Stellar performance used to be more than enough to guarantee a place in an institutional investor’s portfolio, but today’s asset managers need more than big numbers to stand out from the crowd.
While performance relative to expectations is vastly important, a cohesive and stable investment team, timely communications, and firm culture also matter, according to research from Cerulli Associates.
In a survey of 200 institutions, almost three-quarters (72 per cent) say the consistency of performance relative to expectations and the experience, talent, chemistry, and stability of investment professionals as the most important characteristics of top asset management firms.
Further, more than two-fifths (42 per cent) of asset owners cite poor client service as one of the top five reasons for considering terminating an investment manager.
Meanwhile, firms that provide timely, candid, and concise communications (61 per cent) and “minimise negative surprises” are also viewed favourably.
Michele Giuditta, director at Cerulli Associates, says institutional investors seek communications that are timely, accurate and transparent, arguing that while they want a “candid assessment of the past quarter’s performance results”, many clients prefer the update to focus more on the current investment strategy and portfolio positioning for assurance that their portfolio is properly positioned to endure the current environment.
The research also finds that asset managers with a reputation for having a “great firm culture” with loyal, long-tenured employees and incentives that are aligned with clients are also better positioned. Institutions also value managers that have strong investment beliefs about their skills and investment strategies that align with those beliefs.
“An investment team that is adequately staffed and has the resources and an aligned team to deliver long-term performance results is also important,” says Giuditta. “Asset managers that can articulate and clearly display their edge and show that they can implement the strategy will have a competitive advantage in winning and retaining clients.”
Cerulli reports that asset owners also seek managers with a clear philosophy on their use of risk, when they take it and when they avoid it.
Giuditta says being able to explain performance and the sources of excess return and underperformance that align with an asset manager’s stated investment edge through attribution analysis also is critical. Finally, asset owners look for alignment of incentives with clients’ goals.
Giuditta says: “As the marketplace becomes more crowded, securing a spot in an institutional investor’s portfolio has become more challenging for asset managers. To stay competitive, sales and service teams are increasing their use of technology, including artificial intelligence, forming strategic partnerships, and looking to investment consultants and outsourced chief investment officers.”
