LONDON -- Managers need to better prepare for facing the challenges of the new "e-business economy," according to a research paper by Frank Russell Co.
Steve Wiltshire, a director of research in Frank Russell's London office, believes a new technology-driven economy will force money managers to adapt to deliver successful performance and to survive.
"Traditional analyst teams and traditional analytical methods employed by fund managers may simply be unsuited to this brave new world," he said.
Mr. Wiltshire compiled a list of 10 key suggestions for the survival of money managers looking to be leaders instead of followers in an e-business economy.
Equity analysts fluent in e-speak are a prerequisite.
For Mr. Wiltshire, the true test of money managers' e-literacy comes in three parts. Is the firm's website just an electronic brochure, or is it truly responding to the "e-biz challenge"? Is the firm developing processes and strategies for evaluating tech stocks, or is it just buying tech stocks because it can't afford not to? And, is the firm going outside its traditional recruiting grounds and finding staffers who already work in e-business ventures?
Valuation spreads may remain stretched.
In the transition to a business-to-business economy, Frank Russell predicts the gap between growth and value will remain in stock valuations because investors will focus on e-businesses and neglect other firms.
The market's current growth phase will continue.
Technology will continue to drive growth stock performance as value managers are terminated and portfolios liquidated, probably driving value stocks down further. But the opposite is happening on the growth side, where momentum strategies will lead to performance in this tech-driven environment.
Style index composition is changing.
Many traditional "growth" companies are being thrown into the "value" portion of the market. The domino-effect is that depressed value stocks now are pushed into small-cap indexes.
Sector leadership will rotate quickly.
Frank Russell expects the success of some e-businesses to be short-lived and, because of earnings (or no earnings), the stock prices will be highly volatile. Growth managers would win again as portfolios with high turnover and "ruthless" sell disciplines deliver performance by investing in technology stocks.
Some managers will change their processes, and will regret it.
"Indeed, we believe that many dot-com companies will fail to deliver earnings to support their share prices, and managers that have kept at least one foot on solid fundamentals should once again find active management very rewarding," the paper said.
A global research perspective will be increasingly important.
Research operations will need to be restructured to take a broader sector perspective -- the days of having analysts cover specific countries or regions are over. And part of the global research perspective might include a global intranet.
Investment strategies relying on stable long-term relationships will struggle.
The movement to a higher growth and lower inflation global economy and e-business initiative will cause managers to look to different measures of value in predicting future performance for as long as the market is in transition, for the next five to 10 years.
Value managers will find it tough going during a technology-driven market restructuring.
While value indexes historically have tended to outperform growth indexes, active growth managers have outperformed their indexes more readily than active value managers, according to Frank Russell research.
Multimanager portfolios diversified by style will require more careful monitoring and rebalancing.
The unmanaged manager is dangerous and might be guilty of style creep or closet indexing because of a change in investment principles. This ultimately might mean volatility more excessive than the institutional investor may expect of the portfolio.