Industry Study Shows Asset Management Model Is In Transition
US to play leading role in investment and administration
- Alignment of interest will become center stage
- Subdued asset growth to drive out mediocrity
- Multi-boutiques to become the dominant operating model
- Operational excellence will become a cornerstone of the investor’s purchasing decision
- Opportunism in the United States
New York - June 28, 2010 – 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 $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 (SWF), national pension funds, central bank reserve funds and defined contributions (DC) and defined benefits (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.
In the United States, asset allocation will be a pragmatic blend of caution, diversification and (most importantly) opportunism. Rising investments in equities and bonds by sovereign wealth funds will favor big US managers. American asset managers are becoming intent on cultivating a new generation of clients at home. With an expected market and asset new client growth of 32% in the next three years, North America will be the third most important growth point. Currently, the east is consuming more and saving less - while the west is saving more and consuming less. As a result, the US will remain the epicentre of the global economy and the asset industry. The study examined the investment value chain and its competitive dynamics over the next three years and found that the US had the greatest competitive edge relating to investment and administration. The outsourcing business model is one that has already been adapted and embraced by US asset managers as they see the value of gaining efficiencies in a new, competitive landscape. The post-credit crisis environment has further spurred this trend, as evidenced by this research.
Prof. Amin Rajan, CEO of CREATE-Research and the study’s author, said:
"The credit crisis is in the rear view 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% 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% and integrated boutiques represent 28% of the market. Creating a small company mindset in a large company environment helps to foster principles of meritocracy, personal accountability and leadership.
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.
Barb McKenzie, Chief Operations Officer of Principal Global Investors, said:
"The research indicates that operating models are responding to new needs created by the crisis and that multi-boutiques will be a prevailing model over the next decade. Being more nimble and focused, boutiques will be better aligned with client priorities.
"Multi-boutiques are effective in dealing with two primary issues faced by investment managers. First, they can afford to build strong, consultative relationship management teams to work directly with clients in finding appropriate solutions to meet their needs. This aligns boutiques well to compete in a world where clients desire a more consultative approach to doing business. Second, they can effectively manage the diseconomies of scale faced by managers. This means that they are less prone to running out of capacity in capabilities of interest to clients."
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.
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 $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 organisations 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.
Citi, the leading global financial services company, has approximately 200 million customer accounts and does business in more than 140 countries. Through its two operating units, 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, transaction services, and wealth management. Additional information may be found at www.citigroup.com or www.citi.com.
About 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.
About 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.
1"The Principal Financial Group" and "The Principal" are registered trademarks of Principal Financial Services, Inc., a member of the Principal Financial Group.