With fund management moving out of a period of ‘comfortable consensus’ in asset allocation and portfolio theory, the state of the asset management industry is currently one of ‘shifting tectonic plates’, said David Spina, chairman and CEO of State Street. Addressing the 12th international Fund Forum in Rome, Spina said that the possibility of a sustained period of weak markets raised questions about the future of the industry; a future which is less than clear. Some delegates went one step further and talked of current ‘asset misdirection’. Yet looking ahead, a single model would not prevail, said Spina and the trend would see a move away from the generalist manager to specialisation. Forces of globalisation, significant technological progress and evolving legal frameworks were also drivers of future uncertainty about the state of the industry.
More immediate concerns have prescribed a need for co-operation rather than competition amongst Europe’s fund management leaders. “There’s an immense danger that we’ll just get picked off by regulators, governments and the sell-side of the industry if we don’t work together”, said Lindsay Tomlinson, chief executive of Barclays Global Investors in Europe. Threat of costs from future regulatory measures or legislation comes at a time when the fund management industry is engaging in discreet, yet decisive cost-cutting. As Martin Gilbert, chief executive of Aberdeen Asset Management said, “bonuses and renumeration will be down dramatically”. It is fundamentally a matter of where people are adding value, commented Tomlinson.
There would be further consolidation in the fund management industry, said Gilbert and he believed that acquisitions did work and would continue. But, as Jenkins said, many fund managers would not make it at their current size. Jeff Peek, head of Credit Suisse’s fund management house predicted small boutiques as doing very well, concurring with the idea that specialist, niche managers would prosper with current market trends away from the balanced manager. Yet, amid recent accounting scandals such as Enron and Worldcom, “clearly if there’s more we’d head for lower equity levels”, said Peek.
In consideration of equities losses and the end of the bull market, did hedge funds – which offer absolute returns to investors – provide a way out? Robert Jenkins, chief executive of F&C Management was sceptical. “You have to wonder whether everyone getting into the hedge fund business can add value and be successful”.
Whatever the doubts, as Gary Smith, head of alternative investments at ABN AMRO said, hedge funds are an alternative asset ‘rising up through the ranks’. Although still a very US-centric business, the growth of the hedge fund universe in Europe has been substantial, 80% dominated by funds under $100m. The offer of absolute returns to investors; attractive risk/return characteristics; positive returns when the market is down have all made hedge funds popular. Moreover, they offer advantageous fees to businesses.
Alternatives will clearly be high on the agenda looking ahead. “An industry which is probably 10% of the size of traditional asset management industry, but by 2005 will equal it in terms of profitability and economics,” said Ahmed Fahour, CEO of Citigroup Alternative Investments. Contrary to popular belief, alternatives reduce risk, said Fahour, terming them as an ‘efficient frontier’. Although the hedge fund industry was typically dominated by high net worth individuals, pension funds and insurance would still dominate the alternatives scene overall.
Joachim Faber, CEO of Allianz Dresdner Asset Management, said it is European pension reform which provides the ‘strongest opportunity for fund managers’. As Scott Donald, director of marketing and product development at Frank Russell said: “Across Europe a dynamic of change is about to be unleashed, but different countries have different starting points.”
Taking the UK example, David Butcher, CEO of Invesco Life, considered the move from defined benefit to defined contribution. Pensions may well be couched in apocalyptic-type language, said Butcher, but the effective retirement age is trending up. It is a ‘glimmer of good news’. The trend to DC was ‘unstoppable’”. FRS17 – which is to be deferred – may have been the final straw, yet it was the messenger rather than the driver of this trend. Butcher thought that by 2010, all DB schemes based on final salary in the private sector would have gone. However, DB would continue but on a ‘career average type basis’ and DC could be the dominant form of provision.