While the financial crisis and the resulting losses will prompt asset managers’ end-clients to seek simpler investments, they will still require investment firms to be opportunistic, according to a new study from independent financial services think tank CREATE-Research.
The report, ‘Future of Investment: The Next Move?’, which was commissioned by banking group Citi’s Global Transaction Services division and asset management firm Principal Global Investors, stated that most clients realise buy-and-hold strategies amount to wishful thinking.
“Being pragmatic, [clients] will focus on liquid asset classes, backed by opportunism in debt markets, emerging markets as well as equity markets,” the report said.
The study polled 225 asset managers from 30 countries who were collectively responsible for $18.2 trillion of assets as of April 2009 (down from a peak of $24.4 trillion in July 2007). Some 40% to 60% of respondents expect defined contribution clients to chase returns and liquidity; and 20% to 60% expect them to engage in opportunism. In addition, 43% to 63% of respondents expect retail clients to chase capital protection and income upside; and 22% to 39% expect them to be opportunistic.
Asset managers have had to make a number of business model changes to cope with the crisis. The study noted a shift towards a variable-cost model from a fixed-cost one, where costs are linked directly to revenue through variable pay, slimmer product range and strategic outsourcing. “The industry never had a variable cost bug. Now it is catching on, owing to a lethal combination of market falls and high redemptions,” the report said.
It also asserted that large asset managers should not try to be all things to all people. “More than ever, large asset managers are now recognising that they cannot be Jacks of all trades and masters of none,” the report said. “They are forced to make a choice between manufacturing and assembly. The latter is emerging as a major competency in its own right, as sub-advisory mandates have taken off.”
The study stated that no single, dominant vision of the future was predicted by the asset managers surveyed. At one extreme, 34% of respondents expect the industry to become commoditised as a result of regulation and clients’ increased risk aversion. At the other, 17% of those surveyed expect the industry to become more vibrant, with a closer alignment of clients’ and asset managers’ interests.
In the middle, 49% expect a segmented industry, characterised by consolidation, separate groups of firms that excel at serving different client segments, alliances across front, middle and back offices and a changed fee structure that delivers a closer alignment of interest.
Nevertheless, the report said one outcome is certain. “There will be no return to business as usual. Equally, the future will not follow a pre-determined path,” the report said. “As in a game of chess, final outcomes will depend upon the quality of moves made by asset managers at each iteration.”