Pensions & Investments, one of our favorite institutional investing newspapers, hosted a webcast this morning featuring Watson Wyatt’s London-based globe trotting guru, Roger Urwin. Although the event was billed as a recap of Watson Wyatt’s annual survey of the world’s largest money managers, Urwin and webcast M.C. P&I’s Joel Chernoff also covered alternative investments, 130/30, LDI and the implications of August’s market mayhem.
The global money management industry now oversees US$64 trillion. That’s up 19% ($12 trillion) since last year. (Not a bad haul). The industry continues to consolidate, however, with the top 20 asset managers now controlling 39% of this or about US$25 trillion (12 of the 20 have assets of over $1 trillion).
Like the recent II/McKinsey study, this one also sees a “barbell” developing in the industry with small, niche players and global behemoths experiencing an easier time than mid-sized managers.
When asked by one listener if 130/30 would someday replace hedge funds, Urwin cautioned that these funds still had to stick to defined benchmarks. True hedge funds, said Urwin, had no such constraint. Still, Urwin marveled that 130/30 funds had “breathed new life” into product innovation in the asset management industry.
When it came to hedge funds themselves, Urwin thought fees remained too high and that they would eventually have to come down (ed: heard that one before?). Clients he speaks with have had what he calls “a very adult response” to August’s hedge fund roller coaster. He says these investors have been more concerned about long term equity returns than the short term performance of their hedge fund portfolios.
Liability driven investing (LDI) continues to have a lot of fans in the UK where complex pension regulations rule. But Urwin said the US and Europe trailed and that LDI was not a factor yet in Asia. Still, he said that LDI was “here to stay”.
The call ended with one of Urwin’s (and our) “favorite questions”: Is there a fixed amount of alpha in the world? Urwin said that with the exception of currency markets where “a little bit more is left on the table by others”, global alpha is “substantially negative” due largely to the effect of fees. He added facetiously that while the average investor will likely experience negative alpha, “we’re all better than average”.
(As an aside, we tend to disagree with this angle of attack on active management. If markets are perfectly priced and therefore can’t be beaten, then why invest in individual stocks? Further, if the average start-up business will fail, why become an entrepreneur? Urwin himself agreed that larger managers may be better qualified to produce alpha than smaller players. If no one ever felt they could “beat the average”, we’d still be wearing animal skins, picking fleas out of each other’s hair and wondering what to do with our opposing thumbs. But we digress.)
In any case, this is an interesting report and well worth the read if you’re an asset manager. Urwin’s slides, along with a whack of charts and tables showing the size and growth of the world’s top 500 managers can be found here at the WW website.