Objective-oriented money management - the shifting power to pensions

Asset management like any industry is often surrounded by trends and fads. A new buzz word that we are hearing about is goal or objective-oriented money management. This has been used more often by wealth management advisors, but we are seeing this thinking start to move into institutional money management. However, we do not think of this term as a fad, but a focus on providing more targeted investment solutions over just generating total return. Managing for objectives is not new, but there is a revived focus especially by hedge fund managers.

This objectives focus is the result of a power shift within money management.With so many hedge funds and and money managers competing for the same clients, the negotiating power is switching to the investor and they want more focused service. The form of this service is having hedge fund managers meet or think more fully about plan objectives and how they can help meet these needs.

If a pension fund needs a minimum acceptable rate of return, managers have to focus on delivering that return. If the investor wants a focus on factor diversification, then managers have to adjust their investment approaches. If investors do not want to pay for cheap beta, managers have to focus on unique alpha. Investors do not want to pay hedge fund fees for linear factors. They want diversified alpha production that will help offset liabilities.

With index ETF's and alternative beta products competing with managers on performance and skill, managers have to generate customized service to enjoy non-discounted fees. Skill will be applied or developed to help meet the specific objectives of clients. Customization is in, and one size fits all funds are out. Separate accounts and specialized benchmarks are in. Large generic alpha or skill-base funds are out. Risk management that meets the specific risk aversion of the client is in. Investors can get generic returns in a host of cheap forms, so for premium pricing they want something that speaks to their needs. The managers that will thrive in this environment are those that are willing to adapt and customize their offering. There is a higher cost with these services but managers have to provide it or face fees that reflect a generic return product.