Our Lives in Their Portfolios: Why Asset Managers Own the World by Brett Christophers

Author:Brett Christophers
Language: eng
Format: epub
Publisher: Verso

Financialisation?

Asset managers invest in housing and other infrastructural assets to make money for their external investor partners and for themselves. Granted, there are, as we saw in Chapter 2, a series of rationales specifically for real-asset investment that are peculiar to this asset class, including its perceived capacity to provide a hedge against inflation, and the fact that returns are not necessarily correlated with returns on equities and bonds. Nevertheless, the principal reason for asset managers to invest in real assets is the exact same reason that they invest in any other type of asset – to generate investment returns for their clients.

In fact, generating investment returns is an even stronger motivation in alternative asset management than it is in the asset management business more generally. The explanation for this has to do with fee structures and business models. In the ‘mainstream’ asset-management business of investment in cash, bonds and public equities, performance-based fees generally play only a limited role. Either there are no such fees at all, as for instance in the case of index-tracking funds, which have become increasingly dominant in recent times, or the fees tend to be relatively low. Instead, the mainstream asset manager’s remuneration consists largely of management fees, which are based not on the performance of investments, but typically on the amount of capital that has been committed by the client.

Of course, a mainstream asset manager does nonetheless care about investment performance: if returns consistently under-perform, clients will ultimately take their money elsewhere, and management fees will suffer. But an alternative asset manager cares about investment performance in a much more immediate and fundamental sense. This is because performance fees represent a far more significant element of an alternative asset manager’s business model, and – assuming the model’s successful implementation – they account correspondingly for a far greater proportion of such a manager’s overall revenues. Whereas the likes of BlackRock, State Street and Vanguard – the ‘Big Three’ index-fund managers – are predominantly passive investors, rarely charging performance fees, unlisted real-asset funds (together with hedge funds and private-equity funds) are all actively managed, and substantial performance fees are invariably charged.

Compare, by way of illustration, BlackRock and Blackstone. At BlackRock, for which alternatives represented at the time less than 3 per cent of assets under management, performance fees generated only 3 per cent of revenues in 2019.40 At Blackstone, for which alternatives represented 100 per cent of assets under management, performance fees generated fully 40 per cent of revenues in the same year.41 Both are asset managers, but in reality they mostly operate in different businesses.

All of which is to say that, for the companies whose businesses we are primarily concerned with – the Blackstones, Brookfields and Macquaries – investment performance is paramount, as indeed it also is, of course, for BlackRock’s own (proportionately small) real-assets arm. Maximising returns on investment is the absolute sine qua non. Whatever aspect of asset managers’ real-asset investment operations one might hold up for consideration, this ineluctable commercial imperative

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