Industry Study Shows Asset Management Model Is In Transition
Subdued asset growth to drive out mediocrity
Alignment of interest will take centre stage
Multi-boutiques to become dominant operating model
Operational excellence will become cornerstone of investor’s purchasing decision
London – An independent study from CREATE-Research, commissioned by Citi’s Global Transaction Services and Principal Global Investors (Principal), has found that asset management business models are in transition as the industry adapts to dominant investor concerns about liquidity and capital protection in a new, competitive landscape.
Based on a global sample of 237 asset managers from 29 countries, with combined AuM of US$29 trillion, the study entitled "Exploiting uncertainty in investment markets? aims to provide an early indication of how asset managers worldwide are adapting to the post credit crisis environment, what the emergent business models will focus upon and where growth will be coming from over the next three years.
Respondents to the survey estimate that asset growth will be dominated by significant rebalancing of existing allocations; with the volume of new money in motion remaining small. Over the next three years, only a third of assets will mark fresh inflows from Sovereign Wealth Funds, national pension funds / central bank reserve funds and DC and DB plans. The rest will be switched assets from wholesale packagers, DC plans helped by the closure of DB plans and outsourced insurance assets. As a result, competition is expected to intensify further as money moves between geographic regions, asset classes and client segments.
With an increasingly professional, more diverse and more demanding client base, asset managers are already improving their product proposition by enhancing capabilities in asset allocation (54%), absolute return (21%) and product innovation (53%). Furthermore, they are improving service standards and raising technical collaboration with consultants and fund platforms, to broaden distribution.
Prof. Amin Rajan, CEO of CREATE-Research and the study’s author, said, “The credit crisis is in the rearview mirror. But its after-shocks continue to rattle the markets, and a thick fog of uncertainty is presiding over the competitive investment landscape. The small group of asset managers who suffered least had clear financial and non-financial alignment of interests with their respective clients, backed by operational excellence. As a result, asset managers are turning the spotlight on their own offering. They are attacking inefficiencies that have long tended to conspire against the interests of their clients.”
Currently, 50 percent of asset houses operate as integrated producers. According to the study, the number will decline and multi-boutiques will become the dominant operating model among medium and large asset managers over the course of the next ten years. Currently independent boutiques represent 7 percent and integrated boutiques represent 28 percent of the market. Creating a small company mindset in a large company environment helps to foster principles of meritocracy, personal accountability and leadership. Being more nimble and focused, boutiques will be better placed to meet client needs.
Furthermore, over the next three years a fiduciary overlay will differentiate the winners from the losers. Success will require asset managers to exercise "duty of care? by developing a fiduciary overlay that delivers five things: consistent returns, a deep talent pool, exceptional service, a value-for-money fee structure and a state of the art infrastructure. The overlay seeks a three-way financial and non-financial alignment between: asset managers and their clients; asset managers and their professionals; their professionals and clients.
Nick Lyster, CEO of Principal Global Investors Europe, said, “It is apparent that the winning business model continues to be the one that puts clients first. In response, asset managers are targeting improvements that seek to position them as trusted advisers to their clients. A fiduciary overlay that overcomes behavioral biases, offers meritocratic incentives in which gains and pains are shared and develops common investment beliefs and time horizons will be critical. This model can already be seen in multi-boutique structures, which it is anticipated, will become the dominant organizational structure.”
The study further found that outsourcing of non-core activities will become a cornerstone of excellence. Stringent due diligence is the immediate outcome of the crisis with institutional clients and fund distributors no longer focusing on front office talent and track records when selecting managers but operational excellence and business resilience. As a result of the increased professionalization in the client base, there will be an increase in demand for accurate timely reports, regular ad hoc communication, prompt response times and queries, frequent valuation and investment reviews, performance attribution analysis, product sustainability, checks and independent stress tests on new products.
Strong in back office, such practices will spread to a number of high value added activities in the middle office. Ninety percent of respondents have or are planning to outsource custody and settlement, 50 percent have or will outsource valuation of illiquid investments, and 28 percent have or will outsource risk management. New outsourcing will deliver higher operating leverage as well as a raft of checks and balances that rank high in clients’ due diligence.
Neeraj Sahai, Global Head of Citi Securities and Fund Services, said, "The new alignment of interest will have to cover not only financials like fees, charges and returns but also involve non financials like service quality, product innovation, risk tools and operational excellence via outsourcing. For the second time in a decade asset managers are concentrating on their core capabilities and outsourcing the non-core areas.
“Third party administrators are now building a new generation of platforms, with enhanced line speeds, scalability and multi-product capabilities. Consequently, they are emerging as strategic partners, using their critical mass of clients to deliver operating leverage, delivering economies of scope enabling their clients to enter new markets in Asia, Europe and LATAM via UCITS funds. Post crisis, operational excellence is about doing new things to cope with the new reality, whilst also doing old things better. It is about ensuring that asset management remains a quintessential craft business but, with professional overlay of skills and infrastructure to exploit the opportunities created by the crisis.”
The full report is available at: www.create-research.co.uk
Citi, the leading global financial services company, has approximately 200 million customer accounts and does business in more than 140 countries. Through Citicorp and Citi Holdings, Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Additional information may be found at www.citigroup.com or www.citi.com.
The report entitled, “Exploiting Uncertainty in Investment Markets” was jointly issued on 28 June 2010 and includes the results of a survey of 237 asset managers, pension plans, pension consultants and fund distributors from 29 countries, with combined AuM of US$29 trillion. The research was commissioned by Citi and Principal Global Investors and was conducted by Create research.
CREATE is an independent think tank specializing in strategic change and the newly emerging business models in global financial services. It undertakes major research assignments for prominent financial institutions and global companies. It works closely with senior decision makers in reputable organizations across Europe and the US. Its work is disseminated through high profile reports and events which attract wide attention in the media. Further information can be found at www.create-research.co.uk.
Global Transaction Services
Global Transaction Services, a division of Citigroup’s Institutional Clients Group, offers integrated cash management, trade, and securities and fund services to multinational corporations, financial institutions and public sector organizations around the world. With a network that spans more than 100 countries, Citigroup’s Global Transaction Services supports over 65,000 clients. As of the first quarter of 2010, it held on average $319 billion in liability balances and $11.8 trillion in assets under custody.
Principal Global Investors
Principal Global Investors is a diversified asset management organization and a member of the Principal Financial Group®. Principal Global Investors manages $222 billion* in assets primarily for retirement plans and other institutional clients, and draws from the expertise of over 400 investment professionals. The firm offers a broad range of investment capabilities, including equity, fixed income and real estate investments as well as specialized overlay and advisory services. Our global reach provides an information advantage in researching and managing investment portfolios. At the same time, we serve clients on a personalized basis and tailor our capabilities to specific client objectives and investment goals.
*As of March 31, 2010. Principal Global Investors is the asset management arm of the Principal Financial Group® (The Principal®)1 and includes the asset management operations of the following subsidiaries of The Principal: Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Spectrum Asset Management, Inc.; Post Advisory Group, LLC; Columbus Circle Investors; Edge Asset Management, Inc.; Morley Financial Services Inc.; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd.; Principal Global Investors (Australia) Ltd.; Principal Global Investors (Japan) Ltd.; Principal Global Investors (Hong Kong) Ltd.; and the majority owned affiliates of Principal International, Inc. Assets under management includes assets managed by investment professionals of Principal Global Investors under dual employee arrangements with other subsidiaries of the Principal.
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