“We are looking at finding a way to create vehicles that marry longer term, longer date, less liquid assets with vehicles providing greater liquidity.”
The firm has developed some fund of hedge funds products that provide daily liquidity, but overall, creating such hybrid products is a big challenge, he added.
“The less traditional the product, the longer the time-to-market, the more challenging it is to get it structured just right for regulators and distributors. We haven’t seen a proliferation of products in alternatives, but it is coming slowly.”
Sullivan said the fund industry is undergoing a bifurcation into classic active and more customised next-generation strategies.
“Classic active are benchmark-relevant, style-box strategies that compete directly with the passive space. Everybody’s got them. We’ve got a significant amount of AUM in this space.
“There’s not much growth in classic active, so our strategy is to take marketshare,” he said, adding that he believes the firm’s fund performance and distribution channels provide an advantage. According to Sullivan, Legg Mason strategies, representing 80% of assets under management, beat their benchmarks in 1,3,5 and 10-year horizons.
Next-generation products, where he said the firm is seeing growth, involve strategies that are “outcome-oriented, absolute return, unconstrained, often international and with more customisation”.
The new competitive dynamic is the move to customisation. “Investors want to customise their strategies rather than taking off-the-shelf products. We believe it’s not a fad but a long-lasting trend. The conversations our affiliates are having in this area are heavy.”
In Asia, ultra high net worth individuals have been too concentrated on high yield and now they are looking for unconstrained capability in products, added Freeman Tsang, director of business development.
Sullivan said the firm has the landscape of basic strategies covered and it is looking carefully at more alternative products such as private equity, real estate, energy and infrastructure.
“They are far less liquid strategies and typically, they are incongruent with what the retail investor wants, which is daily liquidity. But at the same time we see these as enduring asset classes both institutional and retail investors want to have access to.”
A theme in Asia is to encourage investors to diversify and educate them to think outside the box, he said.
“Investors need to think about going beyond traditional investing and go beyond the borders to be fully diversified.”
Legg Mason had 80% year-on-year sales growth in Asia for the most recent quarter ending 30 September, Sullivan said. However, the results refelct the acquistion of Scotland-based equity specialist Martin Currie, which manages assets in Asia. Earlier this year, Legg Mason also acquired New York-based QS Investors, a global quantitative equities provider.
Sullivan estimated that 38% of his firm’s business is sourced outside of the US. The goal is to get the balance between US and international buisness split evenly.
“The US represents half the world’s AUM, but it is growing slower than the international space.”
Lennie Lim, the firm’s managing director and regional head of Asia, discussed his firm’s Asia strategy in a previous FSA article.
Fund houses are facing competitive pressures, in part because larger global private banks are shrinking the number of asset managers they work with while under increasing pressure to build up due diligence processes and reduce fees.
A fund house has to be careful about over-concentration in one distributor to avoid getting squeezed, Sullivan said.
Small- and mid-sized fund managers have a tougher time due to rising operating costs, he added.
“Take one example, cybersecurity. For a small asset manager, the resources needed to devote to that are overwhelming. Regulatory and technical requirements for fund houses are increasing and scale really matters.”