What’s Next for Retail Asset Management?

What’s Next for Retail Asset Management?

Barry Feldman IMCI

[email protected]

Northfield Information Services 28th Annual Research Conference

Lowes Don Cesar Hotel St. Petersburg, Florida

October 31, 2015

1. Retail Asset Management today

• What do we know investors want but is very hard to deliver? • PERFORMANCE from manager alpha, hedge funds or smart beta

• What else do we think investors want? • Tax efficiency if it’s easy and cheap • Social investing if it’s easy, cheap and safe enough

• Who gets it? • HNW investors in proportion to their height

• How do they get it? • Family offices • RIAs • SMAs and manufactured portfolios (DiBartolomeo 2008) • Roboadvice? – well a little rebalancing alpha

Retail product differentiation

• Huge numbers of products • 8,000 U.S.-based mutual funds • 10,000 hedge funds globally • 1,400 ETFs

• Effective variety much smaller • Most products target U.S. and developed large cap • Tax-efficient and social investing variety is very small • Style and smart beta variety is restricted to principal regions

• SMAs offer high-end retail the potential of meaningful customization • But more often than not potential is not realized

Stalemate?

• Retail asset management seems to offer more than investors want • Investors are of often thought of as

• Cynical about markets • Distrustful of asset managers • Not investing enough • Chasing returns • Reluctant to embrace new products

• Percentage of households owning mutual funds has plateaued • Grew 8X over the 1980s and 1990s • Average of 45% ownership post-2000 • About 43% as of mid-2014

• Portfolio manufacturing remains a niche SMA product

• Is mismatch between investor needs and industry products a problem? • Are we approaching paradigm exhaustion?

2. Mass Production and Mass Customization

Mass customization: What is it?

• Mike Piore and Chuck Sabel, The Second Industrial Divide – 1986 • Potential of flexible specialization

• Stan Davis, Future Perfect – 1987 • Bespoke products produced with scale technology and cost

• Joe Pine, Mass Customization – 1993 • Historical perspective

• Joe Pine and James Gilmore, The Experience Economy – 1999, 2011 • Experiential dimension

• Anthony Flynn, Custom Nation – 2011 • Value of the consumer design experience

Mass Customization – a timeline

• Subway and Burger King – 1970s • FedEx – 1973 • Dell Computer – 1984 • Volkswagen – 1990s • Zara (2001) vs Gap • Zazzle – 2005

Sizzle in Zazzle

• Customized design mass market • No product made until ordered • Shipped within 24 hrs. • $250 Million in revenue last year • 25% p.a. sales growth • 45% gross margin

http://www.cnbc.com/2015/07/29/the-anti-amazon-thats-making-money-zazzle.html

Retail asset management innovation in perspective

• Most retail investment innovation has been about scale • Alpha/beta separation can be seen as the latest scale story • SMAs and firms like Folio and Motif are about custom investing • Betterment, Wealthfront and Schwab Robo-advice

• Portfolio mass customization

• Parts of an emerging trend? • Mass customization could be the next big frontier

3. The Shock of Technological Revolutions

Social change driven by technological change

• Perez provides a convincing synthesis and renovation of Kondratiev and Schumpeter with a detailed recurring structure • Changes cluster and follow “irruptions” of new “techno-economic” paradigms • Frictions generated by the slow pace of social and institutional adaptation are the

fundamental drivers of the disequilibria that punctuate economic growth • The roles of financial capital change predictably over the course of a cycle • Leading and lagging sectors

• Perez potential implications • Varying investment strategies over the techno-economic cycle • Similar analytical framework for industry-level technological change • Is retail asset management today a lagging sector in the ongoing IT revolution?

• Toffler and Rushkoff address the growing experiential stress of change • “One damn thing after another,” ever faster and more fragmenting • Toffler is basically sociological in orientation, Rushkoff phenomenological

4. Culture Wars and The Conquest of Cool

The interplay of technological and social revolutions • Radio and TV-centered popular culture exploded in the 50s and 60s

• The portable transistor radio the first personal media device • Radio itself

• Was a leading edge of desegregation in the late 40s and the 1950s • Did much to unleashed both the cultural forces of the 60s and their backlash

• Advertising appealed to youth and countercultural themes • e.g. “Pepsi Generation”, “Uncola”, and Volvo and VW anti-style campaigns • Catalyzed mass culture “cool” and “hip” versus “square”

• Firms like Apple aligned culturally to popularize their products • The IT industry followed to a surprising extent

POLARIZATION

https://www.youtube.com/watch?v=6JHzkaHS36g

REVOLUTION

https://www.youtube.com/watch?v=2zfqw8nhUwA

REVOLUTIONARY IN A DIFFERENT WAY

https://www.youtube.com/watch?v=2B-XwPjn9YY

The power in cultural connection

http://www.forbes.com/sites/jacquelynsmith/2012/01/30/experts-and-viewers-agree-apples-1984-is-the-best-super-bowl-ad-of-all-time/

The power of a romantic idea

http://www.c2montreal.com/post/game-changing-super-bowl-ad-defined-creative-marketing/

5. The challenge of investing in the future

• KPMG’s four “megatrend” drivers of the retail asset management industry • Demography – young and global • Technology – social media • Environment – particularly climate • Social investing – of all kinds

• KPMG’s warning • Potential for disruption

• Amazon, Apple, Facebook or Google?

https://www.kpmg.com/SG/en/IssuesAndInsights/ArticlesPublications/Documents/Advisory-FS-Investing-in-the-future.pdf

Socially driven investing • Surveys repeatedly show strong interest

• Particularly among the young • But the big wave never seems to arrive

• Mastering social investing variety and the underlying cultural forces has been difficult for the industry • Involves narrowing the investment opportunity set • Industry resistance from financial theory, political and social sensibilities • Proliferation of social investing preferences is seen a problem not an opportunity

• Climate and other environmental issues growing social issue • Direct investment implications • South African divestment experience of the 1980s

• Case study for understanding the potential of impact climate concerns

Divestment and climate social movements March

1980s Divestment campaign 2014 Peoples’ Climate March

http://indiancountrytodaymedianetwork.com/2015/01/06/extinctions- melting-ice-10-environmental-issues-well-see-more-2015-158566

http://www.thecrimson.com/article/2003/6/4/out-of-africa-on-a-cool/

Investment Mass Customization • Empower retail investors to easily and prudently customize the

investment dimensions that matter to them • Tax advantages could be considerable • Social investing options could offer savers a new sense of engagement

with their investments and provide satisfaction and meaning beyond performance itself • Reduces the fiduciary burden on the investment manager in contending with

the diversity of social investing convictions

• Demand for investment strategy customization could grow over time

Thank you! Barry Feldman [email protected]