BNY Mellon Asset Management Stable Is Poised To Offer a Range of Products as Risk Appetites Change

Originally published June 22, 2009

The global asset management business has been shaken up by the consolidations of the past year caused by the economic crisis. One major change is the need for large global investment firms to apply more local business models in each separate market. Another is the comeback of fundamental analysis in asset management. Owned by BNY Mellon Asset Management, Dreyfus takes a specialized approach within a large-scale family of money management boutiques with $880 billion in assets under management collectively. Dreyfus has 17 fund managers, both fundamental and quantitative equity management capability, REIT capability, and bank loan capability. The firm operates units in Edinburgh, London, Germany, Japan and Hong Kong. Global Investment Technology spoke with Phil Maisano, Chief Investment Officer, The Dreyfus Corporation, and Chief Investment Strategist for BNY Mellon Asset Management, who is a member of The Dreyfus Corp.’s operating and executive committees.

GIT: What are your biggest challenges as Chief Investment Strategist of BNY Mellon Asset Management, a leading global asset management firm?

PM: We try to give the kind of advice to investors that makes sense short-term and long-term. They’re not always consistent. We try to determine which asset classes are the long-term keepers and which assets come in and out of play. There are times when trading strategies matter and the certain forms — assets and/or strategies — make a lot of sense. If you look back four or five years, you might have been far more active in the private equity space than you would be today. That is not to say you might not want to be active again as prices correct. But there are periods when the asset classes are more or less attractive.

My role is to match the appropriate manager with the appropriate strategy. We use external managers in very specific asset ways. Our internal managers all do things slightly differently. Some are in the same asset class. Half of our subsidiaries are offshore. So we have the benefit not just of being able to manage assets, but having what I call boots on the ground in markets outside the US. We have people who are investing in their local markets with what I’ll call local expertise.

GIT: The buy-side business model is the elephant in the room. What are your thoughts on how it might change and what it will look like?

PM: The intermediary channel will emerge stronger over time. In the short term, there’s an awful lot to be sorted out. Some of the firms are going through that sorting right now. The Morgan Stanley-Smith Barney merger closed May 29, creating what may be the largest group of registered advisors, with the exception of Merrill Lynch. That consolidation is going to cause some change, but fundamentally, after what happened in the last two years, people are going to look for advice, so the advice model is still going to be there and be important to people. It may be held to a higher level of scrutiny. We have 17 [portfolio manager] options in our own shop. Just sorting through what we offer is a lot for an individual investor; we help them sort through it. Investing has become extremely complicated and while I would like to see us simplify it some, it can only be simplified so much with the number of options we offer.

GIT: There’s a lot of talk about back-to-basics. What does that mean?

PM: What it means from an investor’s standpoint and a manager’s standpoint is that people are going back to fundamental credit analysis when they buy bonds and not necessarily accepting what ratings agencies say. When you buy a stock, you look at the viability of the company during a downturn - as in the Graham and Dodd method. The highly technical derivative strategies are probably not going to be popular for a bit, but appropriate use of derivatives is still worthwhile.

You have to simplify it in the context of how you deal with a client. In almost every area, we are getting back to fundamental analysis. That will determine the winners and losers over the next several years. For example, people are asking what I would buy today. In spite of the fact that the lower quality companies have rallied much harder than the quality companies, I would continue to buy the quality companies — those with strong balance sheets, good cash flows and the ability to survive a prolonged recession. We’re hoping that the amount of liquidity that’s been injected into the system will bring us out of [the crisis] faster, but it might only serve to stop us from deteriorating. If that’s the case, strong companies have tremendous advantages. They will be able to acquire market share either through taking some of their competitors out or by being more competitive with their product. The survivors will be a lot stronger, but they have to be strong going into this to be survivors.

GIT: How long do you think it will be before the recession ends and we are back to an upswing?

PM: There are green shoots appearing everywhere, but those have yet to produce nor will they produce a growth in employment for a while. Until we see employment reversing — not just with fewer unemployment claims than the week before but with actually creating jobs — which is not likely until 2010, we’re not going to get consumers buying again. There is a feeling of ‘We survived nuclear winter, but we’re not necessarily back into spring.’ It’s going to take awhile for that. It’s good that the deterioration in consumer spending is slowing down, but I would like to see increases in that spending. We got a little boost in sentiment but the spending hasn’t come yet, and this is still an economy that’s pretty dependent on the consumer.

GIT: What will the future of wealth management look like?

PM: There’s a lot less to manage than there was. People are reassessing what they need to be comfortable in retirement. They had depended on their houses continuing to increase in value so they wouldn’t need to save as much. That’s why we had negative savings rates. But that has been abandoned as a savings strategy. Now you will see real savings. I would be shocked if we don’t see the savings rate get to 10 percent before the end of this year. That’s a good thing and a bad thing all at the same time. It’s 4 percent now and it was negative two years ago. People were actually spending their assets down, i.e. borrowing on their houses. That’s going to change for the wealthy, the wanna-be wealthy and even for the average working person.

The philosophy is changing across the board. We’re not going to get bailed out or be able to live well based on a single investment decision we made that we happen to be living in, or vacationing in. That’s been taken off the table which means they will have to figure out how to save and invest in securities, cash or bonds, that are not real-asset-related. I think that’s a good thing.

If the savings rate goes up to 10 percent, consumer spending is going to go down. That’s the way that piston works. It will take even longer to get the economy back up and operating again. Once it does, it’s better off for having the higher savings rate, because cost of capital will be very well controlled. That generational shift has to happen. For investment markets or securities markets to benefit, people must have some confidence in what they’re buying. We’ve done a pretty good job of creating doubt in the mind of the buyer.

GIT: What are the projections for what the competitive landscape may look like in 2011 or 2012, in the aftermath of the financial crisis?

PM: We believe the decline of asset values will lead to consolidations. We think we’re pretty well positioned if that happens. A truly excellent small firm, a boutique firm, will flourish no matter what happens. But if they’re not excellent, if they’re only good, they’re going to wind up being consolidated.

GIT: What’s your vision of what the asset management business should look like by 2015?

PM: A lot of it will depend on the individual institutions. There will be fewer players in 2015 than there are today. There will be very narrowly identified boutiques that do a great job in a very specific area and are willing to stay private and not do a lot of other things. But if you’re going to try to be any kind of multi-strategy group, it’s likely you will be consolidated.

GIT: What technology and plumbing are needed to support these changes?

PM: The proliferation of information makes, particularly with respect to asset allocation, the use of the technology absolutely required. Monte Carlo simulations have been trashed recently — but in fact, if you looked at the tails, they weren’t wrong. People just ignored the tails. What this experience over the last two years has probably taught us is to no longer ignore the tails.

GIT: Do you see the product mix or manager mix changing? How will the cost structure be different?

PM: In the foreseeable future, there will be more fixed-income, a little less equity. I’m not sure that will be forever, but certainly for now. We got pretty overweight in equities almost across the board. Those who were counting on having a certain estate value at retirement will want more stability in asset allocation, which means more fixed-income. There will be pressure on costs for those who perform only adequately but not exceptionally.

GIT: What are your goals and views in your role as part of the Dreyfus’s Executive Management and Operating Committees, with respect to how the firm operates, deploys technology, and outsources any tasks?

PM: Investment performance has to be well above average for us to gain the recognition we want. We’re well on the road to that and have lots of options in which to invest. The technology supporting our client service individual accounts and the wire houses that are aggregating accounts has to be in the top quartile of whatever group we’re measured against. That’s clearly our goal and we think we have actually  gotten into that space. We offer enormous choice. That will be important. We’re currently offering well over 100 funds. We believe that choice will be important and we will continue to have a robust offering. Clients expect that. At the end of the day, you have to be fairly priced. You don’t win by being cheap, but you certainly will be cast aside if you’re expensive.


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