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Perseverance: The underlying theme of the ICI Meeting
The recent Investment Company Institute (ICI) general membership meeting (GMM) in Washington D.C. focused on four pillars of change supporting evolution in investment management: globalization, technology, private capital, and investment advice. Along with the stated themes of the conference, there was also an underlying theme of perseverance.
June 20, 2018
A blog post by Doug Dannemiller, investment management research leader, Deloitte Services LP
Lessons learned from managing a business through industry turmoil
In one headline session at ICI, an industry leader spoke about managing the recent turnaround at his firm, providing a case study on executive management through industry turmoil. The key message was that there was no particular insight or technique that changed the course of the business from the edge of ruin to success. The answer instead was securing capital investment, and returning to the basics by managing the balance sheet with business risks that matched the liquidity and volatility tolerances of the stakeholders in the institution. The message I took away from this discussion was that firms should not wait for industry events, which stress the system, to review and test their business strategies and policies to ensure that they make fundamental business sense. Too many firms accepted high margins from business units without considering the risks these units contributed to the corporate portfolio. Critical thinking, sound business practices, and perseverance led this firm to its current health in providing both banking and investment services to both retail and institutional customers.
Composition of retirement savings
Another headline speaker was more forward looking. One of the most significant messages in his discussion concerned the composition of retirement savings. As a private equity (PE) specialist, he advocated allowing retirement savers access to private equity investments. He also told the audience that the accredited investor rules were less than optimal, using the example of a well-educated economist who fully understood PE who would be barred from investing in PE based on the accredited investor classification rules. He added that these same rules allow wealthy individuals who lack investment knowledge to access PE investments. The speaker suggested that in the context of a retirement plan, appropriate, and perhaps, beneficial levels of PE exposure could be afforded to retirement savers who fully understood the risks associated with PE. He also noted that more firms are now electing to stay private, making growth equity harder to access in the public markets. My takeaway was that there may be a future solution that provides retirement savers access to private equity investments. There is strong potential to match retirement savings needs with investment management expertise.
Globalization: Opportunities in China
China appeared to be the big story on the globalization front at ICI, with large Chinese investment management firms speaking about the opportunity there. If China shifts to the standard ratios of investment to gross domestic product as presented in western economies, investment managers operating there will have significant tailwinds. The Chinese market also seems ripe for development based on newer distributed and interconnected business practices, as opposed to the traditional adviser, direct, and retirement plan distribution models we see in the US market. The success of gathering assets under management (AUM) in what is currently the largest money market fund illustrates this potential. The fund grew through an ecommerce networked approach, and has hundreds of millions of investors.
Differing opinions on data and analytics
Several sessions focused on data and analytics. One speaker predicted an upcoming convergence of fundamental and quantitative approaches to drive alpha for active managers. That opinion was not unanimous, however. Another panelist argued that big data was overdone, and that collecting information was not a source of alpha. Her opinion was that investment insight would continue to rule the day. This difference of opinion on stage resonated with me, as I have been involved in discussions with other investment professionals who are also skeptical of alternative data. My feeling is that alternative data and advanced analytics without collaboration with experienced investment professionals will fall short, but I have also seen evidence that some firms can use alternative data effectively. Perhaps the answer is to augment existing processes with information derived from alternative data. This approach may lead to mutual confidence and understanding between data scientists and investment professionals. It will require perseverance on everyone’s part.
On the analytics front, a leader in artificial intelligence (AI) educated the audience of its capabilities, which have grown substantially with the proliferation of data, hardware improvements, and advancements of analytical algorithms. One of the surprising AI results is transferred learning in machines. A machine that learns to optimize one system can be faster at optimizing a loosely related system. It learns how to learn more effectively. It was evident from listening to these attendees that there are multiple perspectives on data and AI among experts. My takeaway was that the blending of these divergent skills and perspectives is a prerequisite to success in using alternative data and AI to augment the investment decision process.
My feeling is that alternative data and advanced analytics without collaboration with experienced investment professionals will fall short, but I have also seen evidence that some firms can use alternative data effectively.
Persevering in pursuit of a common goal
The final day included two excellent sessions. The first was a frank discussion with an outgoing industry regulator, who sounded more like a prudent industry executive. He wanted to help the industry serve its important role for investors without undue burdens, and for risk to be managed effectively. And he favored efforts to improve operating efficiency. His session highlighted the appropriate role of oversight for a complex and important industry. He also pointed out the political nature of our system of government, where a few special interests can impede progress in detriment to the common good, noting that it is a fact of life in the complex US government and regulatory environment.
The conference closed with an inspirational story about perseverance. A NASA astronaut spoke about his 132-day mission aboard the Soviet space station Mir. Being a few years past its expected life, warning lights and repairs on Mir were fairly routine. Then, one day was far from routine, the astronaut and his cosmonaut partner battled a fire that threatened to burn through the hull and destroy the craft, while consuming all the available oxygen on board. Ultimately the two persevered through the battle with the fire. These circumstances were far more dire than the problems facing leadership of investment management firms today, but the lessons are transferrable: Communicate and work together no matter how bad it looks. People who work effectively toward a common goal often find a way. They persevere.
People who work effectively toward a common goal often find a way. They persevere.
Did you participate in the conference?
We welcome your takeaways, given the multiple tracks available it wouldn’t surprise me if there were a few golden nuggets that I missed.
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QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.