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PGIM, Franklin Templeton and BNY on the Asset Management Outlook

Mar 24, 2024
We were just joking backstage about having basically three of the biggest people in

asset

management

here on stage with us today and of course today we're supposed to talk about the future of the

asset

management

industry and really about the growth of that. industry where it's been and where it's going, but I'm a little remiss to have three people with this kind of experience and this kind of talent and not understand some of the current market conditions, the market volatility and maybe some of the structures. changes that we've been seeing in interest rates and inflation and everything else, how does that relate to what we're seeing now?
pgim franklin templeton and bny on the asset management outlook
If everything changes the complexion of what you do, Jenny, you drew the short straw well. First of all, I think for assets. Manager volatility is a good thing so I think in these types of environments where there is market volatility it is an opportunity, I think you know the opportunity becomes more difficult and I think in our case, especially if you look at where it came from the CPI. Nowadays you know things like investing in less risky assets, excellent credit. I think you know that it is during these bear markets that you remember that 40% returns come from dividends.
pgim franklin templeton and bny on the asset management outlook

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pgim franklin templeton and bny on the asset management outlook...

It's a good time to have good solid cash flow and positive companies with uh with good dividends um and uh and it's the time to really pay attention to credit and trends so I think it's an opportunity to active managers. Are they changing strategy right now? Hanukkah um well, we're seeing clients that have interest in different types of strategies, but I have to say I agree with, I agree with Jen, it's actually a very good time, four active draws, four active draws. I always remind us in times like this of the line from Kipling's poem uh and when you know when everyone around you is losing their minds you need to stay calm, it's very, very important and you need to stay focused and be very deliberate about where you invest in this type of environment, you know, where just CPI numbers, you can't rely on growth as a factor in investing, but that doesn't mean you can't invest in companies that generate growth.
pgim franklin templeton and bny on the asset management outlook
We have portfolios where companies are generating growth and sort of doubling the rates we're seeing. At the end of the season, it is still exciting to invest in income value. We are seeing that there is also interest that when you again cannot invest in growth, it is good to see that dividends can contribute and make it meaningful. uh, contribution to returns and, you know, in a risk aversion environment, I think it's not enough for us to also see an interest in fixed income assets again, as rates are rising, our fixed income assets are attractive now or at least relative to what they were a couple of years ago it looks a little better, I'm sure you know it's always good in our industry to look at history and try to learn lessons from it, but if you spend too much time on That, you also spend your time fighting the last war and what we're seeing now is the Federal Reserve waging the wrong war and we're looking at our fiscal stimulus colleagues, whether in the UK or the US. fighting the last war and what I mean by this is that after we came After the GFC, I think most governments realized that they had not done enough to stimulate their economy and promised that we would never again get involved in this and therefore what has been seen around the world is that governments have basically returned 10 percent of GNP to their economies and another five percent that they have allowed to be borrowed, so that You have a huge stimulus coming from fiscal policy that hasn't been seen in 20 years, at the same time that the FED is waging the war that you remember so well from the 70s, they are going to reduce inflation and I think they are very focused on that, but you know the world is not like the 70s and that is a war that is not worth fighting again, we are not going to go up to 20, so what we are seeing now is a different macro environment than we have had .
pgim franklin templeton and bny on the asset management outlook
We're going to look at an environment that has higher inflation on those days where we can't get it. two percent is over, we're going to see a rate environment that I don't think is high by historical standards, but it's nonetheless higher than we've had since the GFC and we're going to come back. Unfortunately, I think a fairly low-growth, fairly low-productivity economy is a very different environment than what we've had to invest in and to your point, on fixed income, yes, fixed income like and I would say all kinds of solutions, both public and private. Assets are now, in many ways, a more attractive combination in that macro environment than they were before.
Still, everything you just said doesn't sound like a growth story to me, so where is the growth in that environment? So it's not growth. For the economy now there is a big distinction between that and what we all see as growth in our businesses, which has actually been a very strong set of growth over the last 10 years and I really echo what you just heard from Mike. say about Aries. "This is a good time to be a professional investor. The money we're going to put in now over the next 24 months, I mean, it's going to be one of the best returns we've been able to get." Our problem three years ago was that everything was expensive, so I think we're going to see real growth in a wide range of asset classes and particularly in the private sector, which we can talk more about, for sure, Jenny.
I want to know your opinion. that particularly from the risk side I mean Franklin Templeton similar to PGM similar to bny melon not exactly the type of biggest risk takers relatively speaking in the financial world, but the structure of his business, the strategy that he has had during Los years are so resilient in the environment that David exposes well. I mean, we've made eight acquisitions in the last two years and we've been very focused on the private markets because I think there are some structural changes that, you know, any asset manager in order to offer complex capabilities to clients has to be able to be in the private market, so today when we close our last deal, it will be about 260 billion in private servers, 1.4 trillion in assets, uh, and I think the real trend is We will bring those private markets to retail investors and, as you know that today they have half as many public capital companies in which they can invest as they had in 2000, they have five times as many private capital companies that support private credit, I think the banks.
Due to regulations like Basel III and US regulations, banks are better capitalized, which is structurally good going into this environment; On the other hand, their capital is valuable, so they only lend to their best customers and preserve their capital for that and that has created an opportunity for private credit markets, and if we look, we know the excess profitability and the reality is that there is a big difference between the performance of your highest-performing private equity fund: about 20 percent a year. In private real estate, you know that the outperformance versus the underperformance is like 10 a year and private credit is around five percent, so you have to select your managers well, but in that, generating those excess returns in a way responsible, I think it is a real opportunity, so we look.
To that, I said, "Okay, we have to be in this space as an opportunity to get excess returns and some would say there's also a lot of excess liquidity in that private market space." You are looking at me? Yes, so let me first. Let's start a little bit more about the environment that we're in, but I just want to talk about that regardless of the environment that we're in and that we're heading toward, I think some of the underlying trends that have impacted all of us. Here as asset managers, they haven't really changed, right? And you mentioned some of them before.
Romaine, you have a bias from institutional portfolios to the retail investor. We're seeing a greater amount of customization. We're also seeing increased demand for delivering low-cost investment solutions, but we're also seeing demand for differential investment capabilities, whether it's in the private markets, whether it's in specialized active investing, so we think that's really important. You have built two things first, those specialized capabilities that we have at bny metal Investment Management, but you also need to develop scale to be able to offer these solutions in a very profitable and effective way. The best way to do it is through m a um you could do, could do, can do, could do.
M A, you could, you could also deliver it organically, we come from a history of m to uh, that's how bny metal Investment management has been built. We have consolidated the number of businesses and refocused the business around a series of centers of excellence, as we call them. with a number of key businesses around Decor's asset classes, but for now we are very focused on organic growth and achieving that through those businesses. David, do you need to be under that big umbrella? I mean, is there room these days to say? an independent, do-it-yourself private manager, so I think the thing to remember about private credit, if we look at this, we have about 250 billion in private assets overall, so we're one of the bigger actors.
The important thing about this is that these are not necessarily new asset classes, although they may seem that way to institutional investors, but they were assets that 20 years ago were on the banks' balance sheets, so those who lent money to the market It was the banks that granted loans for infrastructure. You had the commercial finance companies remember those that did all the aircraft leasing, those are largely now not growing or disappearing and what you have seen is that this institutional capital has come in the same way as the economy in the US .and increasingly, I would say, in Europe.
What is financed comes from institutional asset management rather than through the banking industry, so it is not that they are new assets or that they did not exist before, but rather the way they are financed is very different. So my answer to your question is there. Right now there is no excess liquidity in the sense that most of our companies are in very good shape. Leverage ratios look pretty good and you know that the actual defaults that we are seeing now in the leveraged loan market and others are very low. so I'm not really worried about that, at least in the short term there is a lot of room to operate in the private markets Jenny, you're not in your head, you know, I agree and I was just thinking, I mean, if you already know, if really We look, you have bear markets, I don't know what it is 23 24 and you know that we have had a compression of multiples, we have not yet had a reformulation of earnings, the consumer makes you talk to the banks and their default rates they're lower than ever, they haven't really seen an increase in losses, uh, that's built into the market, you know this expectation if the FED achieves what it's trying to achieve, which is to slow down. bring down the economy and get inflation under control, we'll start to see some of those, you know, some of those structural challenges that happen when there's a slowdown and we just haven't seen that at all yet, but systemic risk is something that doesn't worry you at all. absolute, so I think to David's point, you know that, first of all, most of the leverage has moved to the balance sheets of central banks, rather than we are actually seeing healthier companies and individuals that never. you know, they're coveted previously and actually, if we compare them to the financial crisis, they're actually all in pretty good shape, so I think that's the good news that ends up being a little bit of a cushion here, but just with the FED action I have yet to see it really have an impact and delinquencies and things are a bit of a lagging indicator.
It's a US story Annika. I'm curious. Does that also apply to the rest of the world and practically the developed world? Speaking of which, I think particularly in the UK and Europe some of those dynamics aren't that different. You know, growth is hard to achieve, but I would say certainly in the UK, which was also highly leveraged. before encountering crisis, corporate balance sheets have also reduced leverage on the part of consumers has also decreased and that has been a good thing, but as Jenny and David have said, that has been absorbed in the case of the UK by the Bank of England made a statement on September 22 that they were going to start unwinding that program and start selling government bonds in the market, a decision they had to pause five days later because of what happened nextfrom the budget announcement in the UK, so the UK, um, I think at a high level it also has high inflation, a low growth environment, a cost of living crisis, it's a difficult environment, but still Good investments can be found in that environment when we talk about the growth of the industry, the growth of what you do your business and how you run your businesses here.
I mean, it's obviously had phenomenal growth over the last two or three decades. There have been some challenges in recent years with obviously increased competition and obviously just sell a lot of the changes in market volatility here when clients come to you today new clients potential clients what are they asking of you now that maybe it's different than what that a client 20 years ago would have walked through the door and asked like this. I would say that clients are increasingly asking for results-oriented investments and a result can mean many different things, but they no longer come and say you need to beat the benchmark on this particular strategy for 200 basis points or 300 basis points so they can look for income they can look for inflation protection they can look for tax efficiency they may want to see some of their personal values ​​expressed in their portfolios and in fact it offers some very interesting opportunities for we.
I think also improved biotechnology, you know, the advancements that we've seen in technology allow us to offer better personalization to our customers, but those needs have really changed and I think this environment will change. Really accelerate that move from benchmark-based investing to results-oriented investing David. Your opinion: Many of the large, sophisticated institutional investors of the last 20 years have been very segmented in the way they viewed individual strategies and what they discovered is that they actually built a bank of 200 external managers who, when put together perfectly, they form the most expensive index fund in the world and what they are now doing is working very hard to drastically reduce the number of managers they work with, but then the demands on those that the managers be global, that they have a high level of risk management to deliver the type of results that Hanukkah was talking about, has increased dramatically and I would say that is one of the reasons why you are seeing a push towards consolidation in the industry, it is less the type of logic industrial capacity and more that customers really want to do more business with fewer players and that started in the institutional business but now it is very clear also in the retail world and therefore we will continually see the large companies, I think they will continue. to gain share driven by that by that trend, are you seeing cost pressures in your business because of some of those changes?
Sure, I mean, every time someone asks for a strategic partnership, I watch my wallet, I mean, but that's a good thing, that's it. competition No, no, I appreciate that we have to be under pressure on margins and that's how we improve and become more efficient, so in fact, I appreciate that I don't think that's a problem, what about you Jenny? I agree with both. I think you know, I think in some ways asset managers lost their minds by focusing so much on every little benchmark and breaking down investments so they can measure each component and in the end clients are looking for results, whether they're institutions or they're, um, your consumers and, you know, just investors and I think the good news is that technology is allowing us to understand the risk factors much better and be able to offer much greater personalization to align with those outcomes.
I think it scales for all The reasons David mentioned are important. I also think any active manager is going to have to be exceptional at leveraging data and AI to get insights and data is really expensive so I think scale is needed and that's going to become an increasingly larger part of uh . How does it influence investment processes, how does that change who you hire and who you keep on board? Well, I think we've all been talking about you. You know, on your investment team you'll see Python programmers and mathematicians and I always saw some of that. but I think, you know, it's still part of the whole ecosystem of an investment team.
You're adding these additional types of capabilities. Hanukkah regarding collaboration between some of those teams. I mean, you run a very sprawling organization if I could use that word, how do you keep that together? More importantly, what is the interaction there that addresses some of the things you just talked about? So I would say we actually have a very focused business, um, but we run it. different from others because we have a multi-manager model, so what's different as part of this process is that each of the investment firms broadly focuses on a different asset class, but they also have their own team. of investment and that's really important because That's ultimately what clients engage with, is the delivery of that performance and how it's delivered.
What we deliver from the center, so to speak, is support in data, technology and infrastructure, in distribution and, in particular, in the retail market, delivering those strategies. to the last thing and to the customers and that is where the connectivity takes place. I agree with Jenny that investment in data is very necessary, but it is also transforming each of our businesses and I think it is transforming it in two ways, one is in the integration into the investment process and I want to be very careful when I say that because the use of data and technology does not replace human judgment at least in our opinion, but can greatly augment it, there's the look, we're sitting here.
In the Bloomberg building there is a lot of information that needs to be filtered and needs to get to the portfolio managers and vetted analysts in a filtered way, but I think the other part where data and technology really play an important role in enhancing the experience of the customer and we are investing a lot in that centrally so that customers can interact better with reports, can get better insights and know better what to do in changing environments, how much is it dependent on outsourcing, if at all at this point? Not much, um, what we do, depends on how you define it, we, we run our own investment teams, uh, we do, we outsource part of our operations to different providers, including colleagues in asset servicing at BMW melon, um , but we don't.
We outsource the core of our business, which is actually manufacturing, because that's where the value really happens, nor do we outsource customer experience management. How much of the customer experience right now is still kind of climate? I guess the traditional model, the one-on-one relationship with the advisor, there's more demand, more request for I guess it's a type of relationship that maybe still includes the advisor, but also allows the client to do something on their own. or herself, so it's interesting in our case, we have a high net worth business trust trust and you're going to end up with very sophisticated investors who have made a lot of money and by the way, once you've made a lot of money, it has a big cost of opportunity for spending all their time investing and often you will see some of them take a small part of that and play with it, that's what they do, but they outsource their actual investment portfolio. because they recognize that managing money is not a part-time job.
I think times like this are when people turn to advice and are reminded why having a financial advisor is so important. individual who's going to lead um, in fact I think you're going to start to see more and more coming back to the advisor, are you seeing that we're already David? Although I wouldn't call it so much as going back, as I think there is a new hybrid model of how people want to be served and this is true on both the fa side and the retail side, as well as the institutional side, where we see that People want direct online access to their wallets and they want to be able to access them. run models, they want to be able to run their own analysis, many of our institutional investors want to do a lot of work through our portal, on the other hand, they really value the personal, very personalized advice that they receive from our teams. they want to have them, they're increasingly happy to do regular portfolio reviews on Zoom, but when they have a real problem like what's happening in the UK this week they want to talk to us directly, there's no, there's no, so it's okay with in addition to instead of instead of going back to the old in-person only model, so you're looking at the combination of I think remote and the zoom world along with the digital tools along with, you know, Direct in person, everyone together, I mean, remarkably and I don't know. how have they found this, but during the pandemic our attitude towards our customers actually increased, we were all worried about being stuck in our pajamas, what's going to happen and actually the opposite happened, we had more access, we had more intellectual interest. dialogues with them and more ways to reach them, but I wouldn't have predicted that at the beginning you meet David, it's really interesting that you say it's because I took on the role that I'm in during Covet and I and when I joined.
I was thinking, well, I'll be meeting with clients and colleagues during the summer of 2020, but I really think I've met more clients and colleagues over Zoom and connected really well with them than I would have actually met. I've been on the traditional world tour of physically meeting with clients and colleagues, so I think we've learned a lot and I think Covet has really driven the changes that we're making and how we engage with our clients, which combines both a digital experience and a that you just talked about, as well as in-person experience when we talk about growth in this industry, whether you know that growth and assets under management are generally the growth of your own earnings and so on, where are the geographic opportunities? ?
United States or maybe you have your eye on another region of the world, Jenny. I think the United States is great, but I also think Asia, I mean, they're going to be, you know, they say there's going to be a billion people coming in. middle class 87 in Asia in the next decade, so I think it's interesting if you look at the strength of the dollar right now, it's kind of a sign that people want less risk, so it's their safety currency that's the worst . The other three currencies that work are the euro, the pound and the yen.
So when you talk about security, traditionally you always think of security currencies, but because of the structural problems that you see there, you actually see Asian and emerging market currencies, uh, holding. improve and I think that is also a sign that there are great opportunities in Asia when you talk about economic changes, economic opportunities around the world, obviously, everyone looks at China and says what will that economy be like in a few years, to what extent? will be dominant. Can it somehow usurp some of the dominance that the United States has had? Is there a story to tell David?
So I think there's a long-term story to tell, but in the short term I think it's a little bit more, a little bit more complex, I mean, when we look around and we don't really see our success in our own growth or our own profitability. , we look at our duty to our clients, so what matters to me is the excess. returns to my client, but if I look at the next decade there will be a lot of excess returns, that is, generated in Asia generally speaking. I actually don't like the categorization of emerging markets at all because I don't really think that South Korea, China and Argentina have anything to do with each other and therefore we increasingly build much more personalized portfolios, particularly around to China.
China is a really interesting case, so previously you could get exposure to China by owning Apple is right, because a lot of their sales decline and as ties between countries decline, actually the importance of getting your Alpha in China has risen and that's why even as you see tensions rising geopolitically, you also continue to see Financial companies are willing to invest to try to make sure that they understand the online and on-the-ground capabilities of what's happening in China. Annika, what is your opinion on this? I think there are two aspects to this question: our attitude is us, what does it mean?
I mean from the perspective of investment opportunities for our clients and I think our interests there will be interesting opportunities in the future in China, but you have to invest for the long term. I think the other aspect is what does this mean for our businesses, which is what I think you were asking before? Today, the US retail market is still the largest market in the world and still growing, so I think it's very,very critical for all of us, but the next one will be China, so you have to make sure that you can compete in both, that you can be effective here, but also start to focus on what might be around the corner, but in We are actually talking about a horizon of five to ten years, we only have about a minute.
I left here. I want to go back in time. I mean, you three have a lot of experience. Decades of experience in this industry and I wonder if there is some kind of mistake they made with it. The benefit of hindsight now and all the knowledge you had goes back to when you're a new face, 20-something, here's something you would have done differently overall because you're blessing more than everyone else, let the most young. I've made a lot of mistakes uh no I guess I think the way I'm going to answer this is you know Franklin's been around this is our 75th year um you only make it for 75 years because you evolve with the customers in the industry. and I think we are at one of those inflection points where tremendous technological innovation is occurring.
I think obviously there are all the geopolitical risks and we have to evolve with that and my big fear is that you miss a big trend, Monica, so I would say that you need to stay strong with the courage of your convictions and when certainly, as investor and I'm talking to someone who has been an investor in previous roles, if you move away from that, it's actually, when you get into trouble, you need courage and you need courage in your convictions and I think you need to live up to those beliefs, David, you have the last word, so it's very easy.
I think in our world today, particularly, we overreact to the events of the day. You know, we have a lot of everyone in this room. In fact, you can tell me a lot about the CPI is printed this morning and they will be in a lot of media coming from all of that and it's very difficult, I think, to remember that we are in a long-term game and we invested for decades. I've actually been investing for 140 years through presidential cycles and economic cycles and you know how to keep that perspective, in which case many times it's best to do nothing, which is actually one of the hardest things for everyone to do. humans and particularly for 25 years. old, so I think for those people who haven't gone through a cycle, maintaining that long-term perspective is the most important attribute.

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