Global credit funds & CLO's
April 2020
| Issue 222
Published in London & New York.
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Opinion credit
Putri Pascualy
Investors need to ask: can my asset manager survive the crisis?
Managing Director, senior credit strategist & PM Paamco Prisma
April 2020 | Issue 222
Many of us are working from home amid the coronavirus outbreak and the corresponding market dislocation. We face an uncertain world, so investors need to ask themselves the following existential question: can my asset manager survive the crisis?
Think of an institutional investment portfolio as a person. The health of a person is often dependent on genetics and age (things we cannot control) and our habits such as hygiene, diet and exercise (things we can control). Mirroring this, market conditions are out of our control, but investors can control factors such as investment structure and organisational risk. Organisational risk is sometimes glossed over, especially if a firm has been in existence for a considerable amount of time. However, all asset managers undergo changes and are only as strong as their people. Here are five flags that could signal failing health at your asset manager.
Corporate events
Changes such as mergers and acquisitions often form both the cause and symptoms of organisational decline. Two firms in an industry facing technological or business model disruption may decide to merge to gain size and efficiencies. However, leadership styles and culture clashes are often disruptive and have a negative impact on cohesiveness and morale. Academic research has pointed to long-term team cohesion as the key to high-performing investment teams. A lack of cohesion can mean that a minor market dislocation will turn into a deadly blow.
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Change in leadership
There have been successful mergers where the resultant entity is stronger than the two previous ones. However, the transition period is almost always difficult. Success stories always point to the importance of steady leadership. If there is new leadership, it is imperative that the new team has the unequivocal support and confidence of the outgoing leadership, as well as the trust of people throughout the firm. Ask yourself why the prior leadership left? Are the new leaders truly the most capable people to lead the firm during the difficult transition period?
Declines in AUM
After a change in leadership, some clients will decide that the organisational instability warrants a de-risking via redemptions. The impact of this will be a decline in assets under management, which the manager is not likely to want to disclose. But this data is often available publicly, particularly if the manager files documents with entities such as the SEC. Or the information may sit in an investor’s email inbox in the form of a quarterly report. If a manager has traditionally reported its AUM and changes its monthly reporting format, eliminating the AUM of the fund or the firm along with it, a conversation may be worthwhile.
Falls in high quality resources
AUM and revenue decline are not equal. In some circumstances, high revenue clients may leave first and the clients which remain do so only after being offered economic concessions. Similarly, new businesses may be loathe to sign on to an unstable organisation unless significant fee discounts are made. As fee-paying assets leave and new assets are managed for practically nothing, new leadership is likely to vote to preserve profitability through budget cuts and headcounts. Internal talents with prospects elsewhere are likely to vote with their feet.
Drastic changes in risk-taking
As talent leaves an organisation, fewer bodies have to do more work amid travel restrictions and cuts to systems and data. Therefore, the organisation is making decisions with less information. This is alarming in a normal environment, but it can be deadly in a market crisis. Real alpha is difficult to find and the temptation to chase market beta may be irresistible after periods of strong equity market return. If your asset manager doubled its risk, this should raise questions about its judgment. Just as living in a society exposes us to various microbes, asset management firms are exposed to market and economic downturns by the very nature of their business. However, a healthy body is more likely to survive an infection than a sickly one, and a healthy asset manager has a better chance of surviving market dislocations than one plagued by declining AUM and poor leadership.
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Mergers, declines in assets and changes in risk profile can signal that an investment manager is not as healthy as it was
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