Risk Appetite at the Crossroads: An Interview With BNY Mellon's Jim Cecere
September 12, 2011
As managing director for global product management for U.S. financial institutions at BNY Mellon, Jim Cecere is in a unique position to see developing trends in the asset management industry.
Particularly in light of recent market volatility and dramatically changed investor risk appetite in the wake of the recession, Money Management Executive Editor Lee Barney spoke with Cecere about new product trends.
MME: Have you seen a shift in the types of products asset managers are launching following the recession?
Cecere: Yes. After the market downturn in 2008, there was an immediate flight to short-term fixed-income products. Investor behavior is highly reactive, and since then, asset managers have introduced more complex products, giving investors more tools to react with.
Asset managers have dealt with the impact of the recession and now face what continues to be highly volatile markets. They are looking at growing their businesses by doing one of three things: entering new markets, expanding into new products, or expanding their distribution. We used to talk about the convergence of alternatives with traditional asset management from an asset manager perspective. While that still holds true, the convergence of insurance products, commodities, private equity and other asset classes with traditional investments is probably more accurate.
Perhaps just as critical as the new types of offerings themselves are changes in how distribution is implemented-in other words, how asset managers are getting their products into the hands of investors. So, I'm seeing three major themes: new markets, new products, and expanding and evolving distribution channels.
MME: What types of products are you seeing coming to market now?
Cecere: We are seeing a shift to a much broader array of types of investment vehicles. Asset allocation was traditionally defined by need, such as a certain sum of money for a specific goal. Instead of looking only at accumulating wealth, many investors are also taking a more protective stance while trying to create enough wealth to live comfortably.
Also, investors are looking at different ways to gain exposure to non-correlated asset classes to mitigate risk and battle the rapid changes and pressures we are seeing in the post-recession market-whether it's the sovereign debt crisis in Europe, continued market volatility or the downgrade of U.S. government debt.
Investors can now gain access to these diverse asset classes through exchange-traded funds. ETFs investing in gold, silver, copper, euros, Swiss francs and even hedge-like products are gaining in popularity. We've even seen one firm launch a lithium product.
We continue to see innovative products introduced through the ETF channel. Several investment companies are attempting to bring various types of fixed-income securities to the market, particularly shorter-duration products. Beyond the ETF market, asset managers, insurance companies and banks are also rethinking both their product sets and distribution strategies, as I mentioned earlier. So, we're likely to see even more innovation and convergence in the near future.
MME: What about index funds?
Cecere: Absolutely-there is a definite proliferation in index funds, as well. Indexing remains a core part of most portfolios, even as investors look to diversify their types of exposure. I think Warren Buffett has even commented that investors thinking in the long term need a low-cost index option that tracks the broader market in order to ensure long-term investment success.
The evolution of index funds has led to even more ETFs being introduced and by a wider group of issuers. I admit, I was worried a year or two ago when we started seeing more entrants into the ETF space. I feared that it was no longer a "me too" product, but instead a "me eight" product. However, distribution and segment strategies have become the central focus of asset growth by issuers. Each focuses on its target segments and distribution channels, offering a broad set of index products and subsequently succeeding in many cases with regard to asset accumulation.
MME: You mentioned earlier that there have been significant changes in distribution. Can you elaborate?
Cecere: There has been an evolution in distribution, and this will continue to be of critical importance to the success or failure of a firm. If you think of what an asset manager does, there are three main functions: manufacturing products, producing products and distributing products. While manufacturing products involves the creation and development of new product, producing these products is all about processes, such as back-office and middle-office operations. Distributing finished products to investors is the final step.
If you look at the current objectives of asset managers, they are increasingly focused on the manufacture and distribution of products. They are wondering what sorts of products will differentiate them in the eyes of investors and meet the demands of asset allocation, while also effectively reaching the end customer through both traditional and non-traditional channels.