For several years, some economic prognosticators have been warning that the ten-year bull market can’t last. Lower than expected economic growth, China’s sagging economy, and ongoing trade war fears have stoked predictions that a recession and an accompanying bear market may begin sometime in 2020.
Some portfolio managers and analysts now working for boutique asset managers were in high school during the Great Recession of 2008-2009. They have no real memory of how bad the bad times were. Instead, they rely on backtesting, rather than real life experience, to simulate how their funds might have performed in bear market.
Make no mistake about it. At some point, the bad times will return. When they arrive, some asset managers will find new revenue opportunities, while others will need to go into survival mode. The smart firms will anticipate where they could end up and start preparing for the inevitable.
Equity funds: Anticipate a rough ride
If you’re an equity fund manager, you may want to start estimating how negative returns and investor outflows could affect your revenue. You may want to create contingency plans now to reduce budgets and headcount and delay non-essential expenditures so you won’t have to scramble to make these executive decisions at a time when your efforts should be focused on minimizing losses of assets and investors.
Bond funds: Capitalize on the flight to safety
If your firm specializes in investment-grade bond funds, now might be the time to prepare to capitalize on the “flight to safety” that inevitably occurs during economic downturns. Investors tend to be less concerned about maximizing yields than in protecting capital, and if falling interest rates drive up the prices of your bond holdings, your messaging can focus on total bond returns in a bear market.
Active managers may emerge from the passive shadows
Passively managed funds and ETFs have been the biggest beneficiaries of the sustained bull market, since the relative performance of most actively managed funds hasn’t justified their added costs.
In theory, the best actively managed funds should be able to ride out market volatility better than index funds since they don’t have to hold positions in all of the “movers and shakers” that index funds must. However, most investors won’t take this claim at face value. They’ll only trust active funds that have beaten their benchmarks for at least three years to prove that performance is the result of skill rather than luck.
The importance of crisis communications
Whether your recession strategy reflects a glass half-full or half-empty outlook, the strategies you use to either retain clients or convert prospects during a bear market will be critical. When the time comes, resist the impulse to gut your sales and marketing budget. Instead, focus on spending a smaller pool of money on initiatives that focus solely on quantifiable client retention and acquisition rather than brand visibility. Reduce your spending on print and online advertising, corporate sponsorships and SEO consultants and shift it to the production, promotion and distribution of whitepapers, webinars and conference calls featuring your portfolio managers.
It is possible that the doomsayers are wrong and that the economy and the market will remain on the upswing for several more years. Even if you share this belief, there’s no harm in getting a head start on planning for the inflection, including creating various “what if” scenarios that can create realistic expectations for your funds’ returns and for your bottom line.
Dan Sondhelm is CEO of Sondhelm Partners, a firm that helps asset managers, mutual funds, ETFs, wealth managers and fintech companies grow through marketing, public relations and sales programs. Lick to read Dan’s latest Insight articles and to schedule a complimentary consultation.