Executives from PIMCO, TIAA-CREF and Neuberger Berman discussed the changing forces of regulatory policy on the asset management industry at the 2014 SIFMA Annual Meeting Monday in New York City. The cost of regulation, its effects on liquidity and the opportunities regulation creates for asset managers were major themes for the “Investing in a New Era: The View From The Buy-Side” panel.
All the panelists agreed that some of the new regulation created after the financial crisis has produce burdens for asset managers. “Good regulation has to allow for good growth,” said Douglas M. Hodge, PIMCO’s CEO. A lack of uniformity in regulation has made relatively nimble organizations, like asset managers, “much more functionally heavy,” said Robert G. Leary, president of TIAA-CREF Asset Management. “I’m not sure the benefits outweigh the costs,” he noted.
Regulation hasn’t been all bad for asset managers. Mid-sized asset managers have taken advantage of the tougher regulatory environment banks have faced by buying assets banks were forced to sell to meet higher capital requirements or comply with the Volcker Rule, said George H. Walker IV, Neuberger Berman’s chairman and CEO. “There are real opportunities for us,” he said.
Liquidity is a major concern for asset mangers as a liquidity crunch in mid-October sent the bond and stock markets on a downward spiral. “[Liquidity] is there until it isn’t. And that’s what we saw Oct. 15,” Hodge said. “There was no backstop. There were no balance sheets to absorb or attenuate the volatility,” he noted. Walker said the discussion about liquidity has changed at the board level of his company. “We’re in a new world and greater attention is paid [to liquidity],” he said. Neuberger Berman is most concerned with the liquidity of the bank loans its funds hold. He calls the current 20-day process for settling bank loans “too long.” TIAA-CREF’s Leary is worried about how well the exchange-traded fund market would react to a serious liquidity downturn because it hasn’t been tested in a liquidity crisis.
Hodge would like to see the Federal Reserve improve its communication to market participants to avoid another “taper tantrum” that upset markets around the world. “For policymakers, that signaling mechanism will be really important as we start to evolve monetary policy, particularly here in the United States,” he said.
Leary said that the asset management industry needs to educate investors more about target-date funds, which are the default investment option for many retirement plans. “I’m not convinced that investors know what [target-date funds] are all about,” he said.
A new regulatory environment means asset managers should be creating innovative products that react to the risk environment and the prospects of low returns for traditional asset classes. “We are living in a world of low interest rates and flat yield curves, not just here in the United States, but around the world,” Hodge said. “We are all going to be challenged … What this calls for is intelligent products and creative strategies.”