What is Asset Management?
Asset Management is the art and craft of taking care of other people’s interests in third-party environments. It comprises an ‚outer’ skill-set involving technical abilities as well as legal and compliance aspects but equally important are the internal structure, workflows, processes and behavioural patters. Like with any successful being, these should adapt to their (business) environment. Michael Porter’s five forces are a bird’s view; the scope of „environment“ goes deeper.
Asset Management, at least since the great recession, means: „Don’t lose money!“, which is more easily said than done. It gains importance in a low-interest rate environment which looks to be semi-permanent. The most value-adding Asset Management is not about providing what a client cannot do in practice only but about doing things that a client could not do even if they had the time and physical resources.
Asset Management is not necessarily wealth management where an asset manager gets to choose investments. If the portfolio is not given, one of the more fundamental decisions to make is whether to be a hunter-gatherer (buying assets, often on a wholesale basis) or to cultivate specific crops - for example gaining access to emerging assets e.g in Iran in the post-sanctions scenario. It is a demanding task to prepare an asset management organization for both.
When an asset manager takes on new portfolios of existing assets, the client would expect a quick and comprehensive onboarding process and any asset manager worth their money would want to keep any learning curve on getting acquainted as short as possible and have a low response time. To achieve this systematically, it is useful to learn from the military and emergency services. Apply a ‚S.T.A.R.T.‘ system to new assets taken on on a wholesale basis which is often the case if bad banks or not-so-bad insurance companies are offloading large asset portfolios to servicers. Simple Triage And Rapid Transportation is a first-response method of asset categorisation but it is not simple to apply; it takes a lot of experience and good systems which are managed well (these are two different components).
Two position options for a non-asset-owning servicer:
- systemisation, aggregation of documentation and data
- IT structure including valuation in place
- co-ordination throughout portfolio
- economies of scale, experience
- Tax needs to rest with client’s advisors
- Liability for valuations and data input
- Chinese wall or other procedures if mandates at odds? Contingent policy to be formulated?
*Centrale di rischi is the name of the information system about financial institutions in Italy first established by the Banca d’Italia in 1962/64
Any operation is risky. Operations in financial markets are particularly risky because markets can move fast.
Procedures provide stability but are not perfect. Intervention is sometimes necessary but then, like in aviation, the foremost risk are people. As such, the captain is naturally a bigger risk than the steward. The darker side of this thread can be found among the heretical thoughts (OB - Nash equilibrium) but here I want to focus on structuring an organization procedurally to reflect its risk environment. Our understanding of the correlation between the ‚procedural capture‘ of the business environment and operational success is still evolving.
When it comes to risk control, „control“ is an exaggeration because the word implies command. Recognition of risks is key. For known unknowns in a well-structured organisation, the old espionage adage holds true: a recognised enemy is harmless.
Hence a good organization needs big risk accounting. The Domesday Book, but dynamic it must be. Give derivatives a comprehensive framework. Externally, this has started with the introduction of a central counterparty but internally, particularly among non-FI (financial institution) asset managers, it is often still lacking.
Normally, an organisation or better a business must adjust to reality but at the outset, i.e. either at inception or during a rare watershed event, a business can adjust large parts of the reality relevant for itself to its set-up, ability and scope (within reason). It does so by choosing the products services to offer, their scale, scope and depth as well as other parameters such as price and the decisions to make or buy, all of which must be (or should be) reflected in the real way it is incorporated. Form follows function - business is not an art, at least not in this sense - albeit architects are needed in business, too.
In asset management, as generally in the complex financial environment, businesses can get lost in translation if they have too many specialists around but no bracket. Here, a ‚great communicator‘ with some insight and substantial overview comes in, holding it together and establishing links. This is not new, but often, there is a narrowed view that inhibits the multiplying of insights into procedural links.
In complex environments there is always the specialist trap - or the thin line between division of labour and its fragmentation. This is corroborated by a mental hazard. You see things as you think you know them but as President Obama said, just because you have the best hammer this does not mean that every problem is a nail. The greater an institution’s array of tools and the better their cooperation, the lesser this problem becomes.
„Things must change for everything to remain the same“
Giuseppe Tomasi di Lampedusa, ll gattopardo
Make no mistake. Low interest rates are here to stay. Insurance and asset managers need to venture into loans and structured products - yes, again.
It's not the end of subprime but merely its beginning. This time, though well-managed - and knowingly so.
The rise, fall and rise again of subprime or better dubbed non-vanilla is unfolding. As often, complexity is feeding the Greeks (as in alpha and beta, not as in Athens) if well managed.
From the currently prevailing (NB not shared by all) cautious or reluctant approach, a departure will be required. A possible break-up (or break-down) of banks into smaller, specialised entities poses a complex challenge to lawmakers, regulators and Central Banks but it may be good for the landscape of finance overall. In a summary view, there should be no roll-back, but a certain dichotomy between different roll-outs.
This metamorphosis into specialization has two strands in terms of asset class: typological and topographical which need not be mutually exclusive.
Existing financial institutions, at least some of them, are well equipped to comprehend many different kinds of assets. More categorization and stratification will come along as portfolios are augmented and varied. Geographical interaction will be a conduit to typological expansion.
Against this backdrop and on the more daring end of the AM spectrum, there is Asset Exploration.
„Emerging Markets“ should be an asset class concept, not a topographical or political term. BRICS as so enthusiastically conceived can be mortal. Perhaps it is better to look at emerging assets rather than emerging markets. We are still a long way off from seeing the poly-relevance of global markets completely overcome statehoods. So countries, their culture, religion and politics along with legalities - both overt and covert - stay relevant.
A word about China
The world is currently awakening to the reality that China is not the promised land but a country ridden with problems that are increasingly coming to the fore. It would be wrong, however, to let the pendulum swing to the far side of the other direction. After all, markets do not regularly behave like regulators and in this case, they should not. „China is different“ is a platitude. There is truth to it but that is not a good reason for European and American companies to shift their coordinates. PSA was an early example of how not to do business there. In China, you need to stand your ground while understanding - but not adopting - a Chinese approach. When president Xi Jinping visited the UK, some Chinese companies in the UK bought full-page advertisements in the FT to „congratulate president Xi Jinping on his successful visit to the UK“ before it had even begun. This can read a bit silly, at least in English but it should not shroud the millennia-old proof that the Chinese are smart, sometimes in their own convoluted, or better serendipitous ways. Again, it is important to understand, not necessarily adopt the Chinese view on the the last 200 years and how it connects to the world of today.
Another one about Iran
’The force awakens’ is no longer science fiction and it might be deeply unpopular in Riad, having a startling effect on a post-King-Abdullah government. As with China, the way forward will neither be straight nor smooth. The recent election results are a strong but not necessarily a firm signal. Iran sits on the world’s largest cavern of natural gas but this is not it. Look at Australia. Neither is it about Shahab V or Natanz, look at North Korea. There are going to be opportunities aplenty for asset acquisition and management but to seize them, foreigners need to understand rather than be understanding. Check in again soon for more words on Iran.
Having mentioned Riad, since King Salman ascended to the throne and made his son Mohammad bin Salman the most powerful prince ever, „MbS“ as he is often referred to has been moving a lot in the kingdom. Whether this is all for the better remains to be seen and the intervention in Yemen is not clear evidence for the Princes’ merit or lack thereof as a defense minister
A new paradigm
It is often often heard that we are going to live in a multipolar world. I believe that this is as evident as globalisation and automatisation but it requires a shift of paradigm from the incumbents of the hitherto singular pole. On state level, there is no enemy, there is no victory; there are only facts, interests (some consciously shared, others unconsciously so), relationships and the engagement in solutions. Concrete sources of conflict are to be taken seriously but also recognized for what they are: an overlay to more fundamental developments. To respond to such developments is challenging, wherever you are. For example, the UK and China have something in common, a curse and a blessing: what the Communist Party is for China, inflated property prices are for the UK. One is a legacy, the other a steroid, but for either holds: destroy it and you destroy the country.
There are many more aspects to business opportunities in trade, finance and asset management in those emerging countries - like the legal and political frameworks, not necessarily congruent. Despite all, what Egon Bahr, a German proponent of détente had coined as a strategy during the cold war in the 70s and 80s: Change through rapprochement, is still true.