Rising rates and volatility gives funds food for thought, but a menu overhaul isn’t required!

By Joseph Cordahi, Front Office Pre-Sales Manager of NeoXam

Ever wondered what the investment management industry and the restaurant trade have in common? Look no further than choice for the end customer. The last few years has seen the emergence of restaurants with very short menus. Some offering only two starters and two main courses, all in an attempt to give the customer greater quality at a reasonable price. Similarly, in the investment world, a combination of pressures to deliver greater returns and a prolonged period of low rates has forced asset managers to reassess the investment options they offer to clients.

The trend, at least until now, has been for asset managers to turn towards less liquid assets – as they present opportunities for higher returns in a low yield environment. These assets, often structured credit or bank debt, have given end investors far greater choice when looking to diversify their portfolios. An offshoot of this approach has been the creation of private equity and mutual fund type structures – often run by boutique asset management houses with between 500 million and 40 billion USD AUM.

And despite the recent global equity market volatility following Trump’s tariffs on China, coupled with the trend of central banks gradually raising rates, boutique firms who have adopted hybrid investment strategies are unlikely to change course. After all, interest rates are still at record lows which means returns are still small in fixed income. As for equities, markets are unlikely to see too many days like the global stock sell-off of February 5th – which saw the FTSE 100 slump to its lowest level since 2016.

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So, given the likely continued convergence in private equity and mutual fund strategies, what are the likely challenges that lie ahead for asset managers adopting this hybrid approach? Well, to start with, there is the complex task of trying integrate the technology underpinning private equity/mutual fund business and fund admin tasks. Take the example of a fund manager running regulatory reporting duties siloed not only from middle office risk assessment, but from the running of a client’s portfolio in the front office. Any fund faced with this type of scenario needs to ensure that its equity and fixed income assets can flow seamlessly across the front, middle and back office.

The low rate/low equity volatility environment doesn’t appear to be going away anytime soon, despite recent bouts of equity market volatility. There has never been a better time for asset managers, particularly boutique funds running hybrid strategies, to find a more efficient way of managing less liquid assets. Asset managers who adopt a multi specialist front-to-back solution will ultimately be the ones best placed to provide investors with what they desire – greater quality. After all, nobody walks into a specialist restaurant expecting poor service, so why should investors expect anything different from an investment manager?

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