Fund Managers

The Complete Guide

Matthew Hudson

• Publisher: Wiley
• Year: 2019
• Print ISBN: 9781119515586
• eBook ISBN: 9781119515340
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

The definitive guide on fund and asset managers worldwide

Fund Managers: The Complete Guide is an all-encompassing overview of fund and asset managers around the globe. The only comprehensive guide on the subject, this book covers both the fund manager and the market as a whole while providing insights from current and future fund managers and leaders in the technology industry from the UK, EU and US. Focused examination of the fund managers and their investors – the categories of manager, the asset classes they participate in, how they are using technology and their views on the market – complements a wider survey of the market that includes upcoming changes to regulation, taxation and political shifts in the Western world.

The asset management industry continues to undergo significant changes that rise from the Global Financial Crisis and its recovery, the recent technology boom and political fluctuations that have altered the way business is conducted in financial markets around the world. Questions concerning China and Asia's rise, Trumpian influence in America and post-Brexit UK-EU relations underscore the contemporary relevance of Fund Managers: The Complete Guide to current and future discourse within the industry. This important volume:

• Explains worldwide roles, purposes and operations of asset managers including how local culture influences their strategies
• Examines different types of assets and asset-management strategies
• Investigates the influence of macroeconomic and political factors such as governance and regulation, international taxation, anti-globalisation and populism
• Illustrates the impact of technology and its disruptive products and players
• Describes the different types of investor investing in the managers' funds and how they view the industry
• Future-gazes over the ten years and beyond for the industry

Fund Managers: The Complete Guide is the authoritative resource for anyone who requires an overview of the asset management industry and up-to-date insights on current and future trends and practices. The book also complements the author's earlier work Funds: Private Equity, Hedge and All Core Structures.

CHAPTER 1
Seismic Shifts

There is nothing impossible to him who will try.

Remember on the conduct of each depends the fate of all.

– Alexander III of Macedon

I decided to put down my two favourite Alexander the Great quotes, as someone that distinctly lived for both the moment and the long-term future (which, dying aged 32, he sadly never saw, but I suspect he glimpsed and deliberately defined).

This chapter takes a brief look back at the very long history of asset management, before examining the most influential trends within the asset management industry over the course of the past ten years, including volatility (Vol), growth in passives, rise of the internet and technology, extremism, migration, unemployment, Brexit, generational shifts, the Arab Spring, quantitative easing and then tightening, and the expansion of China. Although an investor's office may seem like a bubble, the asset management industry does not operate within a vacuum. This chapter draws connections between the key social, political, and technological developments over the past decade and relates them to the asset management space.

THE CODE OF HAMMURABI

The origins of asset management can be traced back to at least 1754 BCE and the Code of Hammurabi in ancient Mesopotamia, which set out a primitive system of property law, including basic rules about credit and security. The principal asset class at this time was land and the only people involved in ‘asset management’ were a limited demographic of powerful individuals. Later, in ancient Greece, international trade fuelled the development of basic banking activities, such as loans to seafaring merchants. At this time, the asset managers were slaves of the wealthy (think The Parable of the Talents). By the end of the Roman Empire, the first basic pension scheme had been invented – with some Roman military officers being given country estates (both for the modern-day financial reasons and to keep military leaders away from the politics of the city).

The Renaissance really ushered in the beginnings of modern-day asset management: mercantilism thrived, the Venetians invented double-entry book-keeping, the merchant banks grew, and commercial fairs (protostock markets) developed. The sixteenth century saw the rise of extraordinarily large businesses like the British East India Company and the Dutch East India Company, which were so-called ‘joint-stock companies’ – companies in which shares of its stock could be traded by shareholders. This led to substantial wealth creation and the emergence of public markets, culminating in the establishment of the first proper stock exchange in 1787 – the Amsterdam Stock Exchange. Meanwhile, the First Presbyterian Church established the first modern-style pension scheme for its ministers in 1759.

Industrial revolution and technological development throughout the eighteenth and nineteenth centuries led to a dramatic increase in productivity, which gave rise to surpluses, and surpluses meant more investable assets. The asset management industry became much more established and in 1884 Charles Dow created the first stock index. The beginning of the twentieth century (the ‘Roaring Twenties’) was a wild time for asset management with the development of investment theory and rapid economic growth ending in the Wall Street Crash in 1929 and the ensuing Great Depression (which sparked significant US regulatory reform).

In the second half of the twentieth century, asset management experienced a golden age that set the scene for today's financial sector: the first hedge fund was established by Alfred Winslow Jones in 1949; private equity was ‘invented' in 1946 by the American Research and Development Corporation and pioneered in the late 1970s (and onward) by KKR; and the first index fund emerged, created by Jack Bogle of Vanguard in 1976.

CREDIT CRISIS TO FINANCIAL CRISIS

The financial crisis is a stark reminder that transparency and disclosure are essential in today's market place.

– Jack Reed

On Monday, 15 September 2008, Lehman Brothers filed for bankruptcy. Images of former employees packing their personal items into cardboard boxes flew round the world. The anger, despair, but mostly shock of the 25,000 individuals who lost their jobs signalled a fact that many did not want to believe – Lehman Brothers was not too big to fail. Rewind to March of that year when Bear Stearns (subsequently sold to JPMorgan Chase) failed and it is difficult to imagine why systemic risk in other banks was not addressed sooner. This was just a snapshot of what was to come. What happened in the following years would be known as the ‘credit crisis’.

The collapse of Lehman Brothers resulted in large government bailouts in order to stabilise the rocking financial system. With Bank of America purchasing Merrill Lynch and AIG receiving a bailout from the United States (US) Federal Reserve, the financial ecosystem looked shaky at best. The cause of this is not singular and has been well documented in other literature – for example, collateralised debt obligations (CDOs), excessive leverage, mortgage mis-selling, securitisation of bad debt, poor judgment by agencies, and disproportionate risk-taking by financiers. This period, chronicled by the media and in film, is seen as a defining episode of the last two decades. A key consequence of this financial meltdown was the increase in financial regulation.

In the US, the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act) was signed into US federal law by President Barack Obama on 21 July 2010. This legislation was implemented in direct response to the financial crisis and was the single largest overhaul of financial regulation since the 1930s. Underlying the many rules, which were enacted to prevent similar events occurring again, is a theme of transparency. This has become the watchword for financial reform over the past ten years; used as a stick to beat, but also a badge of pride for those who follow through on their promises. The championing of transparency has been a key trend since the credit crisis.

The 2008 market crash was attributed partly to the housing bubble that burst in the US. The Dodd–Frank Act, in attempting to prevent this happening again, includes provisions to protect borrowers against predatory lending and to prevent abusive mortgage practices. The legislation aims to achieve this by establishing US government agencies to monitor banking practices and oversee financial institutions. Of course this reaction is seen by some as too little too late. The Federal Reserve did little to prevent the housing bubble and central banks in general should have done more to address the financial instability leading up to the crisis. The Bank of England (BoE) took a limited approach in maintaining a financially stable system (post-independence) and the European Central Bank (ECB) did not act in response to the credit surge.¹ Capital reserves pre-crisis were wafer-thin and not sufficient to cover more than a few percent of loan defaults. Some argue that high interest rates made it difficult for these institutions to influence the housing and credit boom. But the regulatory changes that have been enforced across Europe and the US are tools that could have been utilised before. For example, ensuring that banks kept aside more capital (and were not too leveraged, like Bank of America, Merrill Lynch, and Lehman Brothers, which almost entirely financed their purchasing of CDOs and mortgage-backed securities (MBSs) through loans – leverage on leverage) or requiring lenders to lower the maximum loan-to-value ratios for mortgages.

In Europe, these sentiments regarding minimum capital requirements resulted in the Basel III framework. The basic premise is that banks will be liquid enough next time to prevent the domino-like defaulting that occurred in 2008. Banks have also been required to improve the standard and quantity of their capital. This means having a higher proportion of equity to assets or debt. Furthermore, the importance placed on stress tests was felt by several major institutions that publicly failed. This led to banks limiting their diversification and retreating from certain asset classes as they feared the illiquidity and capital adequacy that came with them.

The credit crisis saw many banks fail or bail. Citibank went from being essentially a hedge fund to a retail bank in a sickening squeal of brakes. The credit crisis was a period of bank failure and subsequent regulation and ring-fencing. The financial crisis then consumed the credit crisis. All asset classes suffered. A number of EU member states went bust in all but name (for example, Ireland, Greece, Cyprus, Spain, and Italy) often from excess real estate (RE) excitement pre-crisis. The term ‘PIGS’ (Portugal, Italy, Greece, and Spain) was first used. For a few years, it felt like all the money had gone to the moon.

QUANTITATIVE EASING

A continuous programme of quantitative easing (QE) has kept interest rates artificially low following the financial crisis. QE is a form of monetary policy, the ultimate aim of which is to boost spending in order to increase inflation levels. QE is a process whereby central banks (like the Federal Reserve and the BoE) buy back existing government bonds (gilts) as a way to shovel money into the financial system.² As the demand for the assets increases, so do the prices of those assets which helps to raise inflation. As commercial banks receive more funds from the repurchase of the gilts, they will be encouraged to fund more loans to companies and private individuals.

During the period from 2008 to 2016, the BoE bought GBP 435 billion³ of government bonds. Although critics of the policy have argued that it helped to inflate asset bubbles, the BoE's own research has pointed to the benefit seen by individuals on the lower end of the housing market.⁴ For those people, the increase in housing...

Table of contents

• Cover
• Table of Contents
• Preface
• CHAPTER 1: Seismic Shifts
• CHAPTER 2: What Is it like Being an Asset Manager?
• CHAPTER 3: Structures and Economics
• CHAPTER 4: Governance
• CHAPTER 5: Investment Strategies
• CHAPTER 6: Investors' View of the Industry
• CHAPTER 7: Asset Allocation and Portfolio Construction
• CHAPTER 8: Technology
• CHAPTER 9: Regulation in the Asset Management Industry
• CHAPTER 10: Risk, Compliance, and Regulatory Trends
• CHAPTER 11: Taxation
• CHAPTER 12: Regional Trends
• CHAPTER 13: Future Trends
• Some Conclusions
• Glossary of Terms
• Abbreviations
• Acknowledgments
• About the Author
• Index
• End User License Agreement