In a recent reading of Validea’s Guru Investor Blog, a quote from Georgetown University finance professor James Angel struck home to me: “One of the open secrets of the financial-services world is that we’re also in the entertainment and gaming industry.” In order to see why the analogy fits, it is worth looking at the structure of the financial services industry. In the following, we look at the managers, their clients, and the mangers’ marketing approaches.
Pensions and Investments (P&I) surveyed 565 financial managers. They found they are managing just under $68 trillion. And as Table 1 indicates, each of the top ten is managing at least $1 trillion.
Table 1. – The Largest Global Money Managers
Source: Pensions and Investments
The Target Markets
A good portion of these funds are being managed, directly or indirectly on behalf of individuals. Table 2 presents data on the assets and liabilities of US households. Households own directly almost $18 trillion. They decide how to invest these funds. They might have advisors, pick stocks individually or buy mutual funds or exchange-traded funds. In the case of their pensions, mutual funds and insurance, they defer to others to make specific investment decisions for them.
Table 2. US Households Assets and Liabilities, 2018 (bil. US$)
Individuals have $23 trillion in pension claims but Table 2 indicates they only have $19 trillion in “funded pension assets.” So how do pensions invest their monies? Most pension funds take steps to avoid direct liability, so they create investment committees. These committees also want to deflect direct responsibility, so they hire recognized advisors. These advisors do not decide how to invest their monies. Instead, they again deflect responsibility by recommending managers and the sorts of investments the managers should make.
Like other industries, these managers have to promote themselves to get clients. And certainly, they try to do this in an entertaining way. And like gaming firms, they are in the risk-taking business. I recently did a piece comparing money managers’ marketing promos for wine. Table 3 lists terms used to market securities. The columns include sector descriptors and marketing terms. Note that however invested/promoted, the assets of all money managers plummeted in the 2008-09 selloff.
Table 3. – Asset Class/Sector Descriptors and Marketing Terms
Source: Mostly Pensions and Investments
What Are the Consultants Convincing the Pension Funds To Do?
Pensions & Investments provides details on the moves of pension funds. Here is a sample:
The consultants to these funds are quite imaginative.
I return again to the Angell quote: “One of the open secrets of the financial-services world is that we’re also in the entertainment and gaming industry.” It appears to be valid. And indeed, the consultants and managers they recommend are doing very well by their actions.
I close with a quote from Warren Buffett:
“Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.”