yet, making the scene recently appear to be some investing tactics displaying tinges of “irrational exuberance.” [Hang on.] Fund asset flows continue to be extremely concentrated towards a few shops and clearly those sponsors offering indexed products and ETFs. The more generic offerings of active managers have struggled to attract any attention from the investing public and a not insignificant amount of small and mid-sized advisors are either stagnant or shrinking in overall TNA scope. One would guess that some industry consolidation may be on the horizon. While select portfolio managers have clearly benefited from the recent market volatility, their numbers are not in the majority and the flows still do not show a current preference for active management. Pressure on fee levels continues as expense benchmarks slowly drop, waivers in some asset classes rise, new fund fees emerge at lower levels, and the necessary proliferation of management fee breakpoints are in the forefront of Trustees’ minds.
The fund business is absorbing what appears to be an inescapable truth – bias towards a low-cost, passive style by a not insignificant portion of the market will persist. This is clearly a challenging and potentially problematic issue for both advisors of active funds and their Trustees alike. Given the apparent stickiness of the index trend and heightened focus on cost, some observers may argue that the fund industry has entered an unavoidable phase of evolution and will permanently move towards economic approaches and structures it has never favored to ensure continued health. Consideration of the destruction and reconstruction of some or all business models may be unavoidable. Distribution and marketing, which have clearly morphed over the last decade or so, will need reexamination and retooling. Gone are the days of classic wholesaling, traditional revenue sharing, and well-muscled distribution partners. Current fee and cost models may not resonate in a market focused on indices and investors who do not embrace the value of dissecting financial data manually, seeking to select “winners.” Asset allocation and not necessarily brand- or person-centric approaches may garner the most interest. Thus, given the stability of economic conditions and outlooks, flows and revenues may be less stable. And, margins for newer suites of indexed products will clearly be lower than traditional active funds. Financial expectations will need to be adjusted accordingly. Finally, products which straddle many asset classes, hedge certain risks, and cater specifically to the income needs of boomers may emerge as the big winners.
This projection by some observers of the fund business does not – in my opinion – necessarily equate to a wholesale move to index funds for all providers or the entire industry. There will always be a place for active management, whether on an individual security level and/or more broadly at the asset class level. The efficiencies of the markets must include some level of purposeful security selection to support the notion of stock price vs. value. Yet, the approach to active management is arguably dependent on the type of security. The key for what is quickly becoming a defined active management segment of the funds business is highly diligent risk mitigation and downside avoidance by an active market participant. Who wants to passively follow an index down to the bottom of a trough when one can rely on a skilled person to actively adjust holdings based on market conditions?! Granted, even highly adept portfolio adjustments may not always preserve (or build) capital, but one’s overall chances of besting a plunging index are dramatically improved.
What do these apparently steadfast trends mean for Trustees of the non-index asset leader complexes? What should the discussions amongst Boards and fund advisors look like? Consider the following Trustee questions: 1) how does your advisor’s existing product line address the current investor preferences (or does it)? 2) are asset flows sufficient to counteract outflows and not negatively impact portfolio manager strategies; 3) what new marketing and distribution strategies are being considered? 4) have expense benchmarks shifted downward to the point where your funds’ competitiveness has been compromised? should alternative cost approaches, more aggressive waivers, or fulcrum fees be entertained? 5) with presumably less asset flows, what operational changes or cuts may be anticipated, if any? how might these changes impact the shareholder experience? 6) overall, what fundamental structural business changes are being entertained, if any, to ensure financial health and investor interests continue to be served? These are undoubtedly tough questions with no easy answers (and not an exhaustive list). Not surprisingly, the Board’s job has not miraculously gotten easier.
Nobody should attempt to project, with great certainty, what the coming decades will look like for global markets or what events will gradually transform the funds business. Stress testing, scenario analysis, and careful market analysis seem prudent. It seems likely that the ‘index craze’, while still quite vigorous, has its limits and will reach a ceiling. What is the peak? I won’t even hazard a guess. Traditional active management will survive, yet probably on a smaller scale, and advisors who skillfully adjust to a different environment will successfully forge forward, terra-forming a different landscape as they go.
I encourage fund Trustees to jointly discuss, with great vigor, the path forward for active management with their advisors and the probable recipes for success over the coming decades.
_________________________________________
(December 2016)
As the equity markets reach new heights and economic indicators demonstrate strength, the US financial system has arguably recovered from the trauma that was 2008/2009. Advisors and Directors alike have jointly enjoyed a period of generally positive equity returns and market upswings, albeit volatility has been unpredictable. Yet, asset flows have been extremely concentrated and have favored those sponsors offering indexed products and most prominently ETFs. Net asset growth has very much disfavored the active manager of late. However, with the outgoing transition from DC of the Obama administration and dramatic change arguably on the horizon, one might surmise that active managers might once again have the opportunity to renew their patina.
More to the point, one would be hard pressed to argue against the notion that, with the election of Donald Trump to the office of US President, corporate and general economic scenarios will be highly unpredictable in the short-term. While many campaign promises are notoriously not kept by newly-elected Presidents, Mr. Trump threw out into the public eye many grandiose plans – the markets have responded optimistically. Consider the following quandaries as a new administration takes over. Who can say that significant infrastructure spending will be adequately covered by private funding or through approved deficit spending? Will some level of US protectionism result in better or worse returns for US companies? How will US trade policy be affected by the Trump administration? Who will take Mary Jo White’s position and how will the SEC change under the Trump administration? Will NAFTA be dismantled? What will become of Dodd-Frank, Fannie, Freddie, and financial services regulations? Will Obamacare survive and, if not, what will take its place? These current quandaries are all issues that have not begun to play out at this juncture, but should in time provide ample opportunities for profitable investment, either long or short.
From an inquisitive Director’s standpoint, many probing – arguably unanswerable – macro advisor questions emerge from the cacophony. What US trading partner agreements might be retooled and how will this affect the “flow of funds?” How might elevated government spending benefit certain sectors? How will possible tariffs, quotas etc. impact corporate profits? Most important, what specific scenarios are most realistic and that an advisor might view as actually playing out? And, what investment-related actions does an advisor view as prudent to ‘front run’ a new administration’s potential actions? Perhaps the best course for Boards is to not expect or confirm sizable and definitive movements into targeted industry segments or securities at this stage, but to obtain comfort that monitoring of economic and market developments is rigorous, anticipated asset price movements under possible scenarios are mapped, and plans for a new ‘take’ on shareholder asset deployment are in place. Those portfolio managers who “stay the current course” and/or underestimate the magnitude of economic change that is likely to occur in the near future will surely lag those who closely monitor, plan, and take swift action(s) when the appropriate time comes. The spread between winners and losers could be very polar.
The most pertinent and closer-to-home question that fund Boards are now pondering is “will probable financial services reform result in Board duties being scaled back?” Less overall regulation and fewer Board duties appears likely, but prognosticating also seems fruitless. The new administration is not yet in place, Cabinet members and advisors are still being chosen, and realistic plans for change are still being formed by the incoming administration. Perhaps the presumed shocks to many parts of the economy, financial services, and fund Boards will not be as great as forecast. One might argue that President Trump (with no political background) must acclimate to the DC way of accomplishing goals, learn to work within the system, and embrace compromise. His larger-than-life promises during the campaign must be realized not through full autonomy, but many times through convincing colleagues (of both parties) that less stringent oversight and regulation of the financial services businesses is prudent for the economy as well as consumers.
We neither know what level of priority President Trump will place on certain targeted business segments nor what the timing may be and the support he may garner. Very detailed monitoring of possibly quantum shifts in government policy, regulation, and direction appears prudent for all highly interested (and vested) parties.
(Dec. 2018)
Mr. Trump has now been in office for almost 2 years. It is hard to remember a more tumultuous period in American politics from a securities markets, administrative staff, foreign relations, and media standpoint. Everything is shifting, being upended, and (perhaps) evolving. Tariffs and administration policies are creating inequities amongst industries. Unbridled market enthusiasm is being questioned. Frankly, I pity the portfolio manager for very few inputs appear to be sacred, stable, or even remotely predictable. Investing models are clearly being tested and retested – perhaps some should be tweaked or re-conceptualized. Boards should be glued to the (real and verifiable!) news, asking lots of probing questions, and expecting diligent market monitoring by their advisors. The peeling back of Board duties has not become a reality, to any great extent.
Despite the regulatory, general oversight and social volatility in DC, many aspects of today’s funds business have not changed. Equity markets continue to be strong and reasonably optimistic, albeit with some caution now. The US has mostly recovered from the 2008/2009 market contagion and appears to not be looking back. Yet, making the scene recently appear to be some investing tactics displaying tinges of “irrational exuberance.” [Hang on.] Fund asset flows continue to be extremely concentrated towards a few shops and clearly those sponsors offering indexed products and ETFs. The more generic offerings of active managers have struggled to attract any attention from the investing public and a not insignificant amount of small and mid-sized advisors are either stagnant or shrinking in overall TNA scope. One would guess that some industry consolidation may be on the horizon. While select portfolio managers have clearly benefited from the recent market volatility, their numbers are not in the majority and the flows still do not show a current preference for active management. Pressure on fee levels continues as expense benchmarks slowly drop, waivers in some asset classes rise, new fund fees emerge at lower levels, and the necessary proliferation of management fee breakpoints are in the forefront of Trustees’ minds.
The fund business is absorbing what appears to be an inescapable truth – bias towards a low-cost, passive style by a not insignificant portion of the market will persist. This is clearly a challenging and potentially problematic issue for both advisors of active funds and their Trustees alike. Given the apparent stickiness of the index trend and heightened focus on cost, some observers may argue that the fund industry has entered an unavoidable phase of evolution and will permanently move towards economic approaches and structures it has never favored to ensure continued health. Consideration of the destruction and reconstruction of some or all business models may be unavoidable. Distribution and marketing, which have clearly morphed over the last decade or so, will need reexamination and retooling. Gone are the days of classic wholesaling, traditional revenue sharing, and well-muscled distribution partners. Current fee and cost models may not resonate in a market focused on indices and investors who do not embrace the value of dissecting financial data manually, seeking to select “winners.” Asset allocation and not necessarily brand- or person-centric approaches may garner the most interest. Thus, given the stability of economic conditions and outlooks, flows and revenues may be less stable. And, margins for newer suites of indexed products will clearly be lower than traditional active funds. Financial expectations will need to be adjusted accordingly. Finally, products which straddle many asset classes, hedge certain risks, and cater specifically to the income needs of boomers may emerge as the big winners.
This projection by some observers of the fund business does not – in my opinion – necessarily equate to a wholesale move to index funds for all providers or the entire industry. There will always be a place for active management, whether on an individual security level and/or more broadly at the asset class level. The efficiencies of the markets must include some level of purposeful security selection to support the notion of stock price vs. value. Yet, the approach to active management is arguably dependent on the type of security. The key for what is quickly becoming a defined active management segment of the funds business is highly diligent risk mitigation and downside avoidance by an active market participant. Who wants to passively follow an index down to the bottom of a trough when one can rely on a skilled person to actively adjust holdings based on market conditions?! Granted, even highly adept portfolio adjustments may not always preserve (or build) capital, but one’s overall chances of besting a plunging index are dramatically improved.
What do these apparently steadfast trends mean for Trustees of the non-index asset leader complexes? What should the discussions amongst Boards and fund advisors look like? Consider the following Trustee questions: 1) how does your advisor’s existing product line address the current investor preferences (or does it)? 2) are asset flows sufficient to counteract outflows and not negatively impact portfolio manager strategies; 3) what new marketing and distribution strategies are being considered? 4) have expense benchmarks shifted downward to the point where your funds’ competitiveness has been compromised? should alternative cost approaches, more aggressive waivers, or fulcrum fees be entertained? 5) with presumably less asset flows, what operational changes or cuts may be anticipated, if any? how might these changes impact the shareholder experience? 6) overall, what fundamental structural business changes are being entertained, if any, to ensure financial health and investor interests continue to be served? These are undoubtedly tough questions with no easy answers (and not an exhaustive list). Not surprisingly, the Board’s job has not miraculously gotten easier.
Nobody should attempt to project, with great certainty, what the coming decades will look like for global markets or what events will gradually transform the funds business. Stress testing, scenario analysis, and careful market analysis seem prudent. It seems likely that the ‘index craze’, while still quite vigorous, has its limits and will reach a ceiling. What is the peak? I won’t even hazard a guess. Traditional active management will survive, yet probably on a smaller scale, and advisors who skillfully adjust to a different environment will successfully forge forward, terra-forming a different landscape as they go.
I encourage fund Trustees to jointly discuss, with great vigor, the path forward for active management with their advisors and the probable recipes for success over the coming decades.
_________________________________________
(December 2016)
As the equity markets reach new heights and economic indicators demonstrate strength, the US financial system has arguably recovered from the trauma that was 2008/2009. Advisors and Directors alike have jointly enjoyed a period of generally positive equity returns and market upswings, albeit volatility has been unpredictable. Yet, asset flows have been extremely concentrated and have favored those sponsors offering indexed products and most prominently ETFs. Net asset growth has very much disfavored the active manager of late. However, with the outgoing transition from DC of the Obama administration and dramatic change arguably on the horizon, one might surmise that active managers might once again have the opportunity to renew their patina.
More to the point, one would be hard pressed to argue against the notion that, with the election of Donald Trump to the office of US President, corporate and general economic scenarios will be highly unpredictable in the short-term. While many campaign promises are notoriously not kept by newly-elected Presidents, Mr. Trump threw out into the public eye many grandiose plans – the markets have responded optimistically. Consider the following quandaries as a new administration takes over. Who can say that significant infrastructure spending will be adequately covered by private funding or through approved deficit spending? Will some level of US protectionism result in better or worse returns for US companies? How will US trade policy be affected by the Trump administration? Who will take Mary Jo White’s position and how will the SEC change under the Trump administration? Will NAFTA be dismantled? What will become of Dodd-Frank, Fannie, Freddie, and financial services regulations? Will Obamacare survive and, if not, what will take its place? These current quandaries are all issues that have not begun to play out at this juncture, but should in time provide ample opportunities for profitable investment, either long or short.
From an inquisitive Director’s standpoint, many probing – arguably unanswerable – macro advisor questions emerge from the cacophony. What US trading partner agreements might be retooled and how will this affect the “flow of funds?” How might elevated government spending benefit certain sectors? How will possible tariffs, quotas etc. impact corporate profits? Most important, what specific scenarios are most realistic and that an advisor might view as actually playing out? And, what investment-related actions does an advisor view as prudent to ‘front run’ a new administration’s potential actions? Perhaps the best course for Boards is to not expect or confirm sizable and definitive movements into targeted industry segments or securities at this stage, but to obtain comfort that monitoring of economic and market developments is rigorous, anticipated asset price movements under possible scenarios are mapped, and plans for a new ‘take’ on shareholder asset deployment are in place. Those portfolio managers who “stay the current course” and/or underestimate the magnitude of economic change that is likely to occur in the near future will surely lag those who closely monitor, plan, and take swift action(s) when the appropriate time comes. The spread between winners and losers could be very polar.
The most pertinent and closer-to-home question that fund Boards are now pondering is “will probable financial services reform result in Board duties being scaled back?” Less overall regulation and fewer Board duties appears likely, but prognosticating also seems fruitless. The new administration is not yet in place, Cabinet members and advisors are still being chosen, and realistic plans for change are still being formed by the incoming administration. Perhaps the presumed shocks to many parts of the economy, financial services, and fund Boards will not be as great as forecast. One might argue that President Trump (with no political background) must acclimate to the DC way of accomplishing goals, learn to work within the system, and embrace compromise. His larger-than-life promises during the campaign must be realized not through full autonomy, but many times through convincing colleagues (of both parties) that less stringent oversight and regulation of the financial services businesses is prudent for the economy as well as consumers.
We neither know what level of priority President Trump will place on certain targeted business segments nor what the timing may be and the support he may garner. Very detailed monitoring of possibly quantum shifts in government policy, regulation, and direction appears prudent for all highly interested (and vested) parties.