Mind the Gap - Pension funds and Asset Managers need to better connect on tomorrow's products

Unless there is closer dialogue and further innovation, investors may be unwilling to buy new products from their asset managers, according to a new global research study* from CREATE, a UK-based think tank, co-sponsored by Citigroup and T. Rowe Price.

Based on survey and interview responses from three hundred asset managers and pension funds in 37 countries representing US$30 trillion in assets, the study found a disconnect between the views of these two groups.

Liability driven investments, portable alpha and hedge funds were cited by over 60% of asset managers as the products best suited to meet the needs of pension funds over the next five years. Yet these three were not even among the top five products mentioned by pension funds. For them, global equities ranked first with 55% of the respondents; liability driven investments were cited by only 27% of respondents.

While the research found that institutional investors do, in fact, want absolute return and liability matching products, as well as value-for-money fee structures, it also found that this evolving institutional investor demand requires significant innovation that makes these products more understandable, more transparent, less risky, more liquid, less volatile, and/or more customized. Further innovation is therefore likely as asset managers seek to stimulate demand by delivering better value for clients. Importantly, product innovation will also bring about improvements in the underlying processes and structures.

The study suggested that asset managers should increase their client focus and involve clients more in the product development stage. While many asset managers have produced new investment strategies, they are not necessarily what pension plans have wanted or have believed they will need. This gap in perception demonstrates that the asset management community is not communicating sufficiently well with clients.

The report found that asset managers need to reinforce business basics to engender greater client confidence and understanding. Credibility built on an established track record, synchronicity based on greater alignment with client interests, and organisational stability defined by the ability to replicate past successes will be the future drivers of ultimate success.

"These principles will force an ever sharper focus on protecting and perpetuating core competencies. They will also shine a spotlight on the efficacy or fecklessness of business strategy and its execution," said Todd Ruppert, CEO and President of T. Rowe Price Global Investment Services Ltd.

One of the by-products of this focus on business basics will be the potential decoupling of manufacturing and distribution. The latter will be increasingly dominated by a new breed of professional buyers and assemblers with primary loyalty to their end clients. This trend will spread from the US to Europe and Asia.

Another finding is that administration will be increasingly outsourced. Its next wave will focus on high value-added services, as scalable platforms come on-stream, creating a new infrastructure of skills and technology.

"Asset managers who want to thrive will have to turn conventional wisdom on its head by growing the business while reducing costs through alliances with strategic partners who offer best-of-breed solutions," said Neeraj Sahai, Global Head of Securities and Fund Services, Citigroup Corporate and Investment Banking.

The report argues that meeting institutional investor needs over the rest of this decade will drive asset managers into significant alliances involving activities in front, middle and back offices. This fragmentation will occur alongside further consolidation which will focus on acquiring skills or extending geographical reach in search of new assets.

"As clients are going back to basics, so are asset managers. They will reinforce the craft nature of the industry as it revisits its time-honoured mission to deliver superior, risk adjusted returns" added Amin Rajan, the report's principal author and CEO of CREATE.

The report concludes by warning that the return to basics will be harder than it sounds. It will force major changes in business strategy, client relationship, innovation practices and leadership capability. Execution skills will be a key differentiator as the industry fragments and acquires greater complexity.

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*This study is based on a postal survey and structured interviews with top executives in 300 asset managers and pension funds in 37 countries, with assets of US$30 trillion.

It is the largest and first study of its kind to look at product innovation and how it will fragment the asset management industry. Its publication has been sponsored by Citigroup and T. Rowe Price.

CREATE is an independent research centre that focuses on emerging trends in asset management and the strategic changes they require.

It has published a number of reports and articles on the industry based on a research programme that started in the 1990s.

About Citigroup Corporate and Investment Banking
Citigroup Corporate and Investment Banking is the most complete financial partner to corporations, financial institutions, institutional investors and governments in the world. As a global leader in banking, capital markets, and transaction services, with a presence in many countries dating back more than 100 years, Citigroup Corporate and Investment Banking enables clients to achieve their strategic financial objectives by providing them with cutting-edge ideas, best-in-class products and solutions, and unparalleled access to capital and liquidity.

About Citigroup
Citigroup (NYSE: C), the leading global financial services company has some 200 million customer accounts and does business in more than 100 countries, providing 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. Major brand names under Citigroup's trademark red umbrella include Citibank, CitiFinancial, Primerica, Smith Barney and Banamex. Additional information may be found at www.citigroup.com

About T. Rowe Price
Founded in 1937, T. Rowe Price is an independent, global investment management firm serving institutional investors and financial institutional distributors worldwide, as well as full service defined contribution plan sponsors and retail investors in the US. T. Rowe Price Global Investment Services Limited is a wholly owned subsidiary of the T. Rowe Price Group Inc., a Baltimore-based global investment management holding company. T. Rowe Price Group, Inc. is publicly traded with substantial employee ownership and is included in the S&P 500 Index. With more than 4,000 employees, including over 235 investment professionals, T. Rowe Price has offices in Amsterdam, Baltimore, Buenos Aires, Colorado Springs, Copenhagen, Hong Kong, London, Luxembourg, San Francisco, Singapore, Stockholm, Sydney, Tampa and Tokyo. Further information about T. Rowe Price can be found at www.troweprice.com/institutional