New Year's resolutions to renew asset management

When the annual prediction season rolls around for strategy advisors, I re-read classic texts from the greatest management consultant who never was: Hall of Fame baseball catcher Yogi Berra. (During the year-end holidays, this Boston Red Sox fan conveniently forgets Yogi’s ties to The Main Enemy.) “It’s tough to make predictions,” Yogi said, maybe paraphrasing Niels Bohr, but whatever, “especially about the future.” ?I recycle this quote every year because it properly punctures any ego (particularly mine) before anyone starts blathering about what will happen next. I mean, who in December 2021 would have predicted this? Or this? Or this? (Well, maybe this.)

Yogi did get one thing right about 2022: “A nickel ain’t worth a dime anymore.” That makes 2023 a dangerous year for the global asset management industry. Few of its current experts have any experience surfing risk-free rates that rose as fast as they did in 2022, and that upends the industry’s worldview. During the bull market, industry execs viewed network-oriented technology giants, now crushed by the market, as primary threats, while inertia was an ally replete with cheap money. Today, inertia is a foe—dollars standing still can yield 4%—and supposedly stodgy financial services firms armed with spread and cash management tools (banks, insurers, broker/dealers, even exchanges) are the perils.

So resolutions might make more sense than predictions—instead of what will happen in 2023, what should asset managers do in 2023?

1.??????Outperform indices. The long-term debate about passive versus active often ends like this. But during the first half of 2022, nearly half the investors managing active US large-cap equity mutual funds beat their (admittedly imploding) benchmarks. Almost all US core-plus bond fund managers did the same, possibly heralding a vibrant renaissance of active fixed income management. In 2009, the last time this happened, victory evaporated quickly. The industry has an ideal—and potentially, given scrutiny on fees, a last-ditch—opportunity to win clients by adding value in 2023.

2.??????Deploy the multi-asset toolkit. Excess return shouldn’t be the only success metric. It’s a baby-boomer yardstick, reflecting investment goals from decades past. Next year the last boomer turns 60, and should treasure preservation and income, even before factoring in volatile capital markets and fluctuating real returns—key concerns at any age. And this year’s market collapse once again scrambled conventional wisdom about asset-value correlations (as a wise man once underscored). If individuals want more complex outcomes in a more complicated market, investors who can nimbly deploy capital across a wider range of asset classes, public and private, within a single portfolio, should benefit. It’s no surprise that one out of every five mutual funds launched worldwide in the first 10 months of 2022 used a multi-asset strategy. 2023 will reveal how many of those are effective.?

3.??????Overhaul wholesale distribution, particularly in the United States, where major changes have reshaped fund sales during the last three years alone: individuals demand personalized portfolios, new technologies provide distributors with proprietary advice-delivery tools, and central intermediaries consolidate their share of new flows. Yet other than ditching loads and slapping a fresh coat of digital paint on advisor experience, most US mutual fund companies have sold funds the same way for a quarter century. Asset managers should redesign their US wholesale distribution in 2023, improving use of data, advisor profiling, segmentation strategies, advice tools and partnership-oriented home-office relationships. All will help focus an asset manager’s constrained resources on a subset of advisors that represent better prospects, as well as differentiate the firm from rivals in an oversupplied market. None of this will replace a talented field force, but it will make one more efficient and effective.

4.??????Reglobalize. Cheap money and bull markets made operating leverage appear higher than it truly is within global asset management firms. Cultural and structural contrasts between nations already promote diverging fund distribution dynamics across the globe. Varying policy responses to inflation and possibly recession in 2023 will further emphasize these differences, even in somewhat unified markets such as the European Union. Asset managers reviewing their global distribution organizations should abandon some underperforming efforts in order to refocus resources on opportunities best aligned with their specific competitive advantages.

5.??????Surround the talent with equally talented talent. Gifted portfolio managers and salespeople have driven this industry for decades: the former bottle lightning and the latter trade it. But slowing growth, fiercer competition and deteriorating economics all require asset managers to view themselves as enterprises, not artist colonies. Running the business and running the money should be equal priorities in 2023. Hiring should focus on a long list of functions most industries view as core while ours sometimes labels them dismissively as “support”: product research and development, marketing, operations, technology, data science, talent recruitment and development, compliance, corporate development, strategy and finance.

Resolutions are hokey, but they are actions asset managers can control, unlike an operating environment likely to be volatile and unpredictable. Driving active business strategies, instead of just riding sidecar to market inertia, will create winners in an ever more competitive marketplace for investment advice. Yogi summed it up pretty well: “You’ve got to be very careful if you don’t know where you are going, because you might not get there.” But this sage may have said it even better.

I'm Ben Phillips, a strategy consultant and principal with #Broadridge. My comments aren't endorsements and my opinions aren't necessarily those of my colleagues.