Wipeout… “Decimated,” eviscerated”—those are words the Top 40 money managers have used to describe the carnage in global markets in the wake of the near collapse of the world financial system. What impact has it had on the biggest managers in Canada? All told, they took a massive 40.6% hit overall to assets under management between Dec. 31, 2007 and Dec. 31, 2008. In just one year, the Top 40 money managers lost more than $300 billion, shrinking the pool of assets from $741 billion to just $440 billion. As the wild market dive of September took its Fixed income specialist PIMCO Canada Corp., which debuts on the list at No. 36, posted the biggest gain of all—24.3%. Morguard Investments Ltd. (No. 25) gained 8.9%. Goldman Sachs Asset Management LP, another new player (No. 28), gained 8.8%. BNY/Mellon Asset Management Ltd. (3.7%) and newcomer SEI (3.5%) rounded out the top five performers in a market dominated by losses. Understandably, the crisis of 2008 has produced many changes on the Top 40 list. Greystone Managed Investments Inc. has moved into the top five from ninth place, despite an overall loss of 16.9%. Nine of the top 10 managers among our Top 40 posted losses. Big shifts on the list include seven additions from last year—the newcomers noted above, as well as GE Asset Management Canada Company (No. 32), Integra Capital Management Corp. (No. 34), Russell Investments Canada Ltd. (No. 37) and London Capital Management Ltd. (No. 38). Notable jumps include Addenda Capital Inc., which merged with The Co-operators Group Ltd. in 2008. The firm got a bump up from 11th place to seventh. Bentall LP moved up from No. 19 to No. 15 based on the comparatively solid performance of real estate. Fiera Capital Inc. jumped up eight spots (from No. 27 to No. 19) and MFC Global Investment Management moved up to No. 33 from No. 38 last year. GWL Investment Management Ltd. jumped from No. 33 to No. 26, Leith Wheeler Investment Counsel Ltd. moved from No. 28 up to No. 23 and Sceptre Investment Counsel Ltd. got a boost up to No. 30 from No. 35 last year. |
New Vocabulary
With assets at most of the Top 40 firms shrinking along with the markets, most managers are feeling crunched—and since assets under management are what drives revenues, it’s a gloomy time to be in the industry. Going forward, Woolfolk sees money management undergoing a massive transformation—one built on an entirely new vocabulary, in which alpha isn’t the main driver of investment decisions and capital preservation is the name of the game.
These days, no one wants to touch many derivatives products, and investors stuck with illiquid assets have to rethink how those assets will be valued. Peter Lindley, head of investments with State Street Global Advisors, Ltd. (Canada) (No. 4) in Montreal, says investors are loath to give up liquidity—and for good reason. “Pension plans are in dire straits,” he says. “They are less worried about alpha and more concerned with, Can I get my money out when I need to?” He says some plans have had a complete seizure in liquidity in certain investments. “They may need to make payments to beneficiaries, but they can’t.” As a result, liquidity is now the prime motivation behind many investment decisions.
Fall Fallout
September marked the beginning of what many see as a new era in institutional money management. “September changed everything,” Woolfolk says. “It went from being a bad recession to a financial panic. Now we’re doing everything differently.” Lindley agrees that September was a game changer and that 2008 was a watershed year. Going forward, it’s going to be a profoundly changed business. “Things are going to be re-evaluated from the bottom up,” he says.
Many managers see the consolidation wave of the past few years heating up, with more and more weaker players (both traditional and alternative) succumbing to the shakeout. Indexing and passive investment could also be on the rise, according to Lindley. “It could change investor behaviour with more clients becoming more indexed and more traditional.”
Woolfolk says economic uncertainty will continue to make what used to be seen as the most straightforward investment decisions much harder to make. “Basic decisions, such as where to keep cash—that might have been a simple question a year ago, but not now. Sovereign risks are being downgraded on a daily basis,” he says.
Coming out on the other side of the crisis, “I think resulting change will likely be for the better,” says Doyle. As more fraud and mismanagement is exposed and as regulation heats up in the financial sector, the effects will be felt throughout the money management industry. Pension funds, in particular, will change for the better. “Pension plans will be much more sensitive to the use of leverage, recognizing the risks,” Doyle notes. “Managers will also need to be able to better explain those risks while plan sponsors will need better tools to incorporate the risks in the context of the overall plan and the firm.”
MacDonald agrees that many changes to the industry will be improvements. “We’re going to have increased emphasis on fundamental research in the business—on liquidity analysis and transparency. These are good things. Obviously, transparency was an issue in a number of esoteric products that were out there. Liquidity has been a special focus in this downturn.”
Chinery also sees clients wanting to understand more about risk control going forward. “Two perfect storms in the past two decades has made them realize they can’t take as much risk as they have in the past.” Clients are shifting their assets to more conservative strategies, he notes, and focusing on indexing and fixed income—“areas where you can match liabilities.”
Remains of 2008
The big question on everyone’s mind is, When are the markets going to turn around? Sadly, most managers say real
recovery is a long way off, and the issues that nearly brought down the global financial system are still not resolved. “I think the industry still has a lot of problems to work through,” says Lindley. Until the employment situation improves and consumers start spending again, there is no end in sight. “The U.S. is going to
lead us out,” he adds.
Woolfolk says analysts who are calling for a quick market recovery are basically full of wishful thinking. “CNBC and BNN are willing to peddle out the first person that wants to put a positive spin on this thing,” he notes. He sees no quick end in sight. “I feel certain there’s no bottom within the next six months,” he says. “Beyond that, it’s anyone’s guess.”
For his part, Akkerman doesn’t see the good old days of 14,000 on the Dow coming back any time soon. “It’s going to be awhile before people feel as good as they did last summer. And I don’t think they’ll ever feel that good. Anyone who experienced 2008 will always have this lingering in the back of their minds, regardless of how good things seem.”
Caroline is editor of Canaian Investment Review.
caroline.cakebread@rogers.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the May 2009 edition of BENEFITS CANADA magazine.