IA Fintech Member Insights: Jacobi
Curtis Evans, Managing Director EMEA — Jacobi
Since when did product become such a dirty word in the world of asset management? Despite talk of providing solutions to investment problems, there is simplicity in an off-the-shelf product designed to perform a specific function well. Pooled funds can be cheap, relatively simple to understand and easy to transact.
Today’s challenge is that many asset managers still rely heavily on two-dimensional factsheets, presentations and past performance to position products. Their approach to embracing a solutions mindset has instead been to develop new teams that customise individual portfolios from scratch. As each client requires an entirely bespoke solution and portfolio, this becomes a jungle to manage, monitor and maintain – a tough ask in an environment of shrinking fees. While suitable for some, not all clients require an entire re-casting of their investment mix.
Instead, the best approach can often be to help clients identify where potential for the most powerful incremental change lies within their existing portfolio. This is good news for fund managers as often the ideal solution may be a product already sitting on the shelf.
To do this, each product must be assessed on the basis of its expected contribution to return and risk within the client’s portfolio. Yet just ask any asset allocator or fund selector how quick it is to get an informed answer to questions such as “what should this fund contribute to the expected return and risk in my portfolio?” or “what is an optimal level of allocation to this fund in my portfolio?” These are pivotal questions to ask but which many asset managers struggle to answer well.
Progressive firms recognise the gap and the opportunity that comes from it. For them, an arms race has begun to better equip their relationship teams to contextualise products in the eyes of the client. For those managers that haven’t started, chances are they already have the necessary components to empower a solutions-based product discussion.
The first is having a clear set of capital markets assumptions, including projections of return, risk and correlation across key asset classes or risk factors. Many asset managers produce these but can be reluctant to use projections to position products. With regulators expecting objectives and outcome to be front and centre of any product discussion, this needs to change. Importantly, forward projections should incorporate a range of scenarios, rather than just a single point estimate, plus allow clients flexibility to validate, test and apply their own projections.
Second, capital market assumptions need to be applied to the products being sold. This is not straight forward, particularly where assumptions for alpha, or product variants such as currency-hedging, fees and income distributions need to be considered.
The third and most complex step is having a portfolio optimisation framework to estimate how a product contributes to the risk and return in a client’s portfolio. Importantly, there needs to be flexibility to mimic the client’s starting investment mix – after-all, what is most important is the impact on the client’s portfolio, not a hypothetical one.
There also needs to be flexibility in modelling methods. For instance, switching between objectives such as minimising variance, maximising return or maximising Sharpe ratio, or applying constraints on asset exposure, risk or unique factors such as liquidity or ESG scores. Importantly, having model flexibility can allow the asset manager and client to consider a range of scenarios and optimisation methods to make an informed decision.
Most asset managers already have the components to support solutions-based discussions – that is, to contextualise products in the eyes of the client. But the challenge is distilling that know-how into tools used by relationship managers. In an ideal world, they work with the client to identify gaps in their portfolio and assess the most suitable products. This would avoid the temptation to push products that do not align to the client’s objectives. For now, the race has begun to bring these tools to life.
To learn more about how Jacobi works with asset managers to solve investment technology challenges, visit www.jacobistrategies.com