Investment managers will need to adapt and innovate to avoid falling into a two-tier industry of outperforming alpha fund managers and those left behind to chase scarce market returns, according to Mercer.
Tuesday, November 27th 2007, 7:09AM
In a book, 2020 Vision: Investment Wisdom for Tomorrow, Mercer presents seven key themes that will influence the professional investment industry over the next decade.
The ability to sustain future superior performance will define the funds management industry in the coming years, author and Senior Associate within Mercer's investment consulting business, Harry Liem says.
"Institutional investment is based on the search for alpha or outperformance, however, active investment managers have long battled against the erosion of alpha as their ideas and processes are taken up by competitors. The best of them are constantly searching for new ideas and new sources of information to maintain their competitive advantage.
"Only those players able to adapt themselves faster than their competitors will maintain their leading edge," Liem said.
The book is based on interviews with 12 leading professional and academic figures, and is set against the background of 12 'mega trends' including a more difficult monetary environment, global economic imbalances, increased competition, the separation of reward for skill (alpha) and market exposure (beta), increased interest in the 'alternatives space', and growth in socially responsible investing (SRI).
Seven common themes emerged from the interviews, providing investors an insight into what they may expect from the industry in the coming years:
Active versus passive- the moving frontier
As more and more of what was once deemed 'insight' becomes systemised, pure alpha may indeed become rare.
The future of the investment industry- the dual world
While some fund management firms are positioning themselves for the coming decade with a firm focus on alpha returns, others will fall behind.
Generalist versus specialist - A place for both
Traditional debate has now moved into hedge fund space with many investors comparing the merits of the 'fund of fund' versus the multi-strategy approach.
The current environment- concern and hope
As the sub-prime mortgage fallout continues, attitudes to risk are being re-assessed.
The hedge fund industry- expecting a shakeout
There is increasing concern among interviewees about the fast growing hedge fund industry.
Ethical Investing- the jury is still out
A common theme is that SRI is going mainstream. Investors over the past decade mainly focused on governance, while the attention given to the environmental and social part has been very scarce until two or three years ago. Evidence of the added value of ethical investing in the academic world has so far been mixed.
Investing: art, science or skill?
Despite all the emphasis on quantitative techniques, at the heart of superior performance lies human insight.
"Transaction costs will come down as the number of derivative instruments increases, the skill of the average player will increase and capital markets become increasingly efficient. Ultimately, we will keep finding new betas that explain what was once presumed to be skill, hence pure alpha will become rare indeed," Liem said.
