A New Paradigm: The Evolution of Investment Management

Author(s): Charles D. Ellis

Source: Financial Analysts Journal , Mar. - Apr., 1992, Vol. 48, No. 2 (Mar. - Apr., 1992),
pp. 16-18
Published by: Taylor & Francis, Ltd.

Stable URL: https://www.jstor.org/stable/4479518

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A New Paradigm: The Evolution of Investment Management
Charles D. Ellis
Managing Partner,
Greenwich Associates
A new paradigm is developing in
investment management-a new
organizational and "management
management" paradigm-that
has the competitive strength to
become the new norm in the
business and to dominate the in-
vestment management business
and the practice of the investment
profession.
The new paradigm is remarkably
different from the paradigm that
has, over the last quarter century, By the mid-1960s, two key
become the accepted and now
dominant norm in the field.
The presently dominant para-
digm is a specialist manager with
one investment "product" serving
one market, usually pension
funds. The developing new para-
digm is a multimarket, multiprod-
uct organization.
My thesis is that because the new
multimarket, multiproduct orga-
nization-when properly led and
managed-is more consistently
capable of meeting the long-term
needs of clients and investment
professionals, it will be increas-
ingly accepted and will become
the norm. In fact, the evidence
suggests the Darwinian process of
one species displacing another-
-J because it is even better matched
to the situation-is progressing
very rapidly now.
z of pension fund investing encour-
The Past
To put the current situation in
z
perspective, recall the situation
50 years ago. It was simple: Insur- Second, plan sponsors were
ance companies and insured
-J
plans dominated pension fund in-
vesting through the 1940s.
In the 1950s, with the prolifera-
16 tion of corporate pension funds
213.55.95.207 on Sat, 24 Dec 2022 10:50:48 UTC
From the Board
symbolized by General Motors'
agreements with the UAW to set
up a separate fund and to provide
"fringe" benefits during the Ko-
rean War price freeze, a new par-
adigm moved into ascendance-
the large bank trust departments
offering a narrow product line:
balanced accounts. But their of-
fering included a crucial differ-
ence: Equities could be 30% or
even 40% of total assets, far
greater than the 5% limit of the
insurance companies. And in the
postwar bull market, being in eq-
uities made all the difference.
changes in the situation were in-
creasingly significant. Pension
fund assets had become quite
large, and having so much money
with one manager was question-
able. In addition, performance
was being measured and com-
pared, and some of the largest
bank trust departments were seen
to be underperforming another
type of manager-investment
counselors that explicitly sought
''performance."
Five more changes were increas-
ingly evident through the 1970s
and into the 1980s. First, plan
sponsors split up their funds
among more and more invest-
ment managers-in part because
they sought specialist managers
and in part because many of the
most promising specialist manag-
ers were small, relatively new
firms. The multimanager concept
aged the formation of specialist
managers.
clearly willing to pay higher fees
to get the "performance" manag-
ers they believed could obtain
higher rates of return that would
more than cover the cost of
higher fees. Third, investment
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managers learned that they could
win substantially more business
by engaging boldly in vigorous
direct selling-and they did.
Fourth, the institutional broker-
age industry developed consider-
able capabilities in research and
executions to meet the needs of
"performance" managers. Finally,
assets continued to grow, and
more and more pension plans
and endowments organized
themselves to "manage the man-
agers"-particularly, to be buyers
that could meet the sellers of
investment services and make a
market.
And what a market it was, partic-
ularly for the specialist invest-
ment managers. They became so
notoriously successful that the
trust departments and the insur-
ance companies abandoned their
traditional organizational struc-
tures so they could replicate the
new paradigm that is so familiar
to us all-a group of four to 10
experienced portfolio managers
in their 40s with strong analytical
backgrounds, engaging personal-
ities, high energy levels and con-
siderable skill, who strive to
achieve superior performance as
a creative team, manage portfo-
lios actively, seek to develop
close professional relationships
with clients, and are skillful in
both direct selling and in working
with consultants. They earn sub-
stantial compensation as individ-
uals, charge high fees as firms, are
exciting to be with, and have fun.
They met the market on its own
terms-and have proliferated.
The 1980s extended the develop-
ments of the 1970s. Asset classifi-
cation became increasingly im-
portant. Manager classification
became increasingly important.
You were either a value manager
or you were not; you were a
growth manager or you were not;
you were a sector rotator or you
were not. You had to pick one
and stay there. Product prolifera-
tion began, and the different
kinds of specialization that invest-
ment managers might undertake
multiplied.
One solution to the problem of
proliferating managers was the
emergence of a completely new
industry-"consulting." At least
50 consultants now intermediate
between plan sponsors and in-
vestment managers, trying to
solve the problem of proliferating
asset classification, proliferating
managers, and product prolifera-
tion.
The Future
Managers are classified according
to an ever-expanding set of cate-
gories. A manager is either a
value manager or a growth man-
ager and, within each of those
categories, a large-capitalization of us to handle. Until recently, we
or a small-capitalization manager. expected the consultants to work
He is a passive, quantitative or an it all out. But they are having
active manager. He may operate
with or without "technology." A
global or international manager
can concentrate on the Pacific
Rim, on Europe or Latin America,ers' abilities to perform.
on the emerging markets glo-
bally, or on any specific part of
the world-with or without cur-
rency overlays.
On the bond side of the business,
a manager is immunized or ded-
icated, structured or indexed or
index-plussed. He could have
GICs or BICs; be in the high-yield ucts. And it must be a multimar-
sector, with or without credit
evaluations; deal with private
placements or the extended mar-
ket; avoid or concentrate in mort-
gages and asset-backed securities
of all kinds. A bond manager
could be international or global,
with or without currency over-
rides; have a STIF or a medium-
term note portfolio; be involved
in bank loan packaging or con-
vertibles, sector switching, arbi-
trage, constant yield, constant du-
ration, and so on.
From the investment manager's
point of view, the world is not
213.55.95.207 on Sat, 24 Dec 2022 10:50:48 UTC
particularly simple either. The Figure A The New Paradigm
large, medium and small corpo-
rate funds have fundamentally dif-
ferent characteristics. Public
funds are tremendously different 0000SI
from corporate funds, and en-
dowment funds are different from
both. The 401(k) plans are grow-
ing rapidly and have fundamen- W RELATIONSHIPS
tally changed the terms of the
competition. Nuclear decommis-
' RELATIONSHIPS
sioning could be an important A RELATIONSHIPS
market. Insurance companies are
becoming interesting and, of
course, there are large numbers
of different kinds of offshore
funds. The United Kingdom, Ja-
pan, Germany and Canada-each
an important market opportunity
for American managers-are very
different from each other and fined as to concept, specifications
from the American market. and performance. The circles rep-
resent markets to which the orga-
All the complexity on the invest-
nization sells its product capabil-
ment manager's side and all the ities. The interior space between
complexity on the client's side products and markets will be
are beyond the capacity of most dominated by superior capabili-
ties in relationship management
and relationship developments,
.particularly strong professional
disagreeable experiences as they investment counseling-problem
try to keep up with product and delineation and problem solving,
manager proliferation and with servicing the specific needs of
the vagaries of individual manag- specific clients.
This multimarket, multiproduct
Some new way of being orga-
nized is needed, one that has the investment management organi-
zation meets several needs of ma-
capacity to deal in many different
markets. It must be effective for jor clients-product specification
the client, and it must be produc- and product conformance, prod-
tive for the investment manager. uct innovation to meet new needs
It must be capable of dealing or exploit new opportunities, the
successfully with multiple prod- confidence and convenience that
C)
goes with long-term professional
-r
relationships, possibly lower
ket-capable organization, so it can 0j
CL
access business from many costs, and relationships that are
"client driven" rather than "prod- I
sources. U
uct driven." And this organization
The new form of organization better meets the needs of many
i:1
must be reliable and sustainable investment managers, for profes-
z
both for the client and for the sional growth and creativity and W
:D
0
manager. It must allow individu- financial security at high pay lev-
V)
als of considerable talent and els-without betting their busi-
pools of capital of large size to ness careers as well as their pro-
make long-term commitments. fessional reputations on a single
-J
What I am proposing is the kind way of investing in a single asset ?
of structure shown in Figure A. class.
U
z
The stars represent investment
z
management capabilities, which These organizations can afford to U
can be defined as "products." invest in acquiring increasingly
Each is carefully, rigorously de- costly and essential systems, devel- 17
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 oping new products and develop-
ing new markets-and they will.
And as product specialization and
market segmentation proliferate,
an increasingly large share of new B E Y 0 N D
products and new markets will be
developed by the organizations T H E F R 0 N T I E R ...
that master the new paradigm. In
fact, these new organizations are
already dominating new product
development and new market de-
velopment.

Three concluding observations

seem important. First, the new
paradigm will not overwhelm all
the boutiques. The best specialist
firms will continue to prosper-
but it will be more and more A I MTM
important to be very, very good.

Second, not all of the multiprod-

uct, multimarket organizations
will be assured of success. Only
those that produce consistent Because there's more to portfolio management
product quality and service qual- than plotting an efficient frontier
ity will succeed.
Deciding on an asset allocation mix is important,
Finally, the new paradigm is cer- but portfolio management doesn't begin or end
tainly not "just" a return to the there. That's why we offer AIM, a complete PC-
old "balanced manager." The based investment information and management
new paradigm organization is system.
profoundly different on every im-
portant variable-leading-edge There's the data that goes into your decisions.
investment innovation, strong With a comprehensive international database of
client-centered relationships, de- indices, indicators, manager and fund returns, and
votion to product excellence in currencies, AIM serves as a tool for return
design and conformance in exe- analysis, percentile rankings, performance
cution, strong business develop- evaluation, and asset allocation.
ment, and exceptionally reward-
There are alternative approaches. AIM gives
ing careers for gifted, motivated
you the ability to explore different optimization
professionals, with business
strategies, including mean variance optimization
strength the foundation for pro-
(N) based on historical or projected risk/return
fessional excellence. The old, old
-J paradigm trust department or in- attributes, multiple scenario forecasting,
CC benchmark and risk-adjusted optimization
sured plan couldn't come close to
techniques.
I competing with the new para-
U
digm organization. There's interpreting the results. AIM's analytical
CL
?1
resources help you evaluate portfolio mixes with
z
risk distribution and wealth accumulation reports
and graphs and effectively communicate results
0
with a wide array of reporting options.
L-

18 Discover a new frontier of automated solutions

z ...Discover AIM.
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U
z
z 5335 SW Meadows Rd,
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18

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