Pan-European asset management group, Candriam believes that the interaction between a fund buyer and a fund manager has changed over the past decade as now the first meeting between the two is just the beginning of a process.
“In the past, if you saw a fund manager it was like engaging with an artist,” says Renato Guerriero, Candriam’s global head of distribution. “But we no longer believe in the magic touch of a fund manager.”
It’s a controversial claim – but then we live in interesting times. The success of super-cheap passive funds has made simple access to the markets trivially easy and has prompted investors everywhere to ask the question: are fund managers worth the money they charge?
In the 2000s people used to love high octane star managers, Guerriero continues.
But this has changed: today many funds are led by a team and overseen by an independent risk manager. “People are not looking for performance at any cost,” he says.
Rise of the machines
Part of this increased scrutiny is due to the emergence of factor investing. Fund buyers can see how funds respond to factor investing to double check a fund’s performance.
And if fund buyers can see that 90% of a fund manager’s performance is due to a factor or style bias they are now able to price that by looking at how a relevant factor investing product would cost.
The entire relationship building process between a fund group and a fund buyer is also different from a decade ago, according to Guerriero.
“In the past you would present the fund and this could be enough. You would give some details that were not publicly available, explain the facts and give a bit more insight into the strategy.”
Then, either the fund selector would buy the fund or not. Now, however, that is merely the start of the process. As Guerriero puts it, we are now in an ‘environment of advisory’.
Investors expect that you engage with them on the behaviour of markets, be aware of how you compare to competitors and how you are positioned against the big blockbuster funds in the sector.
This is the news
“What is also extremely appreciated is the ability to get first-hand information very quickly,” explains Guerriero. “Especially after market corrections, instability or fraud, whether it’s single companies or whole countries, you can make the difference if you are able to react quicker than the news.” Candriam, for example, has some healthcare and biotech funds. The managers of those funds are so plugged into those industries that they often hear about developments before they become widely known.
“Very often we’re able to share information with our clients that only gets into the press the following day,” he says.
There are several reasons why swiftly giving analysis on unexpected market events adds value.
Firstly, it can be valuable for a fund buyer to have exclusive early access to information about the market. Secondly, if the reaction is quick then it reduces the length of time that the fund buyer has to wait worrying about what is happening to the fund. Finally, the fund buyers themselves almost certainly have clients who are end investors – and they might be clamouring for answers.
Risk on, risk off
The increasing scrutiny on how a fund manager is overseen is another change that was largely brought about by the 2008 global financial crisis.
“The global financial crisis created a big divide,” he says. “Risk management has become much more prominent than before. When I look at fund buyer behaviour, risk is one of the top factors, when it wasn’t before.”
But how do these post-crisis changes affect the fundamental question: given the success of passives, factor investing and quants trading, is there space in the market for an expensive, skilled fund manager?
“I wish I had an answer that works for everyone,” says Guerriero. “Factors and style are powerful investment tools but not in all market conditions. When you look at active management, there is value when things turn sour – when you enter a phase of correction or dislocation.”
When the market is booming, Guerriero concedes that perhaps an index tracker is perfect – you get cheap access to all that profitable beta.
“But the minute you are afraid something might happen, the minute there is a fraud or an unexpected market event, then ETF and factor investing, which is mostly quant, don’t give you any protection,” he says.
In the fixed income area, this is especially the case. Investing in cap-weighted indices will give you the most exposure the most indebted issuers.
“And that is sometimes not a wise or a smart move,” says Guerriero.
We have, therefore, an interesting contradiction.
Post the 2008 crisis, fund buyers have been moving away from the idiosyncratic risks sometimes associated with strong-willed star managers. They want risk controls, team decisions and oversight.
At the same time, there is little value in following the indices or even having a strong style bias. To protect on the downside you need to be able to choose idiosyncratic stocks that are far from the index.
There are potential sheer drops on both sides of this path but the ongoing success of Candriam – and the whole active industry – will depend on how sure-footed its fund managers can be.