‘Zombie’ future threatens money managers, warns Hunt
The asset-management industry is changing so rapidly that as many as 80 per cent of its players will become “zombie firms” unable to achieve the performance or scale needed to attract new money, according to PGIM chief executive officer David Hunt.
“We have never seen such a disparity between winners and losers,” Hunt said in an interview with Bloomberg Television on Monday. “The vast majority of firms, if you’re just doing public equities, you’re just doing fixed income, you’re struggling. You’re in outflows, and we don’t see that changing anytime soon.”
It’s a bleak vision for an industry that for decades was able to maintain its pricing power and, with it, fat margins and high salaries. Now, institutional clients such as pension plans are demanding lower fees and concentrating their business with a select number of managers. That threatens to leave behind any firm that doesn’t have a track record of beating the market or can’t offer a diverse range of investments.
No part of the investment industry is under as much pressure as active equities. There, easy access to cheap index funds has exposed the widespread and chronic underperformance of portfolio managers.
“If you don’t have the performance, you can’t charge the kind of historical fees that you had,” said Hunt.
“If you’re a benchmark-hugging firm, you’re going to be replaced with passive, and so you deserve.”
The vast majority of firms, if you’re just doing public equities, you’re just doing fixed income, you’re struggling. You’re in outflows, and we don’t see that changing anytime soon.PGIM chief David Hunt.
Some asset managers have merged to gain scale. As Hunt sees it, size alone isn’t enough and he thinks only three business models will thrive: indexing giants such as BlackRock and Vanguard Group; boutique firms that specialise in a certain type of asset, such as private equity; and multi-asset investors with global reach.
PGIM, the investment arm of insurer Prudential Financial, oversees $US1.3 trillion. It’s among the world’s largest managers of public fixed income, real estate debt and equity and private credit.
Hunt, an engineer who spent most of his career with McKinsey & Co., joined Prudential Investment Management as CEO in 2011. It was renamed PGIM in 2015. He said he intends to expand into private equity secondaries, which involves buying stakes in buyout funds. One business PGIM won’t be getting into: passive products.
“We attract really good people, we have a real meritocracy, we support people who have contrarian points of view, sometimes for years, and we encourage people to have non-consensus views,” Hunt said.
“We’re oriented toward active outperformance and we don’t want to dilute that culture.”
Hunt described PGIM’s investment posture as “cautious” after a decade in which stocks have returned an average of more than 13 per cent annually. He said the combination of slower economic growth in both the developed and developing world, low interest rates and indiscriminate risk-taking by investors in search of yield will “sow the seeds of the next downturn.”
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