Uncomfortable Truths

Editor-in-Chief Kip McDaniel on CIO recognizing problems before market forces can react—without becoming an industry scold.

“I don’t want us to become the industry scold.” That’s what Managing Editor Leanna Orr fired back when I suggested she write a follow-up to the June issue’s “Missing Women of Asset Management.” She had a point: No editor, or magazine, wants to be known as the journalistic equivalent to your mother.

So Leanna and I did what we usually do when we disagree: We poured a glass of scotch, and we argued it out.

Our conclusion was this: No, we do not want to be your mother. We do, however, want to be a very close friend, someone who is brutally honest when we think it warranted. And friends, we have a problem: This industry, both with gender and ethnicity, is lagging.

Thus this issue’s cover story, “Whiteout”, which takes what we discussed in our June issue and extends it beyond gender imbalances. Few discussions are as charged and fraught with peril as the issue of race in America and, indeed, around the world. Yet Leanna tackled this issue with the seriousness and honesty it deserves. It is worth a read, as well as further discussions about how this industry can go from laggard to leader in the area of opportunities for females and people of color.

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Which brings me, oddly enough, to transition management. For those who have followed CIO since inception, you’ll know that we’ve had a contentious relationship with this segment of the asset management industry. Starting with our revealing coverage of State Street and ConvergEx in 2011 and extending to this year’s transition management survey and provider league tables, we have been aggressive in our efforts for transparency. I’ve occasionally taken flak for this—a not-disinterested party once labeled me a “muckraker”—but a recent discussion I had with a well-respected industry insider put things in perspective. “The sudden publicity caused massive changes to all firms,” he said as we discussed why the transition management landscape had shifted so violently in the past three years. “It’s all due to the publicity. Transparency only existed for ERISA clients, [and] now it’s industry standard. Tough for firms to admit, but it’s the truth.”

How does this apply to the issue of gender and race ratios within asset management? Because the most common pushback I hear is that “if this was actually a problem, market forces—in terms of asset flows—would have solved it.” That’s not wrong, but it misses a point: The issue must be seen as a problem before market forces can react. Just as it was with transition management—where some managers were able to exploit ignorance and opaque reporting to overcharge clients—we must first recognize gender and race imbalances before market forces can start to solve them.

So we don’t want to be scolds. But just like your best friends, we’ll try our best to be honest with you. Just please do the same for us—over a glass of scotch, preferably.

Kip McDaniel, Editor-in-Chief

All That Glitters

Hype or secular growth in institutional ETFs? One consultant says don't believe the headlines.

“Institutions Shift to Exchange-Traded Funds as Futures Grow Costly”; “Institutional Investors Jump on Cheaper Junk Bonds, ETFs”; “Canadian Funds, Money Managers Increasing Fixed-Income ETF Use.” One glance at these recent headlines and one would imagine major investors eagerly snapping up ETFs and carving out large habitats for them in their long-term portfolios.

Don’t believe the hype, one consultant advises.

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Wall Street and asset management firms are “always looking to sell the ‘next new product,’ aren’t they?” he asks. The US-based consultant services some of the largest corporate institutions in the nation. “But despite this buildup from research and the media, the truth is, ‘The Boom’ has yet to translate into portfolios of true, long-term institutional investors.” These asset owners lack not only the need for daily liquidity, but also are neither tactical nor nimble enough to facilitate frequent trading of ETFs, he continues. “It takes weeks and months to put a strategy in place and implement them for these clients with assets in the billions of dollars. They aren’t day traders.”

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But couldn’t even the most diligent investor occasionally get swept up in the media frenzy—enough to lose its “institutional mind?” Yes, the consultant admits. He has come across one or two investment board or committee members who will cite the Wall Street Journal and insist on the purchase of, say, gold mines or Japan equity ETFs. “Some investors buy odd, one-off exposures largely because of what they read. We then reel them back and remind them to keep with an institutional strategy and a strategic allocation for the long term,” he says. “The media touts ETFs as a tool to gain exposure to niche markets—a catch-all—but in reality, larger asset owners are more suitable for institutional-quality vehicles.”

However, another consulting firm—Connecticut-based Greenwich Associates—asserts that the once retail-centric ETF has successfully seeped into the institutional space and will continue to do so. A May report observed asset owners turning to ETFs of new asset classes, especially fixed income, in a shifting interest-rate environment. New regulations following the financial crisis have resulted in “reduced dealer inventories of fixed securities and lower levels of liquidity in the secondary markets,” also driving growing opportunities for ETFs in institutional portfolios, the firm says.

The evolution doesn’t stop there. Investment advisors are placing ETFs at the heart of their strategies, beyond filling an asset class gap or accomplishing short-term tactical goals, Greenwich Associates argues. Not only are holding periods lengthening, but ETFs are expanding into strategic roles such as liquidity, risk management, and hedging. “Both usage rates and allocations are expected to continue rising as institutions discover new applications for the vehicles and innovation by providers make ETFs more flexible,” the firm said.

BlackRock, purveyor of iShares—the world’s largest ETF provider—partnered with Greenwich Associates to produce the report. 

Whether it’s hype or an honest-to-goodness shift in uptake, asset owners can and should wait for sweeter fee structures, the consultant stresses. There exist other institutional vehicles—that fit the long-term mindset of institutional investors—with better fee structures, he continues, leaving no immediate need to incorporate ETFs. “Or, we could wait for investment boards to alter their decision-making timeframe completely. If clients can make decisions in a matter of days, then maybe we’ll say yes to ETFs.”

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