State Street Global Advisors is looking at options on how to extend its Asia business into the retail sector for active fund management, says Scott Powers, Boston-based president and CEO.
During a recent interview with AsianInvestor, Powers discussed his take on what it means for an asset manager to be a ‘solutions provider’, including SSgA’s strengths and gaps.
He notes the firm’s competitive advantage includes long-standing dedicated research teams; a diversity of portfolio ‘building blocks’ in the form of low-cost, low-tracking error beta products; and experience in assembling these into a variety of finely calibrated risk/return streams. The firm also provides tactical asset allocation (sometimes termed ‘dynamic hedging’) to add value.
This set of skills is particularly well suited to pension funds such as US defined-benefit plans that are looking for target-date like returns, with structures that reduce risk and can morph into income-type products as liabilities mature.
To do so requires not only having the component parts, Powers says. “You need to take a view on how to get an expected level of return or a risk-adjusted return,” he says.
To build on this, the firm is keen to embed more active strategies into its offering. Historically, the firm’s main active management strategies have been quantitative. Like most others in this field, it suffered surprising losses in the summer of 2007, during the first hiccups of the unfolding credit crisis.
This has led the firm to refine its quant strategies, to create a more dynamic strategy that doesn’t just scan historical long-term average pricing data, but also tries to identify ‘inflection points’ or periods of upheaval that will create exceptions.
The firm has also recently completed its acquisition of Bank of Ireland’s asset-management business, which provides fundamental active management. This is SSgA’s first foray into this type of investing.
“We will look for more fundamentally driven active-management businesses [to acquire],” Powers says. “We also want to add strategies to our suite of hedge funds, which have enjoyed good performance but which lack scale.”
Asia plays a big role in terms of the firm’s expectations of future growth. Today around one-third of SSgA’s clients and AUM come from outside North America. According to AsianInvestor magazine, as of late 2010, 11.6% of its AUM is derived from clients in Asia-Pacific.
“That figure will grow at a faster rate than other regions,” Powers says.
SSgA now has investment and/or trading teams in Tokyo, Sydney and Hong Kong, plus a rep office in China. It is banking on the growing popularity of exchange-traded funds in Asia to fuel much of its growth.
Another source is institutions new to cross-border investing: although the general preference among Asian investors is for active strategies, the less experienced will often begin with indexed strategies.
Noting the growing appetite among Asia-based investors for regional exposures, SSgA is enhancing its Asian investment capabilities and ETF product line. But outside of Australia, where independent advisers happily promote ETFs, the distribution model in the rest of the region will put a ceiling on the rate of ETF growth.
Therefore SSgA is also looking at acquiring an Asia or emerging-market onshore retail business. Powers adds that a China joint-venture is one possibility.
Powers joined the firm in May 2008 as the global financial crisis was unfolding. SSgA has come under fire, fending off lawsuits from institutional investors in the US and Europe who claimed it had misled them with regard to the risk and collateral management of securities-lending programs.
Much of Powers’ time has gone into revamping the organisation. He says SSgA’s institutional business focus meant it had lost track of the sort of disclosures and reporting requirements typical of fund managers with a retail arm. The firm has settled with both litigants and the US Securities and Exchange Commission, and has overhauled its governance, compliance and disclosure practices.
Powers asserts the firm today is in “best of class” with regard to its disclosure and transparency standards. The firm has also had to integrate its IT, compliance and risk-management processes into pitches for business, as has the rest of the industry.
However, Powers says the surge in demand for cheap beta exposures throughout the financial crisis led to significant inflows, which have offset the legal troubles and the added compliance and reporting costs.
Noting a lot of client money today is still on the sidelines, Powers says institutions worldwide want more absolute return strategies, particularly ones with lower correlations to others. This reflects demand for infrastructure, absolute return products, currency trading and commodities.
Another trend has been the awakening of emerging-market clients to wanting local or regional exposures, rather than just equating ‘international’ investments with the US and Europe.
And clients are keen on finding cost-effective natural hedges, as they are keen to protect themselves on the downside.