In a highly atypical market environment, asset management is facing massive upheaval from its theory-based foundations. In his book Essays in Positive Investment Management (Economica), Pascal Blanqué, CIO and Deputy CEO at Amundi Asset Management, embarks on a crusade against certain absolute truths in asset management.
Building on his experience and financial markets’ recent behaviour, Blanqué sets about killing some sacred cows of financial theory, such as long-term investors, benchmarks and risk-free assets. He explains that ‘diversification never works when you really need it’ and concludes with the necessity of advisory services as the main source of added value when constructing both private and institutional portfolios.
It is true that putting together an asset allocation adapted to our clients’ needs has become something of a high-wire act. The theory of a ‘risk-free asset’ — which says that there’s no danger that government bonds will not be paid back, hence they are the cornerstones of the main portfolio-construction theories — has been firmly debunked in the wake of the recent crisis. At the same time, other types of investment that are supposed to bring real diversification to portfolios, such as hedge funds, have not been able to stay decorrelated from the financial markets in periods of high volatility.
Then there is the appearance of negative interest rates in the majority of developed markets; this is truly anomalous and is causing a major upheaval in terms of the foundations on which diversified portfolios are built.
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All this means that it is increasingly tough for investors to achieve their performance objectives — objectives which are supposed to enable them to meet their own liabilities. In this context, a paradox has emerged: while the performance objectives can no longer be achieved without a significant allocation to risk assets, the demands of private clients in terms of security and liquidity have never been so great, to the point that they even accept negative returns as long as their nominal capital is guaranteed.
Alongside this, the risk associated with the lack of liquidity — especially in the bond space — has increased sharply, despite the abundance of liquidity on the markets that has been generated by the various monetary easing programmes in operation at the moment. This absurd situation is, above all, the result of new regulations that have had an impact on investment bankers’ strategies, which has strictly limited market makers’ means, whose role it had been to ensure market liquidity.
In this type of new environment, traditional financial benchmarks, which are often abstract and, above all, based on historical models, no longer serve as a point of reference. In many cases, they have become inadequate for defining a private client’s risk profile and putting together their asset allocation.
In order to overcome this hurdle, investors have in recent years tended, by default, to seek refuge in passive asset management, particularly in exchange-traded funds, to the detriment of active asset management. Although these instruments are efficient and inexpensive, they do not meet the majority of investors’ needs in terms of absolute performance.
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Faced with the ineffectiveness of classic asset management theories at responding to the needs of a sophisticated private clientele, the need for and value of personalised financial advice can only increase. Asset management and advisory can no longer be carried out without a precise understanding of liabilities, and they have to include the long-term financing needs with a view to investment, retirement and inheritance.
This means a new type of wealth management is emerging, one based on taking account of a client’s whole estate and optimising their liabilities. These are the needs of the future, and no longer the expectation of a relative performance defined by a benchmark. Within this framework, advisory will remain private bankers’ holy grail.
There’s also the matter, above all else, of avoiding falling into the trap of excessive standardisation and automation of advisory, which in general is not dictated by understanding a client’s long-term situation and their needs, but rather by the conservative management of banks’ reputational and regulatory risks.
In the final analysis, these upheavals constitute a real opportunity for wealth management, as it is for example in Switzerland; private clients have traditionally sought out long-term asset management and absolute performance, accepting the risk of low liquidity as long as their investment aims are achieved.
Our profession is based on the deep understanding of HNWs’ total wealth, as well as their needs in the short and long term. This historically privileged access to what one might call the true benchmark is an essential advantage and a mark of success and longevity.
Pure-play private banks therefore have exactly the weapons they need in their armoury to defend against a competition that often targets clients’ short-term needs, with the associated constraints on relative performance and liquidity that are totally different. It falls to us to put the necessary tools in place to rise to the challenge and respond to the needs of our clients.
Michel Longhini is CEO of Private Banking at UBP
