Volatility is likely to be a major challenge for the asset management industry and institutional investors, as a lack of transparency and major concerns over the global economy persist, according to Nicholas Lyster, European CEO of asset management firm Principal Global Investors.
Whether the late summer turbulence represents the start of another recession remains unclear, and there are signals both ways, Lyster told CNBC.com in an interview from the firm's London offices.
"Typically you'd see a 15-20 percent correction like we've just seen and people would be saying 'that's a great buying opportunity', but there's still trepidation out there," he said.
Certainty has been undermined since the financial crisis of 2008, and with growth slowing in developed economies and both the USand the euro zonestruggling with sovereign debt, macro issues seem likely to dominate markets for some time, Lyster said, with persistent volatility the result, possibly for years to come.
The downgrade of US debt from AAA to AA+ by rating agency Standard and Poors earlier in August was not the watershed moment for investors that it might have been, given that most were more than aware of the country's debt mountain, according to Lyster.
"It's still very, very low risk," he said. Even so, he recognized that the reassessment of developed world sovereign risk is "a difficult [problem] that the industry has not really confronted yet."
"There's nowhere else to go," he said. "If you look at what are the alternatives for AAA, other than the German and French debt markets, in global terms, the UK market is very small, the Australian market is very small. So the market, while they've seen the US debt be downgraded, it hasn't stopped them moving into US Treasurys as a safe haven."
"I think to all intents of purposes, the US government is going to be paying its debt off. They have other options. Those are options which the euro zone doesn't have," he added.
Euro Zone Problems Harder to Solve
With Greece seemingly teetering on the brink of default between multilateral bailouts, and Italy and Spain being drawn into the crisis, the euro zone, with multi-speed economies and little currency flexibility, is going to be a far harder issue to solve.
"Maybe Greece shouldn't have been there in the developed markets. It definitely should never have been in the euro zone, there's pretty much consensus on that. It was just a political ploy," Lyster said.
So far, the measures taken to bail out Greece, Portugal and Ireland - all "relatively cheap to bail out," according to Lyster - are not enough to satisfy markets that the European leadership is capable of taking major systemic steps.
"I think the problem is the whole construct. Right from the beginning there were a number of people who said 'the euro doesn't work unless you have fiscal integration' and unless you take that step [now], we're not sure it will satisfy the market," Lyster said.
"If they do get that step, then maybe it's the last part of the march towards integration , but otherwise, it's like the emperor with no clothes, they can do all this fiddling around but not get to the nub of the problem: unless they get the Germans to sign up to this program, it ain't going to happen."
Responding to the accusation that markets have tended to be negatively biased towards all news from the euro zone, with an insatiable demand for sell signals undampened by the relatively major steps taken by European institutions, Lyster said:
"I think that if European politicians didn't recognize the importance of markets a year and a half ago, they now do. If only they'd dealt with this in a more robust, unified way early on, they might not be in the mess they are in now."
He added that, contrary to many Eurocrats' gripes, the market can be satiated.
"The next step towards integration is a step that half the euro zone appears not to be prepared to take. I'm not saying whether this is right or wrong, but if it was clear that they were prepared to take that step, markets would go 'wow', and then we would have faith in the euro zone and buy their bonds," he said.
Highly Diversified Portfolios Did Better
Lyster runs a multi-boutique asset manager, and recently acquired two London based firms – Finisterre, an emerging market debt hedge fund, and Origin Asset Management, which focuses on global equities.
Although pension funds - which are increasingly being challenged by their growing liability pots and stagnant asset pools - are bringing management in house, they are also more than ever willing to look at specialist mandates to fill specific roles in their portfolio – and pay for specialist managers to run them – Lyster said.
"I think in the past… the consulting industry, the asset management industry and, to a certain extent the clients, have been too focused on the sort of minutiae, rather than the broader picture of how do we help the clients meet their objectives," he said.
Clients have also been looking at asset allocation and multi-asset management again, according to Lyster.
"Asset allocation got a bit of a dirty name in 2008, everybody said it didn't work, diversification didn't work because everything went to a correlation of one," he said.
"Highly diversified portfolios did a hell of a lot better. They still, obviously, suffered, but they did a hell of a lot better."