Mar 25, 2014

This post is part of a series in which LinkedIn Influencers analyze the state and future of their industry. Read all the posts here.

The asset management industry needs to do more to adapt to the post-2008 economic recovery and address investors changing needs and concerns. Even as the underlying fundamentals of the economy are strengthening, fund companies must do more to help investors navigate a dramatically different environment.

Battered by the financial crisis, the ensuing Great Recession, and what amounted to a Lost Decade of investment returns, many investors lost faith in our industry. Their nest eggs took a hit. Many saw traditional buy-and-hold strategies, or seemingly safe portfolios, fail especially if investors exited the market amid the downturn.

The new environment

Deep uncertainty and change characterize the new post-crisis investing environment and cloud the confidence of investors. Investor uncertainty stems from several sources:

• The role of central banks is more important than ever to the strength of the global economy. But investors question whether policy moves, like the Feds quantitative easing program or Japans Abe-nomics, can produce a sustainable recovery and avoid market disruption when monetary stimulus eventually eases.
• Having endured both the dot-com crash in 2000 and the 20082009 financial crisis, todays investors are far more sensitive to tail risk those rare black swan events when portfolios suffer losses due to extreme market events
• Volatility is a dominant theme in the markets. Many investors who may not have heard of the VIX a decade ago are now monitoring the daily movements of the so-called fear gauge.

The uncertainty plays out in some dramatic shifts in investor sentiment and behavior. Investors have made big moves from stocks to bonds and back again. In 2013, for example, stock funds garnered some $478 billion the biggest inflow since the financial crisis. But in January 2014, bond funds, which had been in negative flows for seven months, had an abrupt influx of $7 billion.

Those investors who stayed the course since 2009 have been participating in a historic rally one of the longest bull markets since 1928. But most investors stayed on the sidelines, in cash or bonds, until quite recently.

Change brings challenges, opportunities

Todays market environment represents challenges and opportunities for investors and asset managers. Investors want new solutions, creating an imperative for asset managers to innovate or decline.

• Flexibility is required. All elements of conventional wisdom around investing need to be re-examined, and some traditional rules of thumb may need to be scrapped. Investors need to embrace new strategies that look beyond traditional benchmark indexes to mitigate the effects of volatility. Investors can no longer rely on style box investing alone. Todays alternative investments will be a large part of future portfolios.
• Innovation will be the driver of success for any asset manager in the 21st century. Solutions need to be adapted to the shifting nature of risk in stock and bond markets and changes in investors willingness to endure risk. Embracing new ways of managing risk is essential to seizing opportunities and mitigating the impact of market gyrations that erode returns. Products that employ a more risk-aware security selection process are already beginning to alter the way we approach asset allocation.

Investors are looking to achieve broader diversification not just between asset classes, but among investment philosophies that can offer some mitigation of volatility, divergence of style, tax efficiency and the promise of more efficient risk-adjusted returns. Asset managers that can understand those changing investor priorities and deliver solutions will succeed. Those that fail to adapt run the risk of being left behind.

It is understandable that individual investors are cautious about venturing back into securities markets. The $11.9 trillion in cash on the sidelines as of January could be a sign of a significant communications gap between industry and investors. Those asset managers that are developing new solutions need to do a better job of explaining the mechanics and advantages of these strategies if they want to successfully move them from Wall Street to Main Street.

The views and opinions expressed are my own, are subject to change with market conditions, and are not meant as investment advice. Affiliate of Putnam Retail Management.

Photo: Shutterstock.com

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