'Solutions'-orientated assets are set to double to US$2 trillion within the next five years, says JP Morgan’s Mike O'Brien – making it one buzzword that isn’t going away soon.
Many investment managers now claim to offer ‘solutions’, and more recent fund manager surveys highlight that in order to survive managers need to excel in at least one of three categories; passive/indexation, alternatives and solutions.
McKinsey recently reported it expects North American solutions-orientated assets to double to $2 trillion within the next five years.
The Asset Management Industry: Outcomes Are the New Alpha report cites the example of institutional pension fund investors “seeking outcome-orientated solutions as they attempt to cope with worsening plan deficits and funding volatility management.”
We know that funds are struggling to close their funding gap.
They are also now acknowledging that tinkering around the edges of existing asset allocations isn’t having the desired effect.
In our latest analysis, the JP Morgan Asset Management 2015 Long-Term Capital Market Return Assumptions, we demonstrate that the lower current expected returns across capital markets is not a mid-cycle phenomenon.
It is rather a structural change, meaning that investors should expect a six per cent rate of return from an equity-orientated traditional strategic asset allocation portfolio.
This stands in sharp contrast to the magic eight per cent many investors have previously expected (and experienced).
Coping with lower returns
Other investors, for example insurers, are also grappling with this era of lower expected investment returns.
As a result, many institutional investors now want their investment manager to do bigger picture thinking and analysis around their unique challenges and apply that analysis to develop practical portfolio asset allocations.
They are increasingly presenting their investment managers with the challenges they face, expressed in their own technical language, with an expectation that the manager is able to translate these challenges into investment solutions that straddle asset classes.
This is a very different relationship model from the pre-crisis relationship model but it is the future.
To McKinsey’s point, this is where investment managers that are forward thinking, intuitive and determined to make themselves a client’s first call will win.
Ultimately, success in solutions is about deploying deep subject matter experts in key client segments in order to engage with clients consultatively and proactively.
If that sounds simple, it’s not. There are many dimensions to any given client ‘solution’.
These all need to be carefully calibrated and translated in the investment engine room.
For example, in any specific client segment, an investment manager needs to have a true understanding of, amongst other things, tolerances across multiple risk types, the investor’s time frames, the factors driving their liabilities and their associated regulatory environment.
In addition, a solutions manager must also understand how the interplay between these factors may change through time and differing market conditions.
The solutions drama is being played out in a number of markets; for example, it is no surprise that the US defined contribution target date fund market – the solutions market for defined contribution investors – has grown over 100 percent in five years (to 2013, according to Strategic Insight) at a time when solutions are also growing in popularity.
A global trend
We are also starting to see this trend in the UK, where a rapidly growing defined contribution market is turning to target date funds as offering improved outcomes for default fund investors.
Outside of the world of pensions, sovereign wealth funds and endowments are increasingly finding that partnering with an investment manager that offers more than just products can enhance their financial strength and success and afford them access to a deep bench of investment experience and expertise.
We expect this trend to persist in this part of the institutional market as these investors continue to grow in size and sophistication.
Sovereign wealth funds are forecast to represent over $10 trillion in assets under management by 2020, according to SWF Institute, CPH.
Against a background of growing capital to put to work, increasingly in alternative asset classes, they are challenging the traditional investment routes and looking to develop closer partnerships with their investment managers via co-investment opportunities and access to direct investments.
Such investors, who have internal investment management capabilities, want to work with investment managers who can truly understand the opportunities and dynamics of taking such an approach.
One piece of feedback I regularly receive is that delivering solutions is going to be more expensive. I agree. But that’s the point.
This type of virtuous relationship between investor and manager shouldn’t be about cost. I believe this is how asset managers now need to approach client relationships.
Does that mean the manager has to work harder for their lunch?
Probably, but it means stronger and deeper relationships with clients; that can only be a good thing.
It is also my belief that in order to be able to truly meet these increasing investor demands you have to have the skills and resources to develop deeper insights and understanding of the client’s challenges.
Through greater understanding comes better solutions and improved outcomes for the client.
Getting this mix right can reap tangible benefits as we have experienced here at JP Morgan Asset Management; since 2008 our Solutions business has grown by more than 100 per cent with assets under management now at $239 billion (as at 31 December 2014).
So, solutions appears to be a ‘fad’ that might be here to stay.
Therefore perhaps we shouldn’t call it a ‘fad’ or a ‘buzzword’ anymore; maybe this is the new shape of investment management – a more collaborative relationship with clients based around their needs and their outcomes?
Mike O’Brien is the co-head of solutions at JP Morgan Asset Management.
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