A Seat at the Table
5/24/23 | Eric Alexander
It’s been said that if you don’t have a seat at the table, you’re probably on the menu. And it has rarely been truer than it is today as low-cost passive managers continue to devour more and more of the institutional assets that had previously been passed around a crowded table of active managers.
All this due to the unavoidable fact that asset owners, from enormous state pension funds to smaller endowments and family offices, have increasingly dedicated the bulk of their core holdings to passive funds, having by now seen enough historical evidence that these funds will provide strong, long-term results at the lowest cost.
The good news is that asset owners are still willing to allocate funds to established active managers and newer niche players with particular expertise in less homogenous, less transparent, less scalable, less correlated, and less liquid strategies. It has also motivated institutions to refine their view on the optimal role of active management in their portfolios. To that end, asset owners are often instructing their consultants to identify active managers willing to focus on thinner portfolio sleeves and emerging managers specializing in areas such as litigation finance, royalties or digital loans.
The challenge for managers in these narrower spaces, who are often emerging managers or have shorter track records, is better aligning their messaging -- the way they talk about their innovative strategies and investment processes -- with the priorities of institutions seeking exposure to their space. A thoughtful repositioning of their offering and a more granular approach to quantifying performance and attribution assertions can help these managers better target appropriate RFPs and be prepared to respond fluidly to DDQs.
This reorganization of the institutional menu provides both long-standing and emerging mangers with exciting opportunities to present themselves as ideal answers to new institutional mandates. For established larger firms, this may require a willingness to refine the scope of their strategy to more precisely align with a narrower assignment. Smaller and newer managers must focus their presentations to feature the elements of organizational structure, investment process and risk management that matter to institutions and their consultants, even more so than recent strong performance that these managers may have previously promoted to high-net-worth investors.
Institutions and their consultants have rewritten the menu from which they now choose their entrees, sides and dessert. Their appetite remains voracious, but their tastes have evolved. Active managers must choose wisely where on the new menu to present themselves if they want to retain a seat at the table.
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