Good investment performance used to be all a fund manager needed to deliver. It’s still essential, but it is no longer a sufficient ingredient for success, according to Joe Sullivan, the president and chief executive of multi-affiliate manager Legg Mason Global Asset Management.
Sullivan visited Australia last week to speak at Legg Mason symposiums in Sydney and Melbourne, where the firm discussed various industry and macro trends and how its nine affiliated managers were responding.
In his presentations to planners and super fund executives, he described what the successful fund manager of the future would look like. Good performance was now “a given”, he said. Successful fund managers would:
. need broad capabilities in traditional markets as well as having expertise as specialists
. need size and scale in an increasingly price-sensitive markets
. “partner” with clients who would be looking to have relationships with fewer and larger managers
. need to provide good performance but this was only a “table stake” – good performance was a “given”
. need to provide a broad range of choice to allow for the varying flows of client money through cycles.
Sullivan said that the traditional benchmark-relative or passive managers were unlikely to be able to deliver the returns required by clients in the future.
And for their part, clients would have to accept greater complexity in their investment strictures and processes through more alternative solutions, real assets, hedged and flexible strategies.
Quoting a McKinsey study, Sullivan said there was an estimated US$8 trillion of client funds “at risk” of flowing out from current fund managers. Of this about US$5 trillion was “chronically underperforming” and the other US$3 trillion had such little outperformance that it didn’t matter.
“We [fund managers] need to adopt a culture that fosters innovation,” he said. “That may be the most difficult challenge for us.”
Sullivan said in an interview that the time spent in building investment businesses was important. “It’s not just the work you do but the time you take to do it… Our approach is a bit incremental, but we have never backed out of a market. Sometimes American companies have done this. We always aim to build a presence, build up our people and relationships,” he says.
Legg Mason has about $40 billion under management from Australia and about $10 billion invested back in Australia. The Australian investment portfolios are mainly through Martin Currie Investment Management, the global equity affiliate based in Edinburgh, which also runs the Australian equity operations under Reece Birtles, the Melbourne-based CIO.
Another good example of the requirement for patience is the time that has been taken to develop a business in China. Martin Currie operated a joint-venture equities shop in China for about 10 years, which it shut down after a nasty dispute with its former partner, Chris Ruffle, in 2012.
Sullivan said that the transparent and honourable way that Martin Currie handled that problem, which involved compensation being paid by the firm, signalled to him that it was culturally a good fit within Legg Mason.
“I saw that Martin Currie was Legg Mason-like,” he said. “They handled that problem in the best possible manner… China is a labyrinth. It will take a long time to develop a business there. We have had some success. Permal [an alternatives affiliate] has done business there and Martin Currie, too, in the past few years,” he said.
A potential boost for the firm’s plans in the region follows the announcement, late last year, of the increase in its stake of the largest shareholder, Shanda Group, which is based in Shanghai and Singapore, to a proposed15 per cent and invest another US$500 million in Legg Mason strategies. Shanda, which is a technology company that made its initial way in the world as an online gaming company and subsequently diversified into other internet operations, has appointed its two most senior directors to the Legg Mason board, founder and chief executive Tianqiao Chen and president Robert Chiu.
Sullivan said that they would be able to help Legg Mason to grow its business throughout Asia, not just in China.
“They know how consumers in the region think and they also have relationships that can be helpful to us.”
Despite the headwinds resulting from fee compression, increasing complexity, regulatory changes and technological disruption, Sullivan said funds management was still a “great business that is undergoing dramatic shifts”. He said: “There will be a shakeout… There will be fewer managers. Increasingly clients will want fewer but broader relationships. But it’s still a very good business.”
Greg Bright is publisher of Investor Strategy News (Australia)