What’s The Future Of Active Investment Management Firms?

Investment management firms are facing a number of pressures as they seek to generate profits and create value for their clients. Amid demands for greater returns and lower fees, technologically driven operational changes, new regulations, and the continuing move toward passive management, how are money managers changing the way they do business—and who will reap the rewards of those changes? Chicago Booth Review’s Hal Weitzman talks with Chicago Booth’s Lubos Pastor, Ram Parameswaran of Altimeter Capital, and Andrew Plevin of BroadRiver Asset Management about the forces shaping the contemporary asset-management industry.

Investment Management Firms

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What’s The Future Of Active Investment Management Firms?

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Transcript

It's a relatively tough time for investment managers. Investors are demanding ever lower fees and better performance both of which are squeezing money management firms profits. Technology is transforming the industry and the prospect of tighter regulation is always a concern. So how are investment management firms navigating these challenges and who will be the winners and losers from the changes ahead. Welcome to the big question. The monthly video series from Chicago Booth review. I'm Howard Weitzman. And with me to discuss the issue is an expert panel. Lubowa past the child's McWade professor of finance at Chicago Booth Ram Parameswaran is a partner and portfolio manager at Alta Media Capital in Menlo Park California and Andrew Kleban is KOCO Broad River Asset Management in New York.

Panel welcome to the big question. And for our two guests who are both booth MBA. Welcome back to Chicago Booth. Thank you very much. OK Ron Paul Treasurer on let me start with you. You know this we talk about this pressure downward pressure on fees. How is that affecting the industry. How has it already affected the industry.

Right so people talk about pressure on management fees and it's real because. And one of the main reasons this pressure was because of the mix shift to passive management techniques. But generally what I've seen is if you can provide a strategy and a product that provides outstanding returns and investors believe that that strategy is sustainable over time you will not see those pressures in in management fees.

So does that mean that the poorly performing firms are the ones who are feeling it most to get any specific evidence of that because these things change over time.

But if you continue to perform poorly over time investors will ask questions and then it's a negotiating strategy and everything else. I mean at the end asset management firms are businesses right. So there's overall pressure because the hedge fund industry has been a relatively poor performer over the last few years right now and index strategies and passive strategies have done better than many hedge funds have. But if you have strategies that actually work quite well in sectors that people want to be exposed to then there is relatively less lack of pressure. Ultimately it's the product to provide to the industry and the value for over a period of time.

Andrew Plemmons Do you agree. Well I agree with what Ron said in general and. I think that's for Broad River we compete and manage assets and alternative investments. So it's not with respect to index funds or mutual funds but there is certainly pressure from the institutional market too to contain fees to lower fees. And I agree with Raum that it is important to be able to provide a differentiated value proposition a type of asset or industry that you have expertise in and that helps protect you against some of that downward pressure. But it is present and it's coming from pension plans endowments and the consulting firms who advise them.

And is it the case that more more investment management firms have moved towards those kinds of assets in order to justify fees or were they already those that were already there just able to collect the fees and the others are finding it very very hard.

Yeah I don't know that firms have moved there to justify the fees but clearly there's been a tremendous growth in firms focused on alternative investments. The private equity universe for example has grown dramatically and the number and the number of managers and the assets under management have really exploded. Clearly they have higher fees in there than say index funds. But investors are finding the risk reward worth it otherwise they wouldn't continue to allocate capital.

Okay let me bring you in. You know you have Malva. It was more of a historical view about what's happened to fees.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver