I often hear dissatisfaction from asset managers that they have no place at the DC table. The management of workplace DC assets has largely been given to BlackRock, LGIM, State Street and Vanguard. While they enjoy consumption of the main dishes (the default strategies), other managers feed off crumbs.
Whether this will change following the adoption of the Mansion House Compact, I doubt. The control of funds offered to members either on a self-select basis or as part of a default investment strategy is dependent on investment platforms and by and large these are owned by insurance companies whose natural partners are either sister companies or strategic partners.
If you do not have a place on the platform , you do not have a place at the table, so how can smaller innovative asset managers create strategies that will enable them to compete?
The answer, to use a phrase beloved of salespeople is with “distribution”. Asset managers need to find ways to disintermediate and appeal directly to asset owners, the trustees of large DC occupational schemes, both single and multi-employer sponsored.
This of course is not going to be easy. The journey to disintermediation starts with an understanding of your unique value proposition, whether that be long-term growth or the delivery of short term security. Differentiation in asset management must be expressed in relation to the behavior of indices, if the market beta is too volatile, the asset manager must supply certainty, if beta provides too low a prospect of growth , the asset manager must prove it has new sources of alpha. Costs must be justified by value and the value assessment must be benchmarked against the passive alternative. There is an ETF for everything.
But simply having a valuable alternative is the start not the end of the journey. What the excluded asset manager must create is a compelling proposition for the trustee or platform owner. This necessarily means bundling services in such a way that the asset management is convenient to the end user – the DC saver or the DC spender.
For instance, a fund that is capable of being used in “decumulation” could become much more valuable if it kept records for its unit holders and paid them their required rate of drawdown.
A fund that aimed to provide long-term growth through investment in illiquids, could become more attractive to trustees and beneficiaries if it adopted a clear system of valuations that reflected both the long-term value of the assets and the realisable value (which might well be zero).
Both examples would require fund managers to reach beyond their in-house expertise to third parties who might be administrators or who might be independent valuation experts. It would require an investment of time and money and a willingness to step beyond conventional boundaries.
Asset managers do not need to purchase their partners though a vertically integrated approach may shortcut the journey to the market (witness the proposed purchase of STM.
They may instead work with the platforms to fill gaps in the market which less agile competitors cannot fill. Since the platforms are adept at wrapping anything from an absolute return hedge fund to an investment trust investing long-term capital, the platform is the solutions provider and the key intermediary.
This of course does not render the investment and benefits consultants redundant. They will continue to advise trustees and other platform users on the options available to them, but as these options are now bundled with the services that make them useful to the trustee and beneficiary, they put the asset managers in play.
My suspicion is that asset managers are nervous about bundling in this way, fearing that they may be considered competitors to the intermediaries. This is a very short term view. In practice, the longer term innovation that the market needs will require asset managers to use their undoubted skills to create alliances that go beyond their limited remits to deliver investment solutions that may include longevity pooling and value for money reporting that are sadly lacking to DC investors today.
We cannot rely on consultants, platforms or the product teams within commercial workplace pensions to deliver end-to-end bundled services, we should look to those who have asset management skills, to decomoditise themselves and reassert their place in the value chain.
Too many asset management houses are moaning that they get the crumbs from the DC table. more should be finding a table-setting for themselves.