Tuesday, March 13, 2012

What mega-fund managers care about

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
Risk aversion
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%
Don’t know

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
Don’t know

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
Brand recognition
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.



Anonymous said...

Its just push polling - Trustee style.
They don't give a rats about performance or risk as that's not a Trustee's role ( well not a role they get paid to take).


John Hempton said...

If it is just push-polling then they are bozo idiots.

To tell people we are good at all the things you don't care about is not a way of doing push polling.

Tom said...

If $50 billion is what it takes to be managing a non-negligible amount, then there are only so many mega-fund managers that qualify. And do they really have time to be responding to these kinds of surveys?

I don't get it.

Anonymous said...

They're polling the job creators. Get back to work. Someday, maybe, you will be able to taste their air.

With a sample size of 5, they should be very well equipped to lecture the rest of us on how things should work, aside from pesky things like performance.

Anonymous said...

My guess is that State Street just took a questionaire for mutual funds and recycled it.

Probably they are doing this survey so that they can update their marketing materials by reference to the responses received. They won't change their service offerings one iota, of course, just the spiel which they give to their prospective customers!

Reminds me of the old saying: never attribute to malice that which can be explained by stupidity.

aaron said...

They are not offering their services as an investment manager, they are trying to help decide marketing strategy and new products offered to investment managers. If performance isn't at the top of their clients lists, then they won't be around as clients much longer, goes without saying.

harminder said...

The EIU employees who came up with the survey must not have much experience in the industry, which is why you find the choice of questions so odd. I wonder if they ran a pilot test of the survey to test it out.

BloGollum said...

Sharpe of 5 on T-bills. No. Sharpe should properly be based on excess returns over cash. Sharpe of T-bills = 0/0 which is (annoyingly) indeterminate. So might be 5, I suppose.

John Hempton said...

Mr Gollum - I was of course teasing a little with the T-Bills.

Anonymous said...

Dividing the AUM by 1000 or replacing the B's with M's would make a whole lot of sense to me.

Anonymous said...

How many people running pension funds for government employees in the US are graded on performance?

How many are graded on their politics, or for owning companies that meet some politically inspired mandate?

Or am I being cynical?

Anonymous said...

Your cynicism is doing you wrong Rich.

High performance pension returns allow for politicans to enrich the public sector unions at a lower expense to the public - good politics.

Absalon said...

The concern about computer systems should be: can you track where your clients' money went to at all times under all conditions.

With a billion dollars "disappearing" into thin air at MF Global, reliable record keeping should be at the top of the regulators' demands (as in: Prove you have complete and accurate records that are locked down and cannot be tampered with or shut down today).

Anonymous said...

You don't have to find many firms in the final ( > $1Trillion) bracket before your survey essentially is the entire asset management marketplace.

Since these firms essentially ARE the average dollar invested, it would be outrageous to expect that any one of them would expect to out-perform themselves. Performance-versus-average comparisons, are by definition a zero sum game. Some, but not all, can win.

This of course comes after this year's “86% of fund managers LAGGED their benchmark” type claim. While it's not possible for everybody to be above average, trading costs and fees certainly would allow 100% of firms to be below average!

John Hempton said...

The intended purpose was satellites.

Anonymous said...

Managers of the mega-fund variety are typcially passive managers with the goal of matching a pre-defined benchmark (the word alpha is rarely uttered)--Beta management is the primary objective and the asset owners who purchase such funds are aware of this.

Therefore, their primary concern is reducing TE through the use of more efficient infrastructure.

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