"We are born naked, wet and hungry and get slapped on our ass -- then things just get worse." Yes, it caught the audience's attention too. Such was the opening line of the Asia-Pacific head of BlackRock's speech at last week's AsianInvestor Service Provider Awards 2009.
Fortunately, the speech didn't get worse after that. Accompanied by cartoons making light of the financial crisis that has so heavily weighed on the markets, Peter Swarbreck took the audience through an entertaining round-up of the events of the past 18 months at the JW Marriott hotel in Hong Kong on October 15.
Laying the blame for the disastrous collapse of global markets at the feet of the world at large, he said: "We know that the excessive lending reached deep into communities that were never going to be able to repay the large relative borrowings that were being offered. Individuals and companies have for too long lived beyond their means and it is not any single body that should be blamed. We are all at fault."
But he swiftly went on to reflect on the equally sudden recovery in markets. "Even if we take the final move downward and the quick recovery as an aberration, the year-to-date returns have been spectacular, in both US dollar and local-currency terms."
In dollar terms, he points out that from the start of 2009 to mid-October equity markets rose at a startling clip. Global stock markets were up by 27%; the US market by 21%; Europe 31%; China 61%; emerging markets 71%; and Japan 15%. In addition, the gold price has gone up 21%. And these numbers are despite a very poor January, February and part of March.
Of course, as Swarbreck noted, the crisis had a widespread impact on the financial services sector. Between the end of July and the end of December 2008, average stock price declines in the financial services sector were 43%.
There have been consequences. "The financial services industry is shrinking," he said. "There has been massive deleveraging, record merger activity and landmark bankruptcies."
Breaking it down by sector, Swarbreck first alighted on asset managers, among whom "the crisis has sparked significant global M&A activity". There were 72 transactions involving such firms in the first half of 2009 versus 109 in the full year of 2008, and half of this year's transactions reflect divestitures.
There were equally winners and losers in the hedge fund sector in 2008, said Swarbreck. Average performance was negative 19% across a wide range of funds; globally, more than 450 funds closed (200 in the US, 150 in Europe and 100 in Asia); hedge fund assets declined 39% in 2008; there were record redemptions of $400 billion.
As a result of the dire losses, there has been a re-evaluation of the market, he said. A number of things are now clear: correlations were too high; clients want a new approach (one that separates alpha and beta, and makes use of absolute-return products not benchmark strategies); and there is a trend towards broader mandates, incorporating more flexible guidelines, multi-asset portfolio solutions and total outsourcing of fiduciary mandates.
Meanwhile, we should expect the inevitable regulation that is to come, said Swarbreck, adding: "I am sure we already feel this."
He went on to highlight the even greater importance of the asset management industry's service providers. Global and local sub-custodians are needed that are financially strong; as are service providers that can deal with increasing scale, as M&A activity continues. Tax and legal advisors must help navigate the increased regulatory scrutiny and new and pending rules.
Technology and, more importantly, automation and straight-through processing, is key, said Swarbreck, hence the importance of maintaining infrastructure investment. There was also a mention for other crucial cogs in the asset management machine: "Transfer agents, administrators, auditors, prime brokers, trading counterparties, consultants, index providers and more," he said. "All make up the ecosystem of the industry to which fund houses belong and rely upon."
"The landscape has changed, innovation and efficiency are more relevant than ever before -- as recognised in these awards tonight," said Swarbreck.