Redefining Asset Management To New Global Realities

By M. Isi Eromosele

With currency and debt issues at the forefront, the world's financial markets remain volatile and uncertain. While uncertainty opens up opportunities for astute asset managers, it also exposes them to significant risks.

Many asset managers are struggling to chart a clear course toward sustainable growth and strengthened competitiveness given the new realities in global financial markets and the asset management industry.

As such, it is time to take a fresh look at asset management in light of the fundamental changes that are now taking place in global markets.

Asset Management

There are four key factors that are vital to an understanding of the asset management industry. The first is the essential nature of the asset management market, the assets invested and the regulations to which the market is subjected.

Second, analysis of the business models operated by market players and their value creation logic gives a better understanding of how and where value can be generated.

Clients and their needs, with a distinction drawn between private and institutional investors are the third key factor. Lastly, market offerings and how they are likely to develop.

Asset management comprises three concepts: asset structuring, investment management and investment management services.

• Asset structuring refers to all activities that play a part in structuring or "wrapping" assets (i.e. building a shell or umbrella around assets or portfolios of assets, as is the case in fund-of-funds solutions, for example). Long-term asset allocation linked to possible liabilities is a core result of this process.  
• Investment management is the core discipline in "classical" asset management. Although the terms are often used interchangeably, investment management refers only to the investment decisions made on a day-to-day basis within the limits of the defined asset structure.
• Investment management services include elements of financial analysis/ research, plan implementation (e.g. trading services), ongoing monitoring of and risk analysis for investments and comprehensive reporting on value added and value at risk, for example.

Distribution concerns itself with how asset management services and solutions are sold to either institutional investors or private investors (e.g. via funds). Distribution channels vary widely depending mainly on the business model.

There are three main drivers of structural change in the global market that have a powerful bearing on the asset management industry. One is a shift in the global weighting of assets under management, as rising prosperity in emerging markets tilts the scales toward Asia in particular.

The second involves changes in the regulatory landscape (with regard to pension plans, for example), which will directly and indirectly affect asset managers. And perhaps even more fundamentally, the third driver is the aging population and the general demographic shift that the world is experiencing. As demographic patterns change, so does the spread of asset holders and what they do with the funds they have to invest.

What Do Clients Want?

In what is a traditionally product-driven industry, the balance of market power is gradually shifting toward the retail and institutional investment clients that make up the demand side of the equation.

Though clients long willingly trusted their advisors to "know best", they are now becoming better informed, more professional, more focused on outcome-driven      investing and more willing to pull the plug when they are dissatisfied.

Asset managers must now pay much more than lip service to client service issues, a capability that is as rare as it is valuable. Proving their ability to manage risks will in future be an integral part of the trust-building that is now more vital than ever.

Strategic Implications For Asset Managers

There are significant strategic implications for asset managers as they look to position their business models for future success:

Implications for the market: The most attractive market segments in terms of future asset inflows will differ from region to region. Asset growth in specialties and in exchange-traded funds will be strong in Europe, whereas pension funds will lead the line in Asia.

Implications regarding players: The trend toward specialization along the value chain will continue, as this approach holds out potential to add more value. Independent financial advisors (IFAs) will play an increasing role in asset management distribution. More generally, asset managers will have to adopt a clearer positioning in the value chain.

Implications for the demand side: In the retail business, values-based client segmentation will lead to more actionable insights than a pure wealth-based approach. In the institutional business, greater professionalism will drive more outsourced portfolio management and underscore the importance of risk management.

Implications regarding offerings: Asset managers will have to diversify to protect assets across multiple classes as core/satellite investment approaches require the combination of multiple strategies. Focusing on core capabilities will be decisive.

Asset managers must focus on their specific strengths in five dimensions: financial market intelligence, products and pricing, distribution, branding and operations. At the same time, based on the strategy they choose, they must systematically come up with excellent answers to clients questions.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Global Tactical Asset Allocation Strategy

By M. Isi Eromosele

Global Tactical Asset Allocation (GTAA) is an actively managed, multi-asset class strategy designed to produce alpha from a top-down investment discipline. The strategy features:

• A global approach incorporating asset class, country, sector and currency opportunities
• A combination of quantitative techniques and fundamental analysis

Focus On Asset Allocation

Institutions primarily have focused on generating alpha from bottom-up security selection strategies, relying on a process that attempts to select the best managers within each broad asset category.

However, this approach fails to capitalize on the ability to add alpha by tactically allocating between asset categories, which can provide significant benefits. GTAA seeks to harvest this source of alpha, which is often ignored by institutional investors.

GTAA differs from traditional “bottom-up” approaches, because it seeks to derive its source of out performance from macro or “top-down” decisions. Whereas bottom-up managers must decide which individual securities to overweight and underweight, a GTAA manager would have to decide which country indexes to overweight and underweight.

Other types of macro decisions may involve broad asset classes (global stocks and bonds), regions/countries within global stocks and bonds, currencies, as well as sectors. This top-down distinction means that GTAA managers are not looking for inefficiencies between securities, but rather inefficiencies between entire markets and regions.

Maximizing Investment Opportunities

Unlike most traditional domestic asset allocation strategies that make one allocation decision of equities relative to bonds, GTAA strategy exploits a broader set of investment opportunities.

Expanding the investment universe from domestic to global increases the opportunities to identify and exploit inefficiencies, in order to generate alpha. Global Tactical Asset Allocation expands the traditional investment opportunity set and seeks sources of alpha that are differentiated from bottom-up managers.

Team-oriented Approach to Investing

The Global Asset Allocation team generates original investment research and asset allocation views and implements a customized strategy for each client, depending on their unique requirements.

Investment and Research Teams are responsible for producing investment analytics and making asset allocation decisions across asset classes, markets, sectors, and currencies. The investment team works closely with the Research team in the analysis and development of views.

Portfolio Management Team is responsible for reflecting the ideas and research generated by the Investment and Research Team in the individual client portfolios, subject to specific client guidelines.

Trading Team is responsible for executing trading activities in the cash and synthetic markets according to investment decisions.

Top Down Analysis

The Global Tactical Asset Allocation investment process follows a hierarchy of decision-making. First, the relative attractiveness of global asset classes is assessed. Within each asset class (stocks, bonds), the relative attractiveness of regions and countries is evaluated.

For select equity and fixed income regions, assessments re occasionally made regarding style (e.g. size, duration). The relative attractiveness of currencies are also evaluated. Finally, for portfolios that allow utilization alternative investments, opportunistic assets such as high yield, gold and oil are evaluated.

Investment views are the result of rigorous fundamental research and analysis conducted internally by team members. The inputs to the process include macroeconomic, market and aggregates, and sector/company data.

A flexible approach is used that employs both quantitative and qualitative techniques, allowing for the evaluation of a comprehensive set of information and development of appropriate investment views. This flexible approach has been central to our success and distinguishes us from traditionally quantitative methods.

At each level of the decision hierarchy, the Asset Allocation Team utilizes a variety of quantitative and qualitative measures to determine the relative attractiveness of global asset classes, markets, sectors and styles. Our analysis is based on a strict adherence to a three-pronged assessment of valuations, dynamics and technicals.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Asset Accumulation By Emerging Countries

By M. Isi Eromosele

The evolution of accumulation of external assets by emerging countries is significant. In recent years, their asset accumulation has picked up strongly and has been remarkably broad-based. Combined with changes in liabilities, the net result is that emerging countries have become net capital exporters to the developed world, running a hefty current account surplus. The upsurge in the acquisition of foreign assets by emerging nations can be evaluated through three dimensions:

• An increase in FDI. As globalization is leading developed countries to invest in emerging nations, many emerging country companies are also investing both in high-income countries as well as other emerging companies
• An increase in private investment in other assets. This includes outward investment flows from the resident private sector
• A hefty increase in foreign exchange reserves. The gross foreign exchange reserves of emerging nations has risen by an average of $70 billion a year in recent years

The acquisition of substantial foreign assets by individuals, companies and governments from emerging countries have some positive implications. Most prominent is the opportunity for them to diversify away from local business cycles, reducing their risks. By maintaining high levels of foreign exchange reserves, governments in emerging countries establish a financial cushion that enables them to better ride out shocks in the global financial system.

The high level of East Asian foreign exchange reserves built up in the aftermath of the 1997-1998 Asian financial crisis illustrates why these countries were able to avoid much of the stresses and strains suffered by many other countries during the most recent global financial downturn.

However, there are other troubling aspects to be considered in the acquisition of substantial foreign assets by the private as well as public sectors in emerging countries.

• Emerging countries need to mobilize their savings. Leakage of capital abroad diminishes the savings available to fund  domestic economic activities. It should be noted that high external reserve holdings come with a significant interest rate carrying cost. While most countries invest their foreign exchange reserves in safe short term assets, such as U. S. Treasury bills. However, the yields on these instruments are relatively low, well below the interest rates emerging countries pay on their debt.
• High foreign exchange reserves imply a fear of floating. The move from pegged exchange rates to floating exchange rates has given emerging nations a greater flexibility. While a floating rate system does offer many advantages, it has been accompanied by an increased precautionary demand for foreign exchange reserves.

Living With Less Debt

Emerging countries, in aggregate, have been net lenders to developed countries. They have remained heavily reliant on FDI to finance both their debt repayments to private creditors and their acquisition of foreign assets, both private and official. This is not necessarily desirable. Key flows have to adjust to shifts that have occurred since 2008.

The stock adjustments expressed by the change in capital flows, notably the pay down of private sector debt need to be taken into consideration. When they are completed, capital flows will surely move to a different pattern, probably one that again favors higher debt flows relative to equity flows. This shift is likely to begin in 2013, with net debt flows to the emerging world from private sources turning modestly positive once again.

Meanwhile, a change in global policy will have to be implemented that ensures that current shifts involve the least pain possible, and that the pattern of flows that emerges from the process of stock adjustment is one to put development finance on a more solid footing than it has been during recent years.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2011 Oseme Group