Thanks for interesting article. Two short comments from an economist: (1) would have expected something about facilitating resource allocation (and growth)? To me too much of today’s asset management is about extracting rent in a zero-sum game, where there are no end to the sophistication that can be engineered w/o any optimally considered. Also much return depends on positions that ultimately rely on liquid markets and central bank backstopping; I.e. liquidity is too cheap. (2) your point about information asymmetries reminded me of old paper by Fisher Black from 1986: Noise, where he concludes that “noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark”. So question is whether assets managers do have superior knowledge or simply extract rent by monopolizing scarce information? Good luck with your talk; my hope is that future AM do have some perspective beyond simply max profit.
Thanks for your thoughtful comment. To your points. (1) I excluded consideration of resource allocation precisely because in my experience it is an ancillary result rather than a primary purpose of asset management. That said, I would point out that the receivers of investment are also customers of asset managers, and are equally subject to information asymmetry, even though they frequently are privy to more (local) information than the investment company. The 'edge' of the investment company is to demonstrate that this 'local' information is less valuable than their own. We could discuss in greater detail. My estimation is that growth and economics in general are almost entirely beside the point for asset management, except as a useful narrative to 'prove' to customers the manager is able to navigate uncertainty successfully - i.e. the economic analysis acts as one of the boundaries that allow the manager to claim 'I'm smarter than you'. In almost every case economic considerations will be overruled by non-fundamental considerations. We may enter a long period of zero growth and asset management would still be a profitable industry. A long time ago my group invested according to a checklist of topics which made this explicit: a long list of worthy economic inputs (GDP outlook, BoP, inflation, monetary orientation, IP, etc) could be instantly overruled by our technical assessment (no, not technical analysis). In all my roles since, economics never makes more than a passing appearance in deliberation. I think that is entirely reasonable. (2). Noise is precisely the point, for noise represents information. If you understand the noise you understand the information. However, I dare to suggest that I partially disagree with Fisher Black in that the noise does not constitute darkness, but twilight.
Very thoughtful article Meyrick. I wonder, though, if the purpose of asset management is very much dependent on one's perspective. In your terms of information asymmetry, it strikes me that for the asset manager, the purpose is to expand and maintain information asymmetry, while for the investor, it offers one of two uses. either, it allows the investor to totally ignore the process as something to which they will never gain any semblance of understanding but which they have learned is necessary for them as they go through life, or it is the school by which investors learn about the financial world in an effort to be able to manage their own finances over time.
Thank you Andy. I accept your distinction on the investor side and tried to make clear in the piece the bargain is not without benefit to the customer. The question is whether shifts in goal-posts, which asset managers advertise as in the interests of investors (such as low cost passive funds) are really a means to disguise the aggregation of control through other channels. In addition, many investment managers fail even to keep pace with the indices against which they claim to be measured. And the clamour from pension funds to allocate funds to outside private equity/credit managers is frankly baffling. I would fully understand if these investors created their own expertise in the area, but outsourcing it is a mystery to which I have no answer.
In fact, the cynic in me might say that the purpose of the investment manager is to separate the investor from his funds. But perhaps that is too cynical :)
Thanks for interesting article. Two short comments from an economist: (1) would have expected something about facilitating resource allocation (and growth)? To me too much of today’s asset management is about extracting rent in a zero-sum game, where there are no end to the sophistication that can be engineered w/o any optimally considered. Also much return depends on positions that ultimately rely on liquid markets and central bank backstopping; I.e. liquidity is too cheap. (2) your point about information asymmetries reminded me of old paper by Fisher Black from 1986: Noise, where he concludes that “noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark”. So question is whether assets managers do have superior knowledge or simply extract rent by monopolizing scarce information? Good luck with your talk; my hope is that future AM do have some perspective beyond simply max profit.
Thanks for your thoughtful comment. To your points. (1) I excluded consideration of resource allocation precisely because in my experience it is an ancillary result rather than a primary purpose of asset management. That said, I would point out that the receivers of investment are also customers of asset managers, and are equally subject to information asymmetry, even though they frequently are privy to more (local) information than the investment company. The 'edge' of the investment company is to demonstrate that this 'local' information is less valuable than their own. We could discuss in greater detail. My estimation is that growth and economics in general are almost entirely beside the point for asset management, except as a useful narrative to 'prove' to customers the manager is able to navigate uncertainty successfully - i.e. the economic analysis acts as one of the boundaries that allow the manager to claim 'I'm smarter than you'. In almost every case economic considerations will be overruled by non-fundamental considerations. We may enter a long period of zero growth and asset management would still be a profitable industry. A long time ago my group invested according to a checklist of topics which made this explicit: a long list of worthy economic inputs (GDP outlook, BoP, inflation, monetary orientation, IP, etc) could be instantly overruled by our technical assessment (no, not technical analysis). In all my roles since, economics never makes more than a passing appearance in deliberation. I think that is entirely reasonable. (2). Noise is precisely the point, for noise represents information. If you understand the noise you understand the information. However, I dare to suggest that I partially disagree with Fisher Black in that the noise does not constitute darkness, but twilight.
Very thoughtful article Meyrick. I wonder, though, if the purpose of asset management is very much dependent on one's perspective. In your terms of information asymmetry, it strikes me that for the asset manager, the purpose is to expand and maintain information asymmetry, while for the investor, it offers one of two uses. either, it allows the investor to totally ignore the process as something to which they will never gain any semblance of understanding but which they have learned is necessary for them as they go through life, or it is the school by which investors learn about the financial world in an effort to be able to manage their own finances over time.
Thank you Andy. I accept your distinction on the investor side and tried to make clear in the piece the bargain is not without benefit to the customer. The question is whether shifts in goal-posts, which asset managers advertise as in the interests of investors (such as low cost passive funds) are really a means to disguise the aggregation of control through other channels. In addition, many investment managers fail even to keep pace with the indices against which they claim to be measured. And the clamour from pension funds to allocate funds to outside private equity/credit managers is frankly baffling. I would fully understand if these investors created their own expertise in the area, but outsourcing it is a mystery to which I have no answer.
In fact, the cynic in me might say that the purpose of the investment manager is to separate the investor from his funds. But perhaps that is too cynical :)
"Where are the customer's yachts?"
exactly!!