It pays to be an optimist in this industry. Indeed, it couldn’t be any other way. Money managers are, by necessity, natural believers in the markets’ ability to provide returns—so long as prudence and foresight are wielded—regardless of the forces acting on the economic landscape. So, as the rest of the country steels itself for the onset of the bleak Canadian winter, managers see a different season emerging. The economy is warming. Equity markets are surging. For the institutional money management industry, it is spring, and green shoots are everywhere.
Part of the reason for this bright outlook may be that it couldn’t get much worse. An October report by Watson Wyatt found that assets under management by the world’s 500 largest fund managers fell by more than 23% in 2008, a loss of C$16.8 trillion. “2008 was a dreadful year for fund managers, with the majority posting record losses,” says Carl Hess, global head of investment consulting with Watson Wyatt. “Even after the strong market recoveries since March this year, our expectation is that values will remain below 2007 levels, meaning that the outlook for this year’s revenues and earnings in the sector remains poor.”
Despite the ability of the Canadian economy to avoid the worst of the global recession, the country’s money management industry is not immune to the trend. Indeed, the past 12 months have been unpleasant for Canadian managers, with the Top 40 posting a 15.3% decline in pension assets under management, from 2008. Only seven firms of the Top 40 were in the black for this report, led by PIMCO Canada with an increase of 21.4%.
Within the top 10, not much has changed since the November 2008 report, except that AllianceBernstein Institutional Investments (now No. 8) has swapped places with Greystone Managed Investments (No. 5). Barclays Global Investors Canada retains the top spot with total pension assets of $45.3 billion, albeit down 12.2% from 2008, and TD Asset Management Group is still in second place with $37.4 billion in pension assets, down 3.4%.
The top performer by far this year is PIMCO Canada (No. 33, up 21.4%), followed by Russell Investments Canada (No. 35, up 8.9%), Standard Life Investments (No. 15, up 7.4%), Goldman Sachs Asset Management (No. 30, up 5.2%), Morguard Investments (No. 25, up 3.9%), Fiera Capital (No. 20, up 1.0%) and Beutel, Goodman & Company (No. 11, up 0.4%). However, none of these firms managed to crack the top 10.
Gone from the Top 40 are Capital Guardian Trust Co. (No. 28 in 2008), Legg Mason Canada (No. 33 in 2008) and Brandes Investment Partners (No. 39 in 2008). Newcomers to the list include PIMCO Canada (No. 33), Russell Investments (No. 35), London Capital Management (No. 37), SEI (No. 39) and Mondrian Investment Partners (No. 40).
In light of the heavy losses of 2008, managers see their client base reaching out in search of new ideas. Clients are looking to reassess their strategies, rebalance their portfolios and redefine risk management. In many cases, they’re also looking for new blood, as underperformance from the previous 12 months has left a bad taste in their mouths. For firms that specialize in the skills and capabilities that institutional investors are looking for, 2010 may very well start with a bang.
A few good managers
Manager search activity is up across the board. Not surprisingly, much of it is a result of less than stellar performance now that the dust is beginning to settle from the global financial crisis. Enough time has elapsed to give institutional investors a peek at the competition’s performance and consider a chat with their managers.
However, search activity goes deeper than that. Considering the enormous volatility in markets over the past year, many institutional investors are in dire need of rebalancing, requiring moves to new asset allocations—and, by extension, new managers.
“There are some managers who are being replaced for performance reasons, but the vast majority of selection activity isn’t necessarily performance-based,” says Janet Rabovsky, Watson Wyatt’s practice leader for central Canada. “It has to do with changes in mandates and initiating new asset classes.”
Damon Williams, president of Vancouver-based Phillips, Hager & North, has seen an uptick in search activity relating to fixed income strategies as plan sponsors attempt to get a handle on their risk profiles.
“If you’re going to have a mismatch between assets and liabilities, it better be for a good reason—which is typically for a higher return,” he explains. Williams suggests that some clients have decided that they have too much risk on the table in the form of equity allocations or short-term bonds as opposed to longer-term bonds. “We’ve seen searches related to that activity. We’ve also seen an increase in targeted searches for corporate bond-specific mandates due to the spreads and the overall economic environment.”
Michael Quigley, senior vice-president of distribution with Natcan Investment Management in Montreal, says that while the first half of 2009 was slow in terms of search activity, the pace has picked up, creating a wealth of possibilities for new business. “It’s a welcome opportunity for firms that did relatively well through the crisis,” he says. “Some long-term relationships are coming loose, and it gives us an opportunity to break into those relationships.”
And the nature of those relationships may be changing. While the May 2008 Top 40 Money Managers Report portrayed an industry being forced into either niche specialization or consolidation, some in the industry say the new trend that seems to be emerging is a demand for large full-service shops with multiple asset allocations and skill sets.
“It’s a great time for a shop that has a solid infrastructure and the ability to partner with clients,” says Duncan Webster, chief investment officer with CIBC Global Asset Management in Toronto. “Money managers who are on the fringe—the smaller players, the boutiques, which are dependent on a single asset class—are going to remain challenged for the foreseeable future. We see institutional investors that are looking at their models and seeking more of a partnership approach than they were in the past.”
Webster feels the challenge for the smaller players lies in keeping pace with the bigger shops in terms of manpower and technology, both of which require deep pockets. For this reason, he expects to see more consolidation in the industry.
State Street Global Advisors’ managing director for Canada, Gregory Chrispin, echoes Webster’s remarks. “We’ve definitely seen a flight to quality, in terms of firms tying their fortunes with [managers] that are well established and stable,” he explains. “We’re being asked to take a look at competitor portfolios and see how we can work them into our framework and take over the management.”
However, at least one of the larger firms still sees a role for boutiques. “The [2008] trend has not changed,” says Bill Chinery, managing director and head of Canada for Barclays Global Investors. “In fact, there has been increasing commentary indicating that consolidation will continue in the asset management space—much like the BlackRock acquisition of BGI.” He explains that the “core and explore” style of investing also applies to how clients look at strategic partnerships, with large multi-strategy managers (core) and interest in boutique managers (explore). “The ‘mushy’ middle of medium-size firms, which are not boutique and not large enough to be full-service, will fall out of favour.”