Asset managers & Air bags

Compared to the automotive industry, asset management is still very young in terms of how it operates and standardizes processes. If it were a car producer it would still be producing the Model T, as opposed to the latest Tesla Model S.

Fund houses and Model-T plants

One of the root causes of this is a lack of specialisation. Asset management as an industry is still in a relatively young stage of its evolution, with many actors performing the same, repetitive tasks. There are hundreds of these in the lifecycle of a fund, and yet in Luxembourg alone, one finds 78 companies all performing the exact same task! Admittedly, the industry has seen some consolidation but it still has a long way to go. When Henry Ford rolled out the first Model T Ford in 1908, he single-handedly revolutionized car production, giving birth to a mass production automotive industry that relied upon massive production plants and assembly line processes which allowed Ford to produce enough cars to meet demand. Everything was done within the Ford production plants, from building the pistons and chassis to the brakes and gearbox. It was a hermetically sealed environment, allowing Ford to control production from beginning to end. Like Ford, in many ways asset managers are still doing a lot of the work internally.

Focus on the “Fahrvergnügen”

But look at the automotive industry today. Over the last 100 years, it has witnessed incredible change. When one buys an Audi RS6, for example, the engine comes from Lamborghini. A Porsche Cayenne S Hybrid uses a Volkswagen-sourced 3.0 Litre V6 engine. Cars today are a patchwork quilt of hundreds of outsourced components that are brought into the assembly line using sophisticated, standardised order management and logistics processes. This evolution came about over time as car builders realized that not only was there no inherent advantage to producing all of these components themselves, but the outsourcing model could bring them better products for cheaper—a no-brainer for the manufacturer who was all too happy to be able to have more time to focus on higher-level concerns. The point is, regardless of where the airbags, or the tyres, or the gearbox come from, all that the producer like Porsche or Mercedes is concerned with is the final product, the end consumer experience. They don’t obsess over producing every single component and they are not concerned that the airbags in their cars are also found in the cars of their competitors. Why? Because it’s not core to their business. Their core business is the delivery, performance, and feeling of the end product; or as Volkswagen puts it in their marketing, the “Fahrvergnügen” (the driving experience). Apply that same logic to asset management, and the delivery of the end product is the fund. How does it perform? How is risk managed? Is fund data and reporting readily available and represent the fund positively? Those are the things that most influence fund buyers and investors*. But in order for the industry to get to the same level of efficiency and sophistication as the automotive industry, it will require further significant consolidation.

Time to grow up

In the auto industry, there is a handful of leading airbag manufacturers that supply carmakers the world over. The most prominent include Autoliv, Takata, TRW and Delphi. Autoliv for example also supplies seat belts and steering wheels to virtually every major manufacturer, utilizing a global network of 78 factories spanning 27 countries. When one learns of this level of efficiency, the idea of using 78 different airbag manufacturers is sheer folly. That is the sort of consolidation/commoditisation that still needs to happen in asset management to achieve the kind of industry maturity and efficiency that the automotive industry knows today. When fund managers are in a position to outsource myriad functions to a number of core service providers, it will enable the industry to move into a new era; a more mature one where there are well-defined standards, and greater value is delivered through a shift from what is being done but how it is being done. As the asset management industry consolidates, so it will allow non-core functions to become more commoditized and less economically attractive to continue performing in-house. This will have a trickle-down effect on the numbers of players, who will further specialize, which in turn will further improve the service they deliver, and lower its overall cost. This will benefit fund manufacturers who will be able to focus on their core business of serving their investors, while continuing to ensure excellent delivery of all of the annexe functions that they’re doing today. The automotive industry is cruising in 7th gear: efficient, streamlined. At the moment, the asset management industry is still in first. It’s time to shift gears. * According to a 2015 survey of 999 fund buyers conducted by Fund Buyer Focus, the top 3 criteria influencing fund selection were: the quality of the fund management team, risk management, and information provision and reporting.

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