Presentation to the
Institutional Investor Institute
Senior Delegates Roundtable

Norton Reamer spoke about five industry developments which he thinks are coming in the next two to three years, some of which may be unanticipated by most observers.

1.  The Recycling of Money Management Acquisitions
Mr. Reamer believes that a substantial number of acquisitions of money management firms which were made in the 1990's will be unwound in the next few years.  These acquisitions, many of which were made by large foreign buyers, have disappointed the acquirers, have been mismanaged subsequent to acquisition, have not been meaningful contributors  to the buyers’ bottom line, are not core businesses and have produced culture clashes. The discussion included thoughts on where these unwound acquisitions may be headed.

2.  The Failure of the High Net Worth Thesis
The exuberance of the last ten years about the vast number of fortunes being created by successful individuals led to a major build up in high net worth investment management firms and a significant expansion of high net worth money management activities by large investment banks and other financial institutions. But the clients weren’t there. The bubble burst, short circuiting the creation of many of these fortunes.  In addition, the stock market collapse further depleted the clients’ assets and eroded the clients’ enthusiasm for the kind of investing these organizations were doing.  As a result, these firms are experiencing significant indigestion.  The world didn’t really change and it won’t.

3. The Future of Hedge Funds

Mr. Reamer looks at hedge funds not from the perspective of investment style but as a natural and continually repeated phenomenon within the business of investment management.  The best and the brightest will inevitably gravitate toward roles offering the greatest independence and rewards.  As such, he does not see a hedge fund bubble but, rather, a normal business phenomenon which will eventually regress toward the mean.  "Regression toward the mean" may mean underperformance, as some successful techniques of the last several years fail to deliver outstanding results in the future.  But it also may mean the adoption of more advanced investment styles by many previously "long only" firms.

The Inevitability of Superstars.

Over the last ten years, there has been a significant push by many large money management organizations, especially mutual funds, to replace highly visible star managers with anonymous and faceless teams.  Teams cannot manage money.  Some individuals can.  Most of these teams have failed to differentiate themselves from the general collapse of active manager performance.  Most organizations are going to replace teams in favor of strong individual managers or managers who lead groups but are not subsumed into them.

The Asset/Liability Mismatch

A phenomenon we all know about but may not be paying enough attention to is the massive asset/liability mismatch which has evolved over the last ten years.  More simply, most people and many organizations no longer have large enough assets to meet their anticipated liabilities and expenses over the next decade.  The most striking experience of this on the part of the public, is the disastrous investment performance and, therefore, the anticipated retirement income shortfall of 401(k) plans.

Summary Thoughts

  • There is an inevitable conflict between the conformity preferred by mass market distribution-oriented organizations and the independence required for outstanding investment management performance;  i.e. uniformity and excellence are often conflicting goals in the money management business.  In a large firm, the culture of brand consistency and organizational control must be separate from the independent and entrepreneurial culture of money management.

  • The unrealistic investor and organizational expectations which were bred  by the boom years of 1997 to 2007 are giving way to a period of unwinding these expectations and returning to a more subdued approach to strategy and execution.  It may not be an easy trip.  Commitments are high and, in some cases, still growing while resources, revenues and profits have, in many instances, tanked.



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