No, Mr. Gilbert hasn’t lost his mind – the theory has some valid points.
The asset management industry isn’t doing well presently. Active products have fallen out of favor and margins are plunging.
The majority of money management firms are in decline, and it’s likely because of fees and underperforming index-tracking funds.
Is there anything that can turn the tide?
Epsilon Theory says yes, and refers to an old Star Trek episode when the crew was faced with an exercise designed to be “unwinnable.” Captain Kirk was able to beat the exercise by “changing its parameters.” Kirk said he didn’t believe in a no-win scenario so instead “reprogrammed the simulation.”
Active managers might also want to consider “changing the parameters,” and follow the suggestions of Epsilon Theory and move discussions away from costs. Those struggling most are the mid-size firms that need to start focusing heavily on differentiation. Standing out from the crowd is their key to survival.
There’s a continuing trend of firms wrapping ESG factors into their current product offerings. The socially responsible investment industry continues to gain traction and is currently over $20 trillion AUM. These at-risk managers would be well served to focus on the ESG industry investing in individuals and data that can help them build this particular niche.
As they say on Star Trek, “live long and prosper,” and these managers will need to adapt in order to do just that.
You can find the full Bloomberg piece here.