Pension funds’ and other end-investors’ confidence in asset managers has suffered alongside trust in investment banks, according to Bob McDowall, research director for Europe at research and consulting firm TowerGroup. He says, “People are asking, ‘Why have they been so slow in reallocating funds? Why have they taken nearly the same tumbles as a lot of markets?’”
But with the valuations in the equity markets bottoming out, says the analyst, the time is right for asset managers to re-engender the confidence of investors in the financial markets, and their own businesses.
TowerGroup’s recent report on the top 10 business drivers of 2009 in the European securities and investment sector ranks global financial markets’ interdependency, financial institutions’ access to and allocation of capital, and new market and credit risk regulation as they key themes for the next 12 months.
One of the biggest changes on the buy-side will be a greater spread of risk among fund managers by pension funds, says McDowall. “People will make smaller allocations and more allocations. Buy-side dealers will have to deal with many more small inflows of funds, so they will need to be operationally geared up for that, as that compounds the administrational pressure in the settlement space.”
Asset managers can also expect pension funds to analyse performance even more rigorously in 2009. “Normal half-yearly reviews, which are a fairly formal process, will be replaced with reviews maybe even as frequently as monthly. The whole process will become more continual,” McDowall predicts. Despite this, he insists that “shareholder tyranny” – pressure to produce quarter-on-quarter increased returns from listed companies – can no longer be exerted.
A “more realistic environment” will instigate a longer-term approach to investment and a return towards simplicity. Mandates that currently run to just two years or less should return to a three-to-five-year timeframe, says McDowall. “The constant stress on short-term performance turns investors into traders. That needs to be discouraged, not from a regulatory point of view, but in that end-investors need to set longer-term investment performance targets.”
Following the havoc wreaked by the sub-prime crisis on leading brokers, asset managers’ trading desks are likely to use a much wider range of sell-side counterparts in 2009. Buy-side traders will no longer automatically select brokers from the traditional list of bulge-bracket investment banks, argues McDowall. “Mid-tier brokers can provide as good if not a better service than the major investment banks, and some of the smaller brokers that follow small- and mid-cap stocks should also be cultivated,” he says.
Moreover, while some asset managers have tended to gravitate toward the same leading banks for all their investment and trading needs, in the current climate McDowall now advises them to use different criteria for different asset classes.
As noted in TowerGroup’s 2009 predictions, McDowall also asserts that financial regulation will be carried out on a more truly global level. As financial power continues to move from west to east, he expects the G20 to take over from the G7 group of industrialised nations as the key coordinating force. “That’s not to say that organisations like the Bank for International Settlements’ Financial Stability Forum won’t contribute, but the G20 will become the overarching body.”