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Lionel Martellini, Edhec

Asset Management is going through an industrial revolution

There is currently an industrial revolution taking place in the asset management industry, driven by the dual forces of mass production and mass customisation. Rather than merely create ‘one size fits all’ products, investment managers are increasingly required to develop investment solutions. 

To navigate these changing waters, EDHEC-Risk Institute has teamed up with Yale School of Management to produce a 3-seminar academic programme in advanced investment management techniques. 

The seminar series is specifically aimed at asset managers who wish to learn how to produce smarter building blocks and deliver mass customised solutions to their investors. And for asset allocators, who wish to understand how and when to use smarter, risk-efficient building blocks in their portfolios. The programme will help them to ask the right questions, and know what to look for, when working towards their investment goals. 

“It’s an exciting time for anyone to be involved in investment management,” says Lionel Martellini pictured), Professor of Finance, EDHEC Business School, Director, EDHEC-Risk Institute and Senior Scientific Advisor, ERI Scientific Beta. 
With respect to mass production, one might think this happened a long time ago in asset management. The mutual fund industry, by definition, is an attempt to produce portfolios to be used by a wide range of investor groups. It has been around a long time – the UCITS brand is more than 30 years old.

But as Professor Martellini says, there is something new that makes mass production even more relevant to investors than before:

“That is that mass production now applies not only to cost-efficient building blocks (mass produced ETFs with low TERs) but also to risk-efficient building blocks. This is evidenced by the emergence of smart beta in recent times, which is an attempt to harvest risk premia across and within asset classes in the most efficient way. 

“We now have ETFs being built upon smart factor indices that are investable building blocks, designed to replicate the performance of underlying risk factors: momentum, value, size, minimum volatility etc. It has become relatively easy and inexpensive to access these building blocks.”

The second force at work is mass customisation.

On their own, mass produced building blocks are not an optimal fit to any investor’s portfolio. Rather, what investors require is a customised combination of risk-efficient building blocks. 

This requires a change in focus for the asset management industry, which has long been driven by a product-driven approach. 

“Now, we are turning towards something much more meaningful, which is an investment solution-driven approach. Trying to understand exactly what investors want – be they institutional or mass retail – and provide them with dedicated solutions,” adds Professor Martellini.

Customisation has two different names. For large institutional investors, it is typically referred to as liability-driven investing, where investment strategies are specifically tailored to meet their long-term liabilities. In the broader wealth management space, it is referred to as goal-based investing: i.e. what level of income does the individual investor need to meet their retirement objectives? 

The Yale SOM-EDHEC-Risk programme has been designed specifically around this new paradigm. 

The first seminar, each of which runs for three days, was held in London and New Haven in March. The second seminar will be held in London from 21st and 23rd June and from 11th to 13th July in New Haven. 

The first seminar, which took place in March, was dedicated to the mass customisation aspect. 

“We explained the need for investment solutions and provided participants with the conceptual and technical tools needed to produce mass customised solutions as opposed to products. The seminar went into detail on why mass customised goal-based solutions are based on efficient building blocks and that a key requirement is to efficiently harvest risk premia across and within asset classes,” explains Professor Martellini. 

That naturally sets the stage for the second seminar, which will look at the efficient harvesting of risk premia in equity and bond markets. Each of the three days will cover the following key topics:

Day 1: Foundations and recent research advances in equity portfolio management 
Day 2: Equity factor investing in practice: Applications to portfolio management 
Day 3: Efficient harvesting of interest rate and credit risk premia

The third and final seminar, in December, will consider the efficient harvesting of risk premia in alternative asset classes such as commodities and real estate. 

Whereas the first seminar primarily focused on how to utilise these building blocks for liability-driven investing and goals-based investing, the focus for Seminar 2 will shift towards how to create them in the first instance. 

For the first two days of Seminar 2, Raman Uppal, Professor of Finance, EDHEC Business School  and Will Goetzmann, Edwin J Beinecke Professor of Finance and Management Studies at Yale SOM will talk about factor investing in equity markets: How to identify the main systematic drivers of risk and return in equity markets. How recent advances in portfolio construction techniques allow investors and investment managers to harvest those risk premia. 

What are the pros and cons of using smart factor portfolios? And what are the best market conditions for them to deliver performance? 

“The third and final day of the seminar will look at fixed income markets. This will be led by Riccardo Rebonato, Professor in Finance, EDHEC Business School, a former head of fixed income research at Pimco and one of the world’s leading experts in fixed income,” confirms Professor Martellini. 

If asset managers merely choose to keep doing the same business as they’ve been doing for years, pushing products and claiming that they are smarter than the market, the chances are their AUM will gradually erode. Investors will simply move towards those managers who are embracing this Industrial Revolution that Professor Martellini refers to, in the asset management industry. 

Anyone wishing to register for the academic programme and find out more details about the course can click on the following video link:

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