Losing Focus from Volatility

Volatility is a nerve-racking word in the public markets and 2016 has continued a volatile streak that began for most investors at the end of June last year. The Russell 3000 captures most of the market from small to large-cap, and after reaching a peak on June 25, it fell more than 12% by mid-August, and the market has only continued its roller coaster of peaks and valleys since! In 2016, the Russell 3000 fell by more than 11% for the YTD by February 11, only to once again regain most of what was lost.

When markets are volatile, investors react emotionally and think in the short-term rather than in the long-term. The investor who can "see the forest for the trees" and looks past what seems to be doom and gloom can take advantage of the situation and gain financially as markets return to typical behavior. This type of investor is very rare indeed!

In trying to help the typical investor during challenging markets, investment managers buckle down and focus on their clients to ensure they are as comfortable as possible with their current investment strategies and the markets in general. Market swings and their clients’ reactions usually consume the day-to-day focus at investment management firms during periods of high volatility. It is no wonder, then that in my experience it is rare for an investment manager to be able to take a step back and look at their own bigger picture during such times. I have been working with managers for 20+ years and I almost never see a firm make infrastructure or outsourcing decisions during volatile markets.

Informed service providers typically make the point to prospective customers that they should turn a fixed cost into a variable cost by outsourcing all or some of their operation. But this may not always be fully appreciated due to competing initiatives. Most outsourcing service providers charge a basis point fee arrangement, especially for the private wealth and institutional portfolios. Therefore, when the markets go up and down month-over-month the cost to run the business is adjusted accordingly. Successful service providers understand such is the business they are in; they have strategies to staff accordingly while drawing on technology to gain levels of scale an investment manager doesn’t have the expertise or resources to achieve.

Operating decisions are typically made for compelling events such as new distribution opportunities, significant asset expansion due to new clients, or asset compression due to client losses. However, during volatile periods, managers should more than ever make those assessments and get in front of the next market cycle! It so often happens that circumstances cause us to focus on the immediate which inhibits the longer term strategic thinking that is required for a sustainable business. All investment managers want to weather the markets in any cycle, so making the right strategic decisions about their infrastructure and their operations model may be the best way to do so.