Disruption and Differentiation

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The theme of the 72nd CFA Institute Annual Conference is “Disruption: The New Reality in Investment Management.” For an industry that has been thriving for a half century, the prospect of significant disruption might seem overdue to some but still quite unlikely to others.

You are undoubtedly aware of the major factors that are at play: the declining ability of active managers as a group to add value over time, the increasing market share of index investing, technological developments that are reforming organizations and strategies, and all-in fees for end clients that are often too high for what they receive in return.

One factor that could make disruption more acute: a lack of differentiation in approach between investment organizations. The past success of existing operating models has led to standardization rather than experimentation, and most everyone in a particular category looking like everyone else.

A good example of this can be found by comparing investment advisory firms. If you pick a dozen at random and go their websites, many will have a page or a section that is titled something like, “We are different.” But if you look through the sites, you’ll find that most aren’t any different at all. The firms may fit into identifiable subsets based upon the regulatory rules under which they operate, but within them they look very similar.

That is also true of most asset management organizations. With a few notable exceptions, they offer nothing markedly different in terms of organizational design, culture, people, incentives, marketing, fees, or business models. The firms might take risks in the market, but they are reluctant to do so in other ways.

One such example is when asset managers try to win a mandate from an institutional investor. The process can unfold in a variety of ways, but in many ways it still resembles the “manager beauty contests” of yore. Four or five finalists in a particular asset class or strategy are asked to come before an investment committee to try to win the business.

After all the presentations have been given, there is usually not much to distinguish one from another. The decision is regularly swayed by the performance record of a manager and/or the persuasiveness of a particular presenter, neither of which is a good way to select a provider.

Even larger asset owners and consulting firms with their own analysts struggle to find true differentiation among potential managers, and the managers don’t go out of their way to help. Since adding value comes from doing something different — and having it pay off — you’d think that identifying those differences would be a priority not only for the managers but also for those allocating capital. In practice, most of the manager pitch books and allocator research reports fail to truly distinguish managers in meaningful ways.

To survive the disruption ahead, organizations will need to kindle a spirit of innovation. Sticking to the standard playbook has been a tenable strategy in the past. To succeed in a more challenging environment, they will probably need to write a new one.

At the 72nd CFA Institute Annual Conference, Tom Brakke, CFA, will lead an extended session on the Principles of Manager Due Diligence and Selection, including approaches for identifying true differentiation among asset managers.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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