It’s all good: the lessons of the past three years

The positions have changed, over the past three years, in the food chain of professional funds management, away from the manager and towards the fiduciary. And it is not just the large fiduciary funds which can benefit from the trend.

The financial crisis has taught everyone a lesson, although it has to be said that some of those lessons are a little illusory. Real lessons include: counterparty risk is important, correlations are closer than you think and all stakeholders need to understand what they are investing in.

Less real lessons include: fund managers don’t know what they’re doing, they gouge fees and are disingenuous about the possible results of their activities. In the extreme, it has been said, fund managers are no better than the investment bankers they have always criticised for their transactional attitude to investment.

The rising power of the fiduciary has been coming for some time and would have arrived with or without any crisis. The recognition that unlisted assets, such as infrastructure projects, can provide genuinely low correlations with listed markets, can provide more reliable income streams and don’t have to attract high fees has helped the trend.

The very big funds have started to co-invest in these projects and smaller funds are scrutinising co-mingled infrastructure, unlisted real estate and other big-ticket investment vehicles to better diversify their portfolios.

For smaller funds, though, the crisis has been a real boon. With capital in short supply, they have learned that they can better negotiate with all service providers, particularly those managing alternatives. At the edges, they can also afford to recruit more specialists of their own and spend more time exploring new opportunities in a volatile world.

They have also been reminded of the fact that beta delivers most of their returns. When it comes to asset allocation, it’s really up to the fiduciaries’ management and board to make the calls, perhaps in association with a consultant. Sure, managers can help, even take over some of the work through various overlays, but asset allocation responsibility is now, more than ever, back with the board and management of the funds.

Three years ago, the investment world was staring at an abyss. To a certain extent, there are still dark places where the investment world has not returned to “normal”. Indeed, we now speak of the “new normal” – a phrase coined by the big bond manager PIMCO, which refers to continued volatility, uncertainty, low growth in some areas and lots of opportunities in other areas.

Nearly three years ago, in September 2008, we launched this news and information service for fiduciaries. The staff of Top1000Funds has been privileged to report on the changes which have occurred in that time and, hopefully, provide some helpful information for fiduciary funds to negotiate the new world.

This is my last column for this news service. Amanda White, the editor, will become publisher and a new senior journalist will soon be appointed.

For my part, I intend to return to China, write a couple of books and, as they say, smell the roses. My personal email is: greg.bright@binalong.net