I just received a survey request from the Economist Intelligence Unit on behalf of State Street Corporation. The target group was clearly mega-fund managers – a group of which I am not a member.
However the questions (and choices offered) were an insight into the concerns of mega-fund managers – concerns that are generally not shared by the clients.
The opening question set the tone:
1. What are your organisation’s total global assets under management in US dollars?
Under $50 billion
$50 billion to $99 billion
$100 billion to $499 billion
$500 billion to $999 billion
$1 trillion or more
Pretty close to the entire hedge fund community has to take the first choice here. David Einhorn – first choice. Any of the Tiger Cubs. First choice. Even big-name mutual funds are in the first bucket. This was not a survey that was going to be of any relevance to me.
Question 6 revealed the bulk of the rest of the study:
6. In your opinion, which of the following is the most important factor driving decisions among institutional investors in today’s environment? Select one.
Diversification away from mainstream asset classes
Regulatory complexity / uncertainty
Other, please specify
Kind of amazing. Performance is not listed as even a possible important factor driving decisions among institutional investors. Let me be blunt: the only things Bronte (or any decent small fund manager) sells are “risk management” and “performance” in that order. Not risk aversion. Fund managers are paid to take sensible risks – and to manage money. If risk aversion is your thing I can produce you a fund with a Sharpe Ratio over 5. I will just invest the money in 28 day Treasury paper. I put risk management first because it doesn't matter how good your performance is if you take stupid risks one day you will get lanced.
The growth aspirations of large fund managers clearly follow their performance:
8. What are your organisation’s expectations for increasing assets under management over the next 24 months?
1% - 3%
4% - 7%
More than 8%
Where are the 50-100 percent growth option that a small successful hedge fund manager might have. These guys live in a world where 8 percent growth over two years is a lot to hope for. A small fund manager hopes to get a multiple of that growth in assets under management just from performance. It is not guaranteed by any stretch. However large asset managers are living in a world of very low expectations.
Half a dozen of the next questions were about regulatory environments and the effects they will have on the business. These were interposed with questions about computer systems (clearly necessary to meet the regulatory issues). However this question gave the game away:
15. What are the greatest data management challenges to the asset management industry today? Select all that apply.
Achieving sufficient scale with in-house systems
Providing a high level of detailed and quality data to clients
Safeguarding investor data
Providing accurate data to regulators and auditors in a timely fashion
Collecting and managing the data on the range of investment choices was not even a concern. Nor was any data necessary to assess risks. Bizarre.
At least on the next question you got to write in the issue that really matters:
16. Which of the following will contribute to your organisation’s ability to expand globally over the next 12 to 24 months? Select the top two.
The strength of our infrastructure
Relationships with key market participants
Competitive advantage in niche markets
Other, please specify
We currently have no plans to expand globally
What will enable Bronte to expand globally over the next 12-24 months? What about any small asset manager? One word answer: performance. Fund managers - especially small ones - live or die by it. Our most sophisticated customers when they ask us questions ask us almost exclusively about risk management - so if we want to grow amongst those people we need to have a demonstrated culture of risk control and good performance. But still the thing that makes an asset manager grow is performance - if only because 20 percent returns increase your funds under management by 20 percent even if you have no net flows.
Sometimes, looking at some stock in some company I think is fraudulent or insolvent I wonder what goes through the minds of the large institutional shareholders.
But maybe I am just attributing to them motives that they don't have. Maybe I just assume they want to actually manage money (rather than manage regulators and sell product).
Just maybe. Alternatively State Street (who commissioned this survey and whose business is back-office and custody) have no idea of the concerns of their clients.