Research produced by Saltus, (http://www.saltus.co.uk/) the absolute return investment managers, looks at long term correlation across asset classes. Over the last 10 years, a 12 month period from 9 years ago, the last 6 months and the last 3 months, data clearly shows that there has been a sharp increase in correlation across asset classes this year (do drop me a line if you are interested in seeing this data). High correlation makes it difficult to add value through stock picking or tactical asset allocation, and from a communications point of view this is tough timing for the industry on two counts:
Firstly, the active fund management industry continues to come under fire for high charges and low results. This isn’t a new discussion as anyone who was working in the industry in 2000 will tell you, but it does have a new context. In the last decade investors have suffered not one, but two catastrophic market events and their faith in markets and managers has taken a severe bashing. At the same time, the industry is facing a change of regime with RDR and control of the end investor has clearly shifted in the past decade from fund manager to intermediary (adviser or platform). Do not be surprised to see more fire directed at the industry on the matter of management charges in coming months and it’s worth taking a look at media attention regarding pension charges or indeed Banking CEOs and the clear casting of ‘villain’ if you are wondering just how bad attention could get. Now seems like a sound time for the industry, either as a collective body, or as individual firms, to think through and prepare a response in these terms. It may never happen of course, but if it does do you really want to be caught humming Dixie, particularly if that means investor confidence is further undermined?
Secondly, high correlation reduces the benefits of portfolio diversification and therefore increases volatility within the portfolio which means many investors are likely to be exposed to unintended risks and at a point where investors are incredibly risk sensitive. Think eating a toffee shortly before going to the dentist for that root canal work you needed. If investors aren’t aware of what’s happening and feel blindsided, again, the impact seems likely to be a further erosion of trust in the fund management sector, again bad news for the fund management sector. You can be ship shape, but in rough waters a number of small leaks can quickly become a soaking or worse still sink the ship.
You may think I am being overly pessimistic, and indeed perhaps I am. However, reflecting back on the July Peregrine Perspectives event, Shiv Taneja of Cerulli Associates quoted some sobering figures. A sharp drop in global AUM (assets under management) in 2008 was swiftly followed by sharp growth in 2009, but what was obscured from view is that the increase came predominantly from market growth and not new money coming in. Investors, as any good wealth manager will tell you, remain wary.
There may not be much that the industry can do to erase recent market memories, but what it could be doing is rebuilding trust in its services. There are many fires being fought here, European political pressures, home ground political pressures, regulatory changes, substantial socio-economic shifts, distribution evolution and of course delivering returns from the markets – but the importance of communicating the benefits of the service it offers to the people it’s offering that service to (in the right language, at the right time, on the right ground) should not be overlooked.
Perhaps you disagree with my assessment and feel that actually the industry does a brilliant job of communicating. I shall leave you then with two recent examples of just how the best of intentions can go horribly wrong; the recent response to criticism levied against the cautious managed sector by the IMA (see Matthew Vincent’s FT article on this ‘A conundrum to chew over: http://tinyurl.com/2vyhgvc) and the menagerie of funds that sit within the absolute return sector – be that the IMAs, Citywire’s or an advisers own classifications of that sector.
Challenges welcomed...
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