Lansons Conversations

Climbing the reputational yield curve

It appears that asset managers aren’t to be construed as systemically important, which is good news. Nonetheless, they remain hugely significant in the global flow of capital. And, for an ever growing number of investors and households, they will be an important cornerstone of wealth protection and retirement provision for the foreseeable future.  

Whilst this decision not to allot fund managers and funds SIFI status, once confirmed, should provide a fillip to the sector, the aggregate reputation of asset managers remains somewhat below par. There are signs that the industry is learning from recent regulatory battles, the SIFI scuffle being headed off relatively quickly (but too slow for some). This is no reason for complacency. Critics continue to feel that industry still seems too remote from the outside world, forever brokered by 3rd parties with no guarantee of alignment of interests.

Part of the challenge is that the industry, overall, continues a bias towards product promotion over reputation management, suggesting that some rebalancing is called for. Industry reputation is not the preserve of trade associations and the larger groups, but effectively is a mosaic created by all the sector participants relative to their own visibility at any one time.

Territorial battles within the industry do not necessarily help either. It’s recently been announced that ETFs have overtaken hedge funds in overall assets under management. I’m not convinced of the significance of this “development”– not only do the two product types have predominantly different investor bases, ETFs are not unpopular investments among certain hedge funds.

Another consideration is whether industry divisions based upon what are effectively decreasingly differentiated product types – hedge funds, private equity, mutual funds, ETFs, and so forth – continue to be either helpful or relevant to the underlying investors. During the financial crisis each of these sectors declared their innocence from its causes in turn, along with the fact that they weren’t banks, to be met with a huge wall of indifference by the outside world. Convergence has long been a topic in the industry but, on reflection, what this reaction told us was that to everybody on the outside this convergence had already happened. Furthermore, as banks are coerced into cultural change – although whether that regulatory framework remains in situ remains to be seen – they can develop a reputational advantage over asset managers if they do not respond in kind.

A winning argument in the avoidance of SIFI accreditation is the fact that asset managers don’t own the actual assets they invest in. They are merely a conduit for the actual asset owners. Private lending from institutional and alternative asset managers is growing – either through origination of new debt or the acquisition of existing books of loans including non-performing residential mortgages- and this investment in the real economy is further proof of the social value of fund companies. So far, so good.

But this potentially changes the dynamic between asset managers, asset owners, borrowers and investors, particularly when the last two categories turn out to be the same organisations (or even individuals). For the time being, with economies recovering, default rates improving and the demand for yield undiminishing, this looks like a win-win. But like everything else, markets and sentiment can turn, and the impact of this change in the dynamic has yet to be tested by any sort of credit squeeze. Which is why investing in your reputation now may yield its own return in the future.

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