EUROPE – Investment managers will increasingly look to specialise in asset classes in which they perform best, in what is a growing trend away from balanced fund houses to specialist managers, believes a senior consultant at Mercer Investment Consulting.

AXA Investment Managers recently off-loaded its investments in global equities to its sister company AXA Rosenberg, after realising that it was just no good at it. Instead, the French manager decided to focus on areas in which it performed well, such as bonds, and it is a concept set to catch on among other fund managers.

It makes sense, believes Nick Sykes, senior consultant at Mercer Investment Consulting: “When markets are good and profitability high then firms expand the range of products on offer, and when markets are bad the products that are less competitive are traded in for those in which the firm has a competitive advantage.”

But shouldn’t investment firms be positioning themselves for when the markets do pick up again? Isn’t it essentially giving signals to clients that firms are just ‘giving up’? And in the current environment isn’t every house finding bonds the preferable asset class, so competition will be tougher?

The answer may be ‘yes’ to these questions, but as Sykes explains: “Covering every asset class is an expensive luxury that fund managers cannot now afford, unless they believe they have strengths/competitive advantages in all asset classes - which few do.”

Furthermore, market conditions are not the only decider of success. Some equity houses are continuing to win business and therefore making profits despite what has been a terrible year for the asset class. The success of an individual fund management house also depends on how well the house performs in winning new business, and “managers should recognise where their competitive advantage lies and stick with those asset_classes,” says Sykes.

“The trend follows on from the move away from balanced managers towards specialists, although it is admittedly more painful for specialist managers when their favoured asset class performs particularly badly,” he continues.

The majority of market participants agree that the move towards specialisation is inevitable, and investment firms have to deal with their faults as readily as AXA IM’s chief executive, Nicolas Moreau. With one third of investment firms forecast to make a loss in 2003, low-profit business units should be re-examined.