Each year, we carry out global surveys on emerging investment issues, involving key decision makers in various pension jurisdictions. In addition to the resulting survey reports, we also publish regular thought leadership articles in the Financial Times and IPE that touch upon the burning issues of the day.

Together, they provide a timely pulse check on the latest thinking on issues of interest to decision makers in asset owners, asset managers and asset distributors.

Having had the privilege of doing over nearly 40 global surveys and over 100 thought leadership articles over the past 20 years, the updates found below provide the basis for discussion and debate.

Failure is optional in mergers & acquisitions
Sun, 02 Dec 2018

2017 was a banner year for M&A in global asset management. The tempo has eased somewhat this year. But there is a big difference between the latest wave of M&A and the wave that happened around the turn of the millennium. In many cases, skills as well as scale or market position were the primary driver. In a separate track, team lift-outs have been common.

In contrast, some of the biggest deals in the past were driven by empire building. The outcome was the ‘winner’s curse’: value destruction for the shareholders of the acquiring firm. Many combined firms were inherently unscalable due to cultural mismatches and organisational complexity – and they remain so today.

In hindsight, crunching businesses together proved to be mission impossible. After acquisition, the whole had to be worth more than the sum of its parts.

This has been the exception rather than the rule in the numerous deals I have studied over the past 20 years. Size invariably jacked up costs when firms became too complex to manage efficiently. Many were forced to unscramble or de-merge.

There were no shortage of economies of scale; there was a shortage of management will and the ability to extract it in what is a people business. Deals that slaughtered sacred cows were rare, as were deals that were able to retain the best talent of the combined entity cost effectively. Built around key individuals, the operating models were often exposed to the upward repricing of skills.

In contrast, successful deals had five common threads. First, their senior executives had crafted a sound business case for acquisition that was closely scrutinised by the movers and shakers involved in the integration process. Second, senior executives walked the talk in order to get the necessary buy-in from key staff in every area of the business. Third, jobs were allocated within days of the mergers. Fourth, core decisions on product synergies and cost savings were announced at the outset, with clear timelines and individual accountabilities. Finally, operating models had a strong client focus and meritocratic incentives.

These lessons have shaped the thinking of the new generation of top executives. Their approach to M&A is far more hard-nosed than their predecessors’, who were readily swayed by the big-can-be beautiful argument. But that is not the same as saying that the current wave of M&A can transform the asset industry. It is focused far more on profitability and the survival of asset managers in the face of the relentless rise of passive investing, and far less on radical changes in the existing business models.

If you subscribe to the FT, please see my article of 30th November 2018 for more details.

Elon Musk: a champion of long-term investing?
Mon, 29 Oct 2018

When an iconic entrepreneur is humbled so publicly, it’s a moment of truth. But it’s the bigger truth that is often the real casualty.

Thus it was so over Elon Musk’s dust-up with the Securities and Exchange Commission regarding his fateful tweet on 7 August, which falsely claimed that the necessary funding was in place for taking Tesla private.

Apparently it was a ploy to punish short sellers who had made a bundle from the endless production delays of the car of the future, the Model 3.

But the resulting publicity missed Mr Musk’s main point: namely, today’s markets are over-financialised, as speculative trading comes at the expense of prudent investing.

Equity markets’ primary role is to channel capital from investors to enterprises that want to grow their businesses. Investors are thus issued shares that are meant to claim against the future profits of borrowers.

Over time, however, trading in such claims itself has become more profitable than the rewards for holding them, giving rise to a vast array of financial activity driven by the 24-hour news cycle, which rarely isolates the wheat from the chaff.

Under this unreal quarterly capitalism, where the latest data are all that matters, entrepreneurs are increasingly forced to seek alternative sources of funding for the growth that is beneficial to them but damaging to the integrity of equity markets.

Many long-term investors, like pension plans managing retirement savings,decoupled from the rest of the economy. The result is shorter investment time horizons, an increased search for ‘hot’ products and stronger herd mentality.

Such investors are putting their money where their mouth is by steadily drifting towards private markets with longer time horizons. Worldwide, their allocation has risen from 4% in 1997 to 15% in 2007, and to 25% in 2017. Market distortion is not the only factor, but it is an important one.

Mr. Musk, for all his showmanship, has touched a nerve.

If you are a subscriber to the Financial Times, you’ll find an expanded version in the FTfm today (29th October 2018).

Flash in the pan or game changer?
Mon, 17 Sep 2018

Fidelity’s recent launch of four zero-fee indexed funds has attracted a mixed reaction.

Some see it as a minor ratcheting up in the price war between the mega indexers. Like climate change, they argue, fee models change in tiny steps.

Others see it as a tipping point.  Not only are passive funds now a strong money magnet, they are also enabling index providers to enjoy the so-called network effect. Zero fees, it is argued, will create new revenue streams by cross-selling across the expanding client base, at the expense of specialist active managers.

That fees are a slow-burn issue in global asset management because of its large pool of legacy assets is undeniable. That the price war in the passive space has been causing fee compression in the active space is equally undeniable. The truth, as ever, is somewhere in between – for now.

The media have so far focused on private equity and hedge funds. The change, however, is just as evident across the active space.  Only those managers delivering their benchmark returns have remained immune in this decade.

For the rest, fee pressures have intensified like never before.  And all the more so, since QE has brought forward future returns and turned fees into a key source of outperformance.

Managers are increasingly enjoined to eat their own cooking under the emerging fee models, as fees have become the North Star of the industry.

If you’re a subscriber to the Financial Times, you may be interested in fuller details in an article I wrote for FTfm today, 17th September 2018.

Investment crystal balls: broken or imperfect?
Mon, 13 Aug 2018

“The truth is rarely pure and never simple.”     Oscar Wilde.

Investors have long relied on two crystal balls when predicting future returns: equity risk premium and the yield curve. Both have been broken in this decade because of QE.

Whether the unwinding of QE, however, will mean a return to normality is another matter for one simple reason: these crystal balls have always come with a health warning.

Let’s start with ERP. It measures the additional rate of return that investors require to compensate them for the risk of holding stocks instead of a ‘risk-free’ asset, typically the US 10-year Treasury bond.

In theory, it can never be negative: if it is, investors can always switch out of equities into bonds. Yet, over the past 130 years of data, it has been negative 25% of the time.

Its predictive worth has been undermined by the changing structure of markets. In 1958, the average lifespan of a company listed in the S&P 500 was 61 years. Now it is just 18 years, according to Prof. Richard Foster of Yale University.

The rise of high frequency trading and share buy-backs have also weakened the traditional role of markets as efficient allocators of capital.

The predictive worth of the yield curve, too, has been distorted by central banks’ super easy money policies. But that’s not the only factor. Ageing demographics and ballooning global debt are also bearing down on long-term rates.

The data used to back test the yield curve are, of necessity, drawn from a period when these new structural forces were absent.

QE has therefore supercharged the imperfections of ERP and the yield curve – but not necessarily caused them. Every generation of investors conceitedly thinks that it lives in a transformational era where the tried and tested ways of doing things just don’t work.

But investment history shows that there is no ‘old’ normal or ‘new’ normal. There is only a ‘different’ normal with each cycle.

As investors seek certainty in an uncertain world, crystal balls have their place, so long as they are combined with an uncommon degree of common sense.

I have developed this argument in more detail in my article in today’s FTfm (13th August 2018). If you are an FT subscriber, the article is here.

As always, I welcome your comments.

Investor vigilance rises as populism returns from beyond the grave
Mon, 02 Jul 2018

The Brexit vote, the election of Donald Trump and the gains made by antiestablishment political parties in the West mark the rise of a long-forgotten phenomenon: populism. It promoted fascism when it last reared its ugly head in the 1930s.

It marks an inflection point for the globalisation that has lifted hundreds of millions of people out of poverty in the emerging economies. But it has also reduced prices and median wages in developed economies, causing job insecurity, political alienation and social dysfunction.

Voters are angry. Politics has now become an arena to celebrate all that is small and mean where placebos are paraded as panaceas via angry sound bites.

The most immediate danger is the new wave of tit-for-tat tariffs unleashed by President Donald Trump this year. Do they amount to a full-on trade war or just a brief skirmish? Only time will tell.

Earlier hopes that wiser counsel will prevail after the resignation of his top economic adviser Gary Cohn were short-lived. The cold hard truth is that President Trump sees only what he wants to see.

This is not just a passing phase. Each twist in this saga is chipping away investors’ confidence.   But few are at panic stations – yet. Most are hawkishly watching events.

If you are interested in how pension investors are adjusting their asset allocation to this new reality, and have a subscription to the Financial Times, please see my article in the FTfm on 2nd July 2018.

Why the latest bout of volatility is unnerving investors
Mon, 04 Jun 2018

Politicians resort to rationality only after exhausting all other possibilities, so history reminds us. Before that point, their actions can play havoc with financial markets.

Last week’s Italian turmoil and Trump’s trade wars are only the latest examples of how the world is sliding into competitive and angry populism, threatening old certainties on trade, security and co-operation – with far-reaching consequences for investors.

After the initial sugar highs, populist policies fail under their own contradictions. Yet, financial markets have always been poor at pricing in their impacts until they actually happen.

The reason is that their implied risks have too many moving parts: politics, economics, finance, security, diplomacy and psychology, to name a few.

The average investment analyst can only assess how economic variables affect the markets, but not how politicians will react to events that shape these variables in the first place. The zigzags evident in Italy and the US last week are a case in point. The end-game is anybody’s guess.

Just as intractable is knowing whether any bout of the resulting volatility is an opportunity to buy or sell. This is especially so, as the current over-valued equity bull market – in part fuelled by central bank largesse – is within spitting distance of being the longest in history.

With central banks no longer able to act as circuit breakers during periods of financial stress, investors fear that every correction may well be the tremor before the Richter scale goes ballistic. After the rollercoaster rides so far this year, markets have calmed. But their fragility is on the up: more adrenalin-fuelled sessions lie in store.

If you are interested in how investors’ sentiment towards market volatility has changed, and are a subscriber to the FT, please see my article in this week’s FTfm.

As always, I welcome your comments.

Liquidity hangs over the heads of investors like the sword of Damocles
Mon, 30 Apr 2018

Before the 2008 crisis, even the most esoteric bonds could be sold within seconds, irrespective of market conditions. It now takes seven times as long to liquidate even the most vanilla stuff.

Liquidity was only high because of the implicit subsidy enjoyed by banks that were ‘too big to fail’. That risk has now shifted to buyers and sellers under new regulations on both sides of the Atlantic.

The fragility of the new arrangement became all too evident during the flash crash in the US treasury market in 2014, when securities moved 40 basis points at one point only to reverse just as abruptly. At the time, JPMorgan’s chairman Jamie Dimon described it as an “event that is supposed to happen only once every 3 billion years or so”.

The episode yet again confirmed the age-old paradox: liquidity vanishes when it is most needed.

As the Federal Reserve goes for quantitative tightening, there are growing concerns that a mass exodus of investors may cause a sharp decline in prices and outsized losses for sellers, as the 35-year bull market in bonds comes to an end.

Paradoxically, liquidity is everywhere – look no further than the balance sheets of central banks. Yet dysfunctional imbalances are emerging, especially in two areas.

The first one is esoteric illiquid vehicles that investors have flocked to in search of yield, only to have their fingers burnt. The mass exit from property funds after the Brexit vote is a case in point. Asset managers were forced to suspend redemptions to avoid fire sales.

The second one is reflected in the growing mismatch between the respective assets and liabilities of both retail and institutional investors, as they increasingly demand the daily liquidity that dumbs down their returns.

As markets have plateaued and become more volatile, making money requires exceptional skill or exceptional luck.

Investors worry that the Fed will not be able be able to perform the delicate balancing act of raising rates in 2018 and 2019 (as promised), while keeping a floor under asset values and control volatility.  They are yearning for their sugar daddy to stay.

For those of you who subscribe to The Financial Times, my article on liquidity – “Next liquidity crisis could be hiding in plain sight” – is published today (30 April 2018).

Harnessing the power of technology
Mon, 16 Apr 2018

Will new digital innovations invariably destroy jobs?  The answer is “yes” or “maybe”.

The first view is based on the old dictum that “Science discovers, technology executes and humans conform”.

The second rests on the observation that much depends on how technology is actually used.

In the past nine months, I have authored two survey reports on how digitisation will reshape four subsectors in global investments: long only managers, wealth managers, hedge fund managers and private equity managers. They are available at

The key conclusions are: each of them face digital disruption, given that data is their lifeblood; and the resulting business transformation is as much about leadership as it is about technology. What top executives do to create new opportunity sets makes a huge difference to eventual outcomes.

Early adopters of digitisation, however, hold that there is nothing inherent in digitisation that guarantees success. It is about navigating through the fog to invent a new future, far removed from old connections and causality. Without a clear business strategy and a group of far-sighted people committed to delivering it, no digital tool – no matter how sophisticated – can make much difference.

I co-authored a piece on this subject which was published in the FT on 11th April 2018 and in FTfm on 16th April 2018. If you are a subscriber, the link is here.

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