I was recently invited to speak at Wharton’s annual Investment Management Conference to discuss some of the most pressing issues currently facing executives in the investment management field.

I joined Bruce Herring (Group Chief Investment Officer, Fidelity Management and Research), David Antonelli (EVP, MFS Investment Management), Avi Nachmany (Director of Research, EVP, Strategic Insight Mutual Fund Research & Consulting) and David Silvera (Managing Director, Rosemont Investment Partners), on the “Business of Investing” panel. We spoke to a dynamic audience of 400 Wharton alumni, faculty and students about the challenges and opportunities of running investment businesses in today’s economy.

In competitive and challenging market environments, performance has been, and always will be, a factor critical to long term success. Over the last decade, however, investment management firms have expanded their thinking to include business management practices as key determinants of success. How, then, are these firms adapting to stay on the cutting edge?

At Sextant, we’re seeing firms re-examining their cost structures, talent pool, product offering and leadership in an effort to find ways to differentiate from the universe of asset management firms — both traditional long-only as well as alternatives structures.

• While the allure of jumping ship for a hedge fund may tempt talented money managers to leave the safety of their long-only platforms, many of these long-only platforms have retaliated by introducing or incubating new alternative strategies that will engage and challenge their investment talent—while also offering up the stability of deeper pockets, branding and resources. 

• Additionally, firms of all types are migrating away from the traditional style box product offering to a far more complex array of custom solutions that span alpha-only, beta-only, or portable alpha and liability-driven investment solutions for institutional clients.  This has forced a number of firms to conduct exhaustive product rationalization studies to determine profitability, sustainability, competitiveness and growth of product sets. In many cases, the war for talent has only increased as progressive money management firms seek talent that can allow them to jump start new areas of product growth. 

• We’ve observed that most firms are building talent and organizations around the notion that specialization can lead to greater arbitrage opportunities (e.g. sectors and sub-sector specialization in particular).  At the same time, firms have also ratcheted up their client-facing teams by hiring and developing talented professionals who can think outside the box — often assuming the characteristics of the portfolio managers they represent with little distinction between the “real” PM and the “faux” PM.  Many of these professionals were former portfolio managers who enjoy problem-solving discussions with increasingly demanding and sophisticated clients. 

• Finally, we believe that the best firms in the industry are stressing the importance of building a culture that will nurture and bond their teams in more collaborative and integrated ways.  Allowing young investment talent to find their voice early in research discussions by fostering and encouraging healthy debate is only one example.