NEW YORK—“In the next five years, the asset management industry will face the first fundamental change it has seen since the 1970s when ERISA was enacted,” said Don Putnam, chairman of financial services investment banking firm Grail Partners. Market instability, pressure on margins and consolidation will continue to roil the asset management industry, and in a desperate search for returns, investors will flock to actively managed ETFs.
Putnam was addressing Money Management Institute’s Fall Solutions Conference Friday here, titled “Tactics for Growth Opportunities in Changing Risk Environments.
“Global markets aren’t as liquid as we thought. Liquidity equaling efficiency has generally been true, but the most liquid markets are where the government has intervened and introduced volatility. Is there any doubt that governments are getting more involved, especially in state capitalism, which is growing in China, India and Brazil?” Putnam asked.
“Instability is here to stay,” Putnam said. “This new paradigm will change what products are sold, the chain of distribution and how companies are capitalized and operated.”
Since asset managers are not selling labor or services, Putnam said, they must find “something that is a powerful narcotic—and that is hope, promise, love and a positive income. A vision of the future,” he said. In order to achieve that, firms will have to turn to holistic, risk-based investment management, starting with actively managed exchange-traded funds.
Investors and advisers are moving to low-cost options and alpha generated by beta allocations, said Putnam, who had some harsh words for mutual funds.
“We think mutual funds, as opposed to managed accounts or ETFs, are crappy. The product is being homogenized. Asset allocation failed. The idea of efficient diversification failed. Truthfully, those buckets aren’t that uncorrelated and are too complex. Active ETFs and ETFs are a better product. You need to embrace them. They are a natural, global, transparent solution in which hope can be packaged well,” Putnam said.
“We think ETFs are categorically the rodent eating the dinosaur eggs,” he said. “ETFs are the new PCs [personal computers]. This is the new wave of the future.”