Equity markets are set to slowly grind higher but endure bouts of volatility, says an Australian board member for the world's largest investment manager with assets of US$10 trillion.
Jason Collins, the Head of BlackRock's client business in Australasia, remains broadly positive about the prospects for equities as interest rates are unlikely to increase as much as the market fears.
"We're still pretty sanguine about the equity markets," he says, conceding that the inflation figures are spooking many investors.
Markets are pricing in more rate hikes amid hawkish policy signals, but Collins sees the eventual outcome as more benign but expects bouts of volatility along the way.
"The markets are betting that rates will rise well beyond their pre-pandemic levels. We're taking a more considered view, as such policies are unlikely to contain inflation without taking a heavy toll on growth. It's one reason we believe central banks will have a higher tolerance for inflation than in the past for years to come."
From where he sits, the biggest challenge for asset managers and super funds relates to the heightened levels of earnings volatility and explaining if return expectations change.
"Despite small bouts of volatility, Australian investors have been used to very solid returns for long periods," he adds.
The volatility faced by asset managers is just one of many challenges for funds as the industry is being reshaped by consolidation, internalisation, and regulation.
In his view, asset managers should neither be surprised nor alarmed by these trends since they were well-telegraphed.
"We talked about consolidation and internalisation ten years ago, although the trend has certainly accelerated recently with the Your Future, Your Super reforms."
Fighting for survival
While the widening gap between small and large industry funds has unleashed a wave of consolidation in the $3.4 trillion super industry, Collins doesn't think this will necessarily be the catalyst for more tie-ups between local asset managers.
Citing his previous experience leading a boutique asset manager incubator, he says the catalyst for mergers among local asset managers is more to do with the hunt for specialised capabilities in order to build more holistic offerings relevant to more clients; access to new channels of distribution, most notably wealth; and legacy and succession issues. This view comes as two well-known funds - VGI Partners and Regal Funds Management- have merged. Also, Charter Hall has bought 50 percent of Paradice Investment Management.
Collins suggests the expectations of most asset managers have changed, explaining that clients expect broader holistic conversations with their asset manager, such as access to global IP and scale, and insights and access into more specialised areas in alternatives for example.
He notes that in this environment some asset managers are changing their focus and pushing resources into different market segments. "Some assets managers have tilted effectively, and found new areas of distribution or product structuring suitable to the SMSF market or high-net wealth market for example, whereas others are finding it trickier," he states. "There is certainly a strong tailwind for high-end advice and bespoke investment solutions, given the complexity of our tax and social security system and the number of high-balance individuals entering into the retirement phase.
As for the argument over whether internalisation or agency is the best model, BlackRock supports both.
"Australian super funds have been strong stewards of capital in Australia over decades, and internalisation trend is consistent with what we've seen in some other key pension markets globally as funds grow and seek scale"
"But there are also very large local funds, including super funds and government agencies, that successfully use agency models and have enjoyed very strong investment returns over time.
"The argument has much more to do with the DNA of the individual organisation, it's established skill-sets, their investment philosophy, and approach, as well as their stakeholders and end clients".
BlackRock is at the forefront of the push to become a partner to retail, public sector, and industry funds alike bringing assets in-house who want to leverage the fund's knowledge of overseas markets. BlackRock makes overseas capabilities available to partner firms and has assisted asset owners seeking to develop a global presence and open offshore offices.
Critical to the partnership model is the demand from clients for a whole-portfolio approach rather than having funds pitch an individual exposure or strategy. Technology, access to scale, and local market insights across the globe are also appreciated.
The relationship underscores at a high level the importance of portfolio construction and risk.
Locally, it also underlines the impact of regulation and APRA's performance test.
Colonial First State appointed BlackRock to enhance its approach to managing investments in its MySuper book. CFS said partnering with BlackRock and using their global scale and Aladdin - BlackRock's proprietary risk system - will improve the performance of its MySuper products more quickly.
Similarly, with their decade-long engagement in New Zealand, BlackRock is also helping to steer New Zealand wealth clients like ASB into whole portfolio solutions for its KiwiSaver book, in addition to supporting AMP New Zealand's index investment management approach of its Kiwisaver schemes.
Collins says such relationships require a large joint investment and a certain pragmatism. "These are deep engagements. They are resource-intensive, require a great deal of trust, and you need to have aligned values and purpose," he says. We're very fortunate we've found whole portfolio solution partners with whom we will seek to grow." We are not seeking to do this with everyone.
The perfect sales team
But it isn't always easy to know with the partnership model if the fund manager is striking the right balance. For instance, it involves a notably different approach from the sales team since every contact with a client must be seen as an opportunity to make a positive impact.
BlackRock has become much more conscious of market segments where the opportunities lie and within its team the type of skills needed that will work well with various client segments. To that end, the firm has been active in reshuffling its sales staff to broaden their experience including its recent announcement to merge its Client Business and iShares functions mid last year to better serve clients' whole portfolio needs.
"I think that some individuals lean towards certain types of deep long-term engagements, and others are more activity or transaction orientated. There is no such thing as a stereotypical salesperson," he says.
"It's about having the ability to step back if you are not adding value and the ability to lean in when you can. Being able to listen and understand this is a long-term game is critical."
Finally, Collins says reputation is everything in a small and concentrated market. "We are not focused on being the largest investment manager in Australia by growing our funds under management aggressively, our priority has always been our clients. We have a consistent business model that is centred on serving clients fully and serving them well.