Commentary: Asset management in a ‘next normal’ post-coronavirus world

The coronavirus is leaving lasting impressions not only on individuals, families, businesses and society but also on the economies and markets designed to serve them. For asset managers, the greatest challenge may not be how they perform amid the turmoil caused by the pandemic but, rather, how well-positioned they are for a "next normal" future.

The pandemic is not taking place in a vacuum — making the challenge even more difficult. It is happening amid a backdrop of previously inflated market valuations, rising populism, deglobalization, increasing debt and shifting demographics. Collectively, such changes in the investment universe will test the resilience of every asset manager and challenge many long-held investment assumptions

Investors are likely to face a very different environment as the COVID-19 crisis begins to recede. For much of the past decade, capital market participants have grown accustomed to equity markets characterized by healthy multiples, cheap debt, buybacks, corporate results bolstered by low interest rates, and active central bank monetary involvement. These conditions, along with a coincident rise of cap-weighted indexing, have helped desensitize the market to fundamental business drivers and have, for a time, unmoored returns from risk.

We are witnessing a wholesale deindustrialization of research capacity; reductions in resources, teams and capabilities across the sell side and buy side have impacted the efficacy of price discovery in ways that are still not yet completely apparent. For asset managers whose investment strategies and business models have been shaped by the decadelong, low-volatility recovery, the coronavirus may be a wake-up call that portends a "next normal" of choppier, less certain markets combined with heightened client expectations.

Experience, increasingly short in supply, will be crucial to navigate what is to come. The coming "coronavirus quarters" will likely include economic data that simply won't compute — unemployment levels that already exceed the Great Recession and global GDP dislocations that reflect the impact of physical distancing.

But what if your entire career as an investor has been built on a rising market, or your approach has been largely price insensitive, based upon a period of abnormal returns? Furthermore, investors have dealt with falling rates for a generation; finding someone who has managed in an inflationary environment is rare indeed. Yet, the current global pandemic reminds us that the range of possible outcomes is often underestimated — as are the vectors of investment risk.

Given the known (and unknown) uncertainties ahead, consistent results will come from a dynamic synthesis of a wide range of quantitative and qualitative factors, requiring a manager to be part economist, part anthropologist and part historian. Asset managers that have made investments in teams with deep research and analytical capabilities will have an advantaged perspective on companies, industries, politics and demographics, allowing a broader perspective to identify opportunity in a changing landscape.

In the coming "next" environment, asset managers must deliver on an expanded mandate for clients: helping achieve tangible, holistic goals through investment. Traditional benchmarks will still exist, but increasingly serve as a point of reference, a guidepost toward longer-term, comprehensive potential outcomes. The most evolved will deliver alpha in support of client objectives and provide perspective on greatly expanded opportunity sets, historical parallels and time horizons. A range of enhanced analytical tools and new lenses on risk, including environmental and governmental, will be part of this toolkit.

A popular ethos in asset management has been the search for scale, often taken to be synonymous with assets under management and cost extractions. Efficient execution will remain important, but exceptional firms will balance two scales at once — the craft-based, creative cultures of individual investment teams and the quite different dimension of robust business infrastructure and distribution.

Next-era firms will have the ability to address a wider array of needs as investors reassess their allocations. To be more client-centric, firms should be conversant in a range of global assets, in both equities and fixed income, across different investment geographies. A diversified platform enables an investment firm to weather market cycles when certain strategies may be out of favor but can strategically position for future waves. In addition to research-driven approaches to price discovery, clients will demand cost-efficient, customizable operational and technology infrastructure, impeccable cybersecurity and digital privacy.

In the post-virus market, "paper plans" will be no substitute for action. Managers will be asked in detail what they have learned from previous dislocations (hurricanes, wildfires, power outages) and what actions they have taken to strengthen their ability to withstand future shocks. Given the myriad, evolving challenges facing global businesses today — from pandemics to cyberthreats to climate change — asset managers should consider how their firms would survive multiple overlapping crises.

Some firms that have historically delivered solid performance may decide they cannot (or do not want to) support the additional investments needed to upgrade their business platforms; they have a range of options, including outsourcing and partnership.

A key element of a firm's durability will be its real-time experience — teams that have lived through crises and have successfully guided their clients (and portfolios) to the other side. It is particularly important to have a culture capable of adapting to changing circumstances — one that puts its people first — and the "social technology" to keep clients informed.

One could debate whether the coronavirus was a black, gray or white swan event; what is clear is that in its aftermath, institutional investors will have expanded expectations and needs. Despite strong equity and fixed-income markets, many institutional investors remain underfunded, and all face new circumstances of volatility and off-textbook assumptions.

The COVID-19 crisis will end. Resilient asset managers that have built deep research and analytical expertise, broad capacity for client outcomes, strong operational infrastructure and sustainable business models will have a huge opportunity to add value for clients — and help meet the challenging and complex needs of the next normal.

Cooper Abbott is chairman and president of Carillon Tower Advisers Inc., a global, multiboutique asset management firm, St. Petersburg, Fla. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.