I recently read a great article regarding Boeing’s interest in exploring space aviation and how this would be a natural evolution of their business. It seems very logical that companies would think about how to expand and create new initiatives in an effort to grow. Unfortunately, the asset management business has not followed this evolutionary model.
Over the past decade, there has been very little innovation in the asset management business. I could easily argue there has been NONE, but some might suggest that interval funds or ETFs have somehow pushed the innovation ball forward. I would counter that these innovations were nothing more than packaging initiatives and not really creating a new marketplace. After all, innovation explores inventing something that creates a new clientele. For example, if you package Private Equity into a liquid mutual fund then you are creating a new clientele; you are bringing something that was unattainable to a specific group of people via a vehicle that they could access and trade efficiently. As a side note, if you are at all interested in the dynamics of how companies go about this initiative, I would suggest you read Blue Ocean Strategy by Chan Kim and Renee Mauborgne. This book provides countless examples of how companies have succeeded by creating a new marketplace.
Now back to the asset management business. Most “active” mutual fund companies are in massive net redemptions, and the consensus is that this downward spiral will not only continue but will get worse. All you have to do is look at the stock prices of these firms, and it becomes evident that “Wall Street” has become cynical of their long-term outlook. I have had the opportunity to work for a handful of publicly-traded asset management firms, and the main factor that drives the stock price is quarterly flows. Most publicly traded asset managers are down 25%-50% from 52-week highs compared to the S&P being up 20%. Why are they down so significantly? – because they are all in net redemptions.
So how do you turn these battleships around? Through innovation. They need to recognize that they will not gain any significant market share by highlighting that their large-cap growth fund is performing better than others. They need to start creating products that fill demands that their clients do not recognize they have and/or give clients access to something that they normally could not obtain. For example, I have a close friend that has “crushed it” by opening multiple franchises in the fitness industry. Why not create a fund (or a private placement) that allows investors to invest in a pool of franchises that generate significant income? To me, that is an innovative idea that creates a new marketplace. Another example? I recently discovered an investment platform that uses Artificial Intelligence to develop models that tactically navigate the equity and bond markets. Their performance is exceptional, but they have no background in how to best market this platform to the masses. Executing on ideas like these is how you win wallet-share.
The search for Alpha will never stop. We just need to be more creative in how we are delivering client outcomes. And the answer is not creating more long-only, active mutual funds.