Q1 Where do you expect organic growth to come from in the next three years – new asset types, client types, product types, market places? Please give details
Q2Are the perceived risks ahead for your business different to those you have experienced in the past few years – if so in what way – if not, in what way are they unchanged?
Q3Asset managers’ levels of profitability have been under scrutiny – what’s your formula for successful and profitable asset management?
Q4 Will Europe ever be as an integrated asset management marketplace as national markets are – if so, when? Please give reasons for your answer?
Q5 Which of the regulatory moves/market developments – proposed or on the way – give you most cause for concern?
Joachim Faber: CEO
1. In terms of new asset and product types, absolute return strategies from both long-only asset managers and hedge funds, total return bond funds and Asian equity funds. For client types, pensions/savings organisations in Europe and Asia but also broad demand from affluent retail clients. Market places: Europe, notably consultant-driven markets and pension opportunities in Germany, France, Italy, etc, and in Asia-Pacific, for example China.
2. a) Unchanged risks: volatility of capital markets (equity downturn and risk of rising rates). However, ADAM is capable of managing this risk thanks to a broad array of asset classes, products and investment styles. b) New risks: a critical/hostile regulatory environment, which, nevertheless is also an opportunity for our industry, and low-margin and indexed products.
3. a) Fulfil our mission: attract and retain the best talent, always apply the highest ethical standards, always be client-focussed. b) Disciplined cost containment. c) Autonomous investment processes in our firms/entities. d) Retention of key people.
e) Diverse product portfolio for all capital market scenarios.
4. For European asset managers to compete with the scale of US mutual funds, European regulators have to give them the opportunity to allocate demand across Europe into one single fund structure.
5. Unpredictable world politics, especially international terrorism.
Nicolas Moreau: CEO
1. From two sources: first, the reorganisation of pension funds and second, the growth of various DC markets across the globe.
The pressure that pension funds face due to market constraints will probably result in the death of the traditional balanced-funds mandate and it is likely to be replaced by either cash-flow-matching products, which help funds address future financial gaps, or specialist mandates. These changes will lead to large-scale reorganisation of funds and, as such, will play to the strengths of specialist managers or managers that can structure solutions. I believe we are very well positioned to address both challenges.
The other big area of growth will be in the various DC markets around the world. Here, we will focus on delivering investment solutions, product quality, client servicing, distribution and brand.
2. I don't think the risks have really changed, they have evolved but in nature are the same. Products and sales processes are more specialised, so operating risk is more costly and more complex to control. The other main risks, in my view, centre around the retention of teams and the market effect on their earnings. The only way to control the latter is through product diversification, and I spend most of my time on the former, which is critical for any fund manager.
3. To be successful, you need to either manufacture products that add value or have critical mass. AXA Investment Managers is positioned to add value and has several core-product groups that are sold with performance fees: private equity, real estate and active equity management. This charging structure represents a good way to share the value-added between the client and manager, help retain the investment teams and also to align the interests of portfolio managers and shareholders. Cost control is also critical. I am very much in favour of focusing on the strategic part of the business: managing money and servicing the clients. This was the basis for our recent decision to outsource our operations functions.
4. I believe Europe will be an integrated marketplace at some stage. Today, the two main issues to deal with are around the administration of funds and remaining local constraints. For me the first is the most critical as it is the most expensive to deal with. Currently, no single unified administrative platform exists that facilitates cross-border sales of funds in Europe. Multiple local and manual processes have to be undertaken. This issue will need to be addressed by the industry if a unified market is to develop. The other issue is around a single regulated market. We will undoubtedly see the effects of UCITS III, which is a step in the right direction, but I feel we will only really be unified when a single European regulator is in place. Today, too many constraints are put forward by local regulators.
5. Unbundling. I am in favour of a ban on soft commission but I don't understand how unbundling will work in a practical way. I believe that we could deal with that issue through transparency.
Brian Goggin: CEO
1. a) Geographically, Asia/Pacific and European operations and from Iridian Asset Management, the US domestic equity value manager we acquired in late 2002. The client base for both businesses is institutional and will remain so. b) In terms of asset classes, global equities, but with increased opportunities for fixed income while Iridian will continue to focus on the US institutional market for US value large- and mid-cap equities.
2. They are the same as always – that you fail to live up to your client’s expectations. Historically, client expectations might have been interpreted purely in performance terms, but given the regulatory failures of the mutual fund industry in 2003/2004, the interpretation has widened, and rightly so. That’s not to say that performance is not high on the agenda for institutional investors. It is, but they need to know that you are also observing your wider fiduciary obligations to them. That’s why we believe that having a strong compliance culture is central to our business.
3. Control of costs is obviously key. Thankfully, our business model lends itself to controlling costs and helps us maintain a favourable cost/income ratio by industry standards. Costs are also controlled through detailed annual budgeting and ongoing re-evaluation throughout the year, especially when markets are volatile.
There are good costs and bad costs – we believe that one should invest in the former and avoid the latter. In controlling costs, we take great care to ensure that any steps we take do not impact on the quality of service we provide to our clients.
4. It may be some time before we see this, at least from an institutional (particularly pension funds) perspective. Even among very developed European economies large disparities exist in pension infrastructure and tax regimes. I cannot see these gaps being bridged in the very short term, as the cost to governments and employers is likely to be punitive. However, having recognised that a true single market in financial services is vital to its economy, the EU is addressing the matter through its ongoing Financial Services Action Plan. Notwithstanding other impediments, this could produce some benefits in the medium term.
5. We welcome all measures that enhance investor protection, create confidence in the market and facilitate best practice. Throughout our global business, we keep well abreast of any such developments, both through our own research and through active involvement in consultations on new regulatory developments. While there are significant regulatory and market developments on the way — particularly in the EU as legislation works towards the creation of a single market in financial services — none give us any great cause for concern.
Barclays Global Investors
Nigel Williams: Head of European business
1. Asset liability-matching strategies are becoming an increasingly important focus for pension plans, which will drive growth. It’s an area in which we are already concentrating resources and providing advanced solutions.
Having enjoyed explosive growth during the last four years in Europe, exchange traded funds (ETFs) are set to continue to attract significant new assets. This growth will come as an ever-wider group of investors recognises the core advantages that these funds offer. Funds providing access to new markets, like the recently launched fixed income ETFs, should also support this expansion.
Structured products also appear well placed to grow in popularity as investment solutions offering specific return targets attract interest.
In terms of marketplaces, continental Europe and Asia should both enjoy growth going forward, with the intermediated segments of these markets leading the way.
2. In the main, the risks are the same It will always be key for us to deliver the level of performance that clients have come to expect – this will remain a clear focus for the business. We are also aware that the growth we’ve enjoyed during recent years introduces some risks. BGI has become a more complex entity, offering a wider selection of products in more markets, while also taking advantage of additional investment instruments including derivatives.
3. It’s a fairly simple approach at BGI: tight cost control, combined with revenue growth. BGI’s innovative approach to asset management goes back to the introduction of the first index funds 30 years ago, and it’s our ongoing innovation that will drive a continued supply of new investment products. Through these new solutions we aim to gather additional assets and grow our revenue base.
4. Not in my lifetime. Europe clearly presents some pretty significant hurdles that will not make it easy for an integrated market to emerge. Cultural differences, varying tax regimes and disparate regulatory requirements are all obvious factors standing in the way of an integrated European market. To overcome these issues, concerted political action would be needed, and that would require considerable desire and determination on the part of Europe’s policymakers.
5. Despite the fact that corporate governance has improved significantly over the past 10 years, it remains an area of concern. Market participants, including asset managers, the voting public and policymakers need to be clear about what they want to achieve through corporate governance to ensure positive progress is made. In the UK pension fund market, the switch from equities to fixed income may also cause fundamental problems in terms of the liquidity available in the bond market.
Hugo Lasat: Chairman of Dexia Asset Management executive committee
1. Over the last two years we have witnessed high growth in the institutional segments (public and private pension schemes, insurance companies) and this will continue. As investor confidence returns to normal levels, investors are again considering equities and diversified mandates instead of cash.
The debate on corporate governance and LT sustainable growth in combination with local regulatory initiatives will certainly continue to favour investments which take into account social, ecological and ethical criteria. This market has become mature in terms of solutions which combine SRI with the financial objectives and risk constraints of the institutional investors. The key to success in this field is being able to offer tailor-made solutions. With pension plans investing an average 2% in alternative investments and given the a-typical returns generated by these investment types, further growth can be expected. We see high growth coming mainly from southern Europe and Asia (excluding Japan).
2. In general the risks have not changed that much. Investor behaviour is still lagging market evolutions and despite all experiences this is still not changing. A new risk is that there are too many players in the alternative fund of fund arena, mostly with little or no expertise or added value. Many on the production sides are seduced by the rapidly expanding market. Too many new market entrants neglect investment processes with strict risk control and due diligence procedures, which should be an integrated part of a professional investment process. Clients should only consider well-established names.
3. We operate with a cost expressed in terms of AUM at 13 basis points. This has been achieved via an organisational framework, which is based upon centralised production in three non-overlapping production centres and decentralised sales and distribution. Dexia AM performed extremely well during the past bear market without any impact on the engine of our asset management company and continues to do so in these recently positively oriented markets. Net new cash as a proportion of AUM has exceeded 12% over the last 12 months.
4. One should never exclude anything, but the actual situation suggests that it will still take one or more decades before we could achieve an integrated European marketplace. The difficulties in appointing a new president of the European Commission and the very difficult road that had to be followed to achieve acceptance (to be confirmed in some countries via referenda) of the European constitution, are indicators of where we stand today. Differences in tax policies, social security and the implicit protectionism of certain member states are still important hurdles making an integrated European marketplace somewhat far away.
Goldman Sachs AM
Suzanne Donohoe: Co-head of GSAM Europe
1. We expect continued strong demand for uncorrelated and higher alpha strategies, and we are working closely with many of our clients to help them separate and maximise alpha return from beta and interest risk and return in their pension and insurance pools. As open architecture continues to grow in Europe we also would expect consistent growth in the third-party market, and we hope to grow our share along with it. Finally, we think growth will continue in a number of funded pension markets – Sweden, Holland, Switzerland – in addition to seeing opportunities arise in some PAYG markets.
2. People and performance are risks that remain constant. This is a people-intensive business. One of our greatest business risks is keeping our talent, and as the outlook for markets improves, we must remain especially focused on retaining our people. Our aim in keeping our teams together is to continue to meet the performance expectations of our clients. We take this responsibility very seriously; we are aware that it is a key risk we take on every day. Finally, it is clear that the ‘regulatory bar’ in our industry has been raised over the past year (appropriately so), and we continue to be vigilant in making sure we live up to our clients’ and regulators’ expectations.
3. Pricing discipline and scalable investment strategies underpin the profitability of our asset management business. Supporting this is thoughtful investment in technology and operations, which provide the flexibility and capacity to grow profitably.
4. No, at least not for a very long time. While Europe continues towards greater harmonisation of regulations, the reality is that differences in risk appetite, investor behaviour, existing national regulations, etc, cause some offerings to appeal to some investors and not to others. It is this dynamic that makes our market a particularly interesting and challenging one.
5. It is still unclear how a number of the issues raised in the investigations into the US mutual fund industry will play out worldwide, and in Europe in particular. We are continuing to monitor these developments and are keen to ensure that legitimate concerns to maintain a fair playing field between investors in the same share class are not misapplied in ways that could have unintended consequences and cause institutional investors to withdraw from the commingled market. This outcome could be damaging both to investors and to asset managers.
Roger Yates: Managing director
1. We anticipate that we will continue to see good growth in our higher-margin investment products – such as hedge funds, CDOs, offshore funds, US mutual fund range – property and private capital.
2. No they are broadly the same.
3. The keys are: a) moving up the margin curve via changing mix of products, emphasising mutual funds and alternative investment products; and b) cost control, particularly headcount which is approximately half of total costs.
4. As far as the regulatory environment is concerned, while we know the EU is trying to promote regulatory convergence on best-of-breed financial regulation, in reality I suspect at best this will result in a single regulatory authority in each market. In terms of product mix, I'd suggest that continental Europe is already pretty integrated, for example we have a successful range of offshore funds which we distribute across all key financial markets in Europe. While individual markets still differ in terms of elements such as compulsive saving and pension provision, the underlying drivers and the recognition of the need for financial provision for retirement remain the same.
5. I don't think there is any one thing that particularly causes concern, other than the resources which are required to meet current regulatory requirements, monitor and respond to proposals and consultation papers and, when new regulations come into force, to change our reporting and/or accounting procedures.
Angelien Kemna, CIO Europe
1. a) Client types: Insurance clients who outsource asset management.
b) Product types: manage the manager, alternatives.
c) Marketplaces: eastern Europe/China/US.
2. Yes, risks ahead that differ from those of the past few years are related to increased regulator scrutiny.
3. Keeping costs sufficiently under control although maintaining investments in human capital combined with maximisation of available (ING) distribution.
4. No. National markets are protected by national governments and different regulators.
5. Increased regulator bureaucracy/increased cost without real achievements regarding increasing transparency.
Jean-Baptiste de Franssu: CEO, Invesco Continental Europe
1. Organic growth in the short term will likely be fuelled by the changing sentiment in product type needs. We are beginning to see a concentration of demand at each end of the product spectrum between alpha and beta products. Today’s environment calls for asset managers to safely navigate market volatility (ie managing beta) while delivering consistent alpha through stock picking.
2. Perceived risks remain, but are accelerating. They are: a) volatility of the markets creating a need for asset managers to become more and more proactive in managing their product lines;
b) the demand for quality products in a cost-conscious environment; c) an increasingly competitive environment, especially from foreign asset mangers looking to capitalise on long-term opportunities in Europe; and d) increasing legal and compliance risks.
3. Best execution and putting clients at the heart of our business.
4. I don’t know if a pan-European market will ever be as integrated as today’s national markets. However, I believe the increasing demand for mobile work forces across national boundaries will continue to encourage the creation of one financial European market. In regards to the integration of asset management markets in Europe, time is on our side; but what is lacking is leadership from the industry to drive this forward.
5. We have much work to do to regain the trust and confidence of investors. However, the onus is on us and not the regulators to achieve this. My concern is not one particular regulatory move but rather that we do not over-regulate our industry and put in place an environment that is both too costly and that is inflexible for investors.
Gary Black, President and CIO
1. In the US I anticipate that organic growth, predominantly from the institutional segment, will come from our traditional core expertise – growth equities – where we have seen a strong uplift in our performance. We are also anticipating growth for global equities and we have expanded our global research capabilities to meet that demand. In Europe, I believe we and the industry will see continued pensions market demand for enhanced and actively managed products where many funds are looking to switch a proportion of their assets from passive mandates to claw back that extra 1-2% plus a year to meet their actuarial returns, but in a highly risk controlled manner. Many of these enhanced mandates will be for broad global mandates from the mature pension markets of northern Europe. More broadly in the industry absolute return products and global sector mandates will continue to be popular.
2. Risks today are as they have always been – under performance and under-investment in your assets (ie your people). To mitigate those risks I have to make sure we have organisational stability and the right incentives in place to make sure the best people remain at Janus to deliver that performance.
3. Our singular objective is to consistently deliver strong consistent performance over a market cycle across our core capabilities. Clearly, it is performance that ultimately drives flows and profitability. To get to that point and stay ahead of the pack means we have to continue to have the best research, ensure we hire the best people and focus our investments where we have a research edge. And if we don’t have the expertise in house then we’ll outsource to one of our subsidiaries or elsewhere, such as our risk managed subsidiary INTECH that without doubt is one of the gems in its category. On the other side of the equation we obviously need to keep a tight control on our cost base.
4. Unlikely, or at least not in the foreseeable future. While the EU is certainly heading in the right direction there is still a great deal of work to do. The problem is that many of the markets are at different stages of development and protectionist measures continue to prevent consistent national implementation of directives – particularly legal and tax obstacles. Punitive tax regimes benefiting domestic players or those with local operations still remain. New European rules need to be implemented domestically before we will truly see an integrated marketplace.
JP Morgan Fleming
Mark White: Head of the institutional business
1. First, the polarisation in the market between large global players and small niche providers means that these two camps are likely to capture market share at the expense of medium-sized players who lack a compelling proposition for investors and clients. The strongest product growth is likely to be in absolute-return and total-return products as investors continue to seek to escape subdued beta returns by moving away from benchmark-constrained strategies and focus on outperforming cash. The move towards funded social security in some European markets such as France also offers interesting opportunities to asset managers. Within the occupational market, the steady shift from DB to DC schemes also has important implications for where future growth for providers lies – manufacturers need to have a broad platform that can accommodate both DB and DC provision to flourish in this market.
2. There have been no significant changes in terms of perceived business risks. However, since the end of the bull market some risks may be more apparent than they were previously - a good asset manager knows he must be aware of risks to business in good times as well as bad. Key business risks surround retaining good people, maintaining superior performance, controlling operational risks and managing regulatory pressures.
3. Added value for the client (in the form of alpha generation and top-flight service) plus price discipline at all times. Provided the price you charge is proportionate to the value-add for the client, there is never a need to discount a high-quality product. By maintaining premium pricing, one can also maintain premium-quality business rather than going after poor-quality business on price simply to increase volume.
4. Measures such as UCITS III and the European Financial Services Action Plan are taking us closer. However, the European market will not be properly integrated until we have uniformity in financial policing and tax regimes.
5. The new framework for capital adequacy for banks imposed by the Basel II accord is a cause for concern and will have an impact throughout the financial system. The EU has decided that Basel II will apply to all investment companies and Europe’s asset management industry needs to consider how this affects European competitiveness compared to the US. There may be a significant impact on what products companies may choose to offer – for example, private equity could take up far more regulatory capital under the new regime. The growth in the hedge fund sector also needs to be carefully monitored. While there is plenty more scope for institutional investors to take advantage of hedging strategies, capital needs to be deployed extremely judiciously with the support of informed advisers who understand how this market works. Moves to make shorting strategies more widely available to the retail/defined contribution market are of particular concern. We would not like hedge funds to be the next big financial scandal among private investors.
Robert Helm: Managing director MEAG Munich Ergo AM in Munich
1. We expect that organic growth will come from the demand for total return approaches. There will be a shift from the focus on quantitative and mechanistic styles to opportunistic and strategic asset allocation-based styles. With respect to client types like medium-sized insurance companies and pensions trusts, they will outsource their asset management to a considerably higher degree than in the past because of the higher standard of risk management and balance sheet requirements.
2. The perceived risk in the past was the focus on relative return products, which led to disappointed investors who withdrew their money. In the future we must keep a close eye on risk stemming from total return products like timing and exit strategies.
3. Our formula for success and profitable management is based on our strategy of building up a second strong business pillar in addition to offering standard products with excellent performance track records but with a competitive pressure on the margin. We focus on supporting clients in the areas of strategic asset allocation and risk management so they feel that they have an asset manager who correctly understands his requirements and so that they entrust us with the larger part of their assets. MEAG’s competitive edge lies in the ability of its management, controlling and reporting functions to take into account all the requirements of risk budget, market perspectives and balance sheet demands of the total asset side.
4. Europe’s relevance is increasing but it will be many years before Europe is as integrated an asset management market as at the national level. The language barrier is a main problem, especially for medium- and small-sized investors who like to talk about their assets in their native language. However, further European integration will have an impact on the integration of the asset management market.
Jean Thouvenin: Head of business development
1. In the next three years absolute return strategies and high alpha products will be the major product areas providing organic growth. Pensions funds in Europe are expected significantly to increase their allocation to hedge funds and hedge fund of funds. Currently, this is between 0.5% and 2%, it should reach 5-10% on average in the period. Enhancement of active returns will continue with investors in the more matured markets (US, Netherlands and Scandinavia) increasing their exposures to emerging markets, small cap equities, high yield bonds etc. In particular, with $600bn (e484.2bn) invested in EAFE equities by US pension funds, the shift from core EAFE to style-specific products should be a major opportunity for providers of the latter. Fund distribution through third parties (large banks and insurance companies) will become increasingly important as an asset-gathering channel.
2. Perceived risks ahead for our business are not dissimilar to those faced in the last few years but they will be heightened in many ways:
a) attracting and retaining talents – demography and competition battle for talent and this will intensify unless a conducive business environment and the right incentive structure/scheme are put in place, at which point the risks of losing good people will fall;
b) risks of losing ‘edge’ and being overtaken by competition will increase rapidly without a constant search for ways to improve portfolio management technology research and processes; c) ensuring fund managers focus on alpha creation while providing clients’ needs or information will need to be managed increasingly tightly; d) making hedge funds and long-only managers cohabit within the same asset management structure will be a major new source of risk.
3. First, even tighter cost management and control, coupled with strict product management are key to success and profitability. We are increasingly fighting product proliferation and retrenching when needed (a major challenge for the industry) in order to maintain eminence of our flagship products and to be able to allocate resources to new products that we believe to be critical drivers of future profitability. Second, continuously boosting the investment knowledge and skill base of our client-relations and sales staff is key to maximising client retention and successful asset gathering.
4. Europe will never be as an integrated asset management marketplace as a national market such as the US can be. Even though a lot of progress has been made in unifying legislation (eg the EU pension directive, UCITS III) and all EU-based investors now consider euro equities and bonds as domestic asset classes, significant obstacles remain (local regulation, fiscal and accounting rules) which are unlikely to be removed in the next 10 years. Even if they were removed, cultural bias towards investing will remain, meaning that local preferences will force asset management firms to offer custom-made structures (eg legal structures, KAG, FGR) as well as investment solutions and client servicing.
5. a) Increased regulation of the mutual funds management and distribution business. b) Geopolitics, spreading of terrorism, extreme risk aversion, liquidity crisis causing systemic shock to financial markets amplified by increased use of leverage. c) The tendency for regulators to over-regulate, future European investment directives.
State Street Global Advisors
Kanish Lakhani: Head of European marketing and consultant relations
1. We expect significant interest across all assets classes in risk-controlled active strategies. Clients are increasingly demanding investment strategies that are rigorous, well thought out and have a good chance of producing successful outcomes. There are a lot of strategies on offer in the market place that have no compelling value-added proposition and their days are well and truly numbered.
2. SSgA’s focus will continue to be the institutional market. We have and will continue to grow our share of the pension fund segment but managing assets for other financial institutions (white labelling) is now a very significant activity for us. For example, recently SSgA won one of the largest fund management contracts ever from Abbey National. We suspect that there will be other financial services organisations that will reach the conclusion that asset management is not a core activity for them and is best outsourced.
3. SSgA went through and came out of the bear market in very good shape. Even before market conditions became uncomfortable we had kept a close eye on profitability. As an organisation we had always operated in a fairly lean manner so adapting to tough market conditions did not really come as a shock for us. Our style of risk-controlled investing found favour among investors, so that certainly helped our situation. Apart from producing consistent return streams for clients, asset management companies are also in the business of delivering value to the owners of their businesses. Those asset management companies that don't adopt a strong business management model will be vulnerable.
T Rowe Price Global Investment Services
R Todd Ruppert: President and CEO
1. Ethical behaviour and doing what’s in the client’s best interest are our starting point. If we execute on these correctly, our chances to sustain organic growth will be enhanced. The importance of this cannot be overstated. We will not introduce new products if we believe they are a fad, may not be in the client’s best long-term interest or if we are not confident in our ability to add value. We will not enter new marketplaces if we are unsure of our ability to generate profitability. All this said, we believe organic growth will come from a combination of providing asset allocation assistance