For large firms in the asset management industry, the projected demographics and wealth creation of international economies mean they must have a global outlook toward growth.
But many firms have shied away from the prospect of venturing beyond Western borders, as investment costs and dealing with the challenges of multiple regulatory regimes seem daunting.
In that sense, BMO Global Asset Management is a firm on the edge, with established footprints not only in Asia but even in the oil-rich Middle Eastern Gulf nations. It maintains its own offices in these locations rather than relying on a foreign partner to be the face of its overseas operations.
Such face-to-face effort is one reason why the subsidiary of the Bank of Montreal has amassed $249 billion in AUM, says Barry S. McInerney, the firm's co-CEO. In the last year, it has been integrating its acquisition of London-based F&C Asset Management, a $1.17 billion purchase that catapulted it into the top 50 global asset managers.
McInerney spoke with Money Management Executive about how the firm manages its presence internationally, and what it learns from operating in so many different markets.
What would you tell U.S. asset managers that might want to access overseas markets, but are unsure of the investments required to do so?
We're a global operation, but there's always a balance between regional and global. When anybody aspires to be truly globally integrated, that's very difficult because your clients are regional. So, we look at it from top-down, bottom-up. For instance, we have regional PNLs, and they would have various degrees of evolution in terms of a startup in one region versus something that's more mature in another region. But you do have a game plan of where you want to be in five years from now.
So you have to understand how it all rolls up into one global financial picture, but if you want to expand you have to understand the investments required and thoughtfully execute on your business plan and track it.
But I want to step back and start with manufacturing. Right now, through acquisition and organic innovation we have a lot of global products and strategies. If you don't have that, then why go into Australia or the Middle East? That's a fair statement, but if you're just manufacturing U.S. products, there's nothing wrong with that.
There is interest in the U.S. and the Middle East, but the interest for the U.S. is typically regional.
The interest for global, which is what we're building up - emerging market, frontier equities, and the whole array - they are in demand anywhere around the world in various quantities. So, if you say you want to be global, which means global manufacturing, then you've got to thoughtfully build up your distribution. You have start with, 'What do you want to manufacture?'
We want have solutions, we want to be global, we want to have a variety of vehicles to distribute those capabilities, be it mutual funds, ETFs - which we have - and fortunately we are part of BMO Financial Group, which has decided that the industry is growing quite rapidly. It's at $65 trillion globally and is expected to reach $100 trillion by 2020, and as you probably have seen the statistics, that's only in an industry managing 30% or so of all investable assets. If that 30% was the 35% percent, $100 trillion in 2020 becomes $135 trillion. That's more than just double in five years. So, demographics are at our backs, both emerging markets citizens have to save. Baby boomers have to save longer and it's really pointed to the fact that this pool of assets managed by the industry is growing.
So, let's get into it aggressively and thoughtfully. And we think the best way to do that is that every regional investor increasingly wants a global opportunity, so we will do global equities, European equities, we do a lot of regional, manufacturing of equities and fixed income, other products - because that fits in a portfolio but increasingly we have the global capabilities - and performance is strong.
And because of that you have manufacturing tool kit, and then you build distribution into the various regions.
If you don't have the first two, then one-on-one you have got to watch your third. So, we're at the point now where manufacturing is there, performance is there and so therefore we're really ramping up our distribution - doubling it in the U.S. in the last 18 months, doubling it in Canada in the last 18 months; F&C, we're doubling their sales force for the next two to three years in Europe because there's a lot to sell, we think there is demand.
How are the operations of asset management different in established markets versus these up-and-coming markets?
It comes down to what the investor in the various markets are looking for and it might change, 10 or 20 years out.
For instance, the U.S. is large but fairly homogeneous in terms of investor sentiment. In Europe, it's very different in Nordic regions than the south; Asia it's the same thing. We're all, because again if you take greater China, it's a hugely important geography for BMO and for asset management.
That's slow because typically, because regulation or because of regional or domestic fixed income and equities look pretty attractive, the Chinese investors invest mostly in China. We want to plant our flag there when that unlocks, but you can't start aggressively selling global into greater China - not yet.
Brazilians still mostly invest in Brazil, for good reason. High interest rates, historically; stock market is quite immature, actually when you look at the Brazilian stock market; capitalizations percentage GDP is like 40%. In the U.S. or Canada, it's 120%, so that hasn't really evolved, so when you go to a market you have to match your manufacturing to the demand. Every country is different and you have to be very smart. First of all you have to have the product, but the demand of your product completely varies by the region, and it evolves.
Have you been able to glean an answer to the millennial issue here in the U.S. while dealing with the younger markets in other regions?
Take millennials in the developed market, here in North America and in the U.S. specifically; they're technologically savvy, robo-advisor-types and in the early days it might catch on. Environmental, social and responsible type of investing really matters to that generation.
I don't necessarily think that's something that translates from Asian millennials to the U.S., but those are trends that we are constantly looking at. Millennials really like ESG. They don't have a lot of capital to invest, but they will.
But, another translation would be the fact that frontier markets - that's in the African nations, Eastern European, Middle East and Asia - those are very young populations.
We manage frontier equity funds and they have actually done quite well because there is such huge education needed. I was in the industry in the 80's and then everyone said, 'Emerging markets? What's emerging markets?'
I couldn't have invested in Brazil, Russia and all these countries and they was less than 1% of the world's capitalization 20 years ago. Now it's over 10% of the equities, so frontier is something where you get in early; it's going to be volatile, put 1% of your portfolio in it and just let it go. The correlation of GDP and equity growth is uneven in the short term but it does actually match one another over time.
It certainly is a lot of ground to cover, between different geographies and product offerings.
We get asked all the time, how can you house all these products under one roof, and again, the answer is that we are a solutions provider. Active, smart beta, even passive, it all coexists when you put a solution together: target date, target risk, fiduciary outsourcing, and we also do a lot of selling of single products. There's trends going on everywhere, and you have to be nimble.
If you remember Peter Lynch, that star manager, that stock story, was really important in the '70s and '80s. It's not as much now. Now it's team, process and long-term horizon. What's low volatility? That didn't exist in the 1970s. Now we're using quantitative measures to pick stocks even for downside protection. Again, another term that was never used in the '70s.
So Asia is probably a couple of decades behind developed nations. When the Shanghai Index goes up so high and then drops, you have to remember that's all they know, There's a little more short termism involved there, and you can't help it with high interest rates. Also higher turnover in Asia, particularly China. We had it here, 40 years ago. It just takes time, and we're just trying to get ahead, to go where the puck's going. You're never going to get it right all the time, but we're trying.
Do you have any sympathy for the asset managers who are struggling to take their active work and put it into an ETF wrapper because they want to remain competitive?
A well-executed business model, irrespective of what it is, is going to work. You've got firms that are pure active, regional focus, maybe just small-cap, mid-cap or large cap. If you just keep your focus, form really well, have repetitive processes and create alpha, you're going to do just fine.
Remember when everyone wanted to have their own target date fund? And what happened was that the top five firms took the lion's share of the market. But you didn't have to have your own target date fund, you could just plug into a third-party platform.
I don't think there's sympathy required for someone who's active and doesn't have passive. Active always spikes up when it shouldn't; and then passive doesn't spike up when it should. When everyone's moving in the same direction it's hard to beat the market.
So use both. Passive is good for cost budgeting purpose, a risk budgeting purpose, but successful active management is always worth it.
The money that you manage five years out, typically are in strategies that didn't exist when you started. That's 35 to 40% of assets, that's innovation. So liquid alternatives, frontier equities, unconstrained bonds, smart beta. What's to the advantage of the industry, given our growth and regulation, is there's more heavy lifting being done by the industry now.