In the first in a series of four articles on a new research study, Amin Rajan and Jervis Smith highlight the lessons learnt so far by asset managers venturing abroad.

Globalisation of funds has come in three overlapping but discernible phases. Starting in the 1960s, the first phase witnessed the internationalisation of business, as large asset managers on both sides of the Atlantic began importing and exporting products in order to offer diversification opportunities to their clients.

The second phase started in the 1990s, with major transnational mergers by banks and insurance companies, bringing together a number of disparate asset businesses. These were soon followed by asset managers doing their own acquisitions as well.

The third phase started around 2000, when the bear market triggered yet more cross-border mergers, which were also followed by organic expansion in the newly emerging markets in Europe and Asia Pacific.

What it took auto and aerospace industries 50 years each to achieve, asset managers have managed in a third of that time: namely, having clients and production capabilities in over 70 countries, according to a new study sponsored by Citi* and carried out by
CREATE-Research, a UK-based think tank.

Currently, this process is being primarily driven by two sets of mutually reinforcing factors, focusing on clients and returns.

Taking them in turn, after the headlong growth of the past twenty years, domestic markets in America and Europe have matured. In order to maintain growth momentum, asset managers have increasingly intensified their efforts to gain new clients abroad, where liberalisation of pensions and rising prosperity have been creating fresh opportunities.

In parallel, asset managers have also intensified their search for alpha in the newly emerging markets around the globe, as their clients have switched from relative returns to absolute returns mandates, in the wake of the huge bear market losses.


Teething problems

In the process, asset managers have relied on a mix of avenues to go global, including organic growth, clean slate starts, alliances, M&As, and hiring of teams. Such opportunism has inadvertently given rise to complexity in the current generation of operating models. Where M&As have been a prominent source, operational independence has been hard-wired for various business units as part of the deals. Where geographical distances have been significant, differences in national cultures and languages have conspired against the potential synergies in front, middle and back offices.

Four overlapping models are now being implemented (see chart below). Their rough percentage breakdown is given in the relevant circles.

Using a variety of matrix structures, operational autonomy is their key defining characteristic. They range from sub-scale independent subsidiaries, with no more than financial integration with the parent company (at the right-hand end) to networked scale players with high cultural integration (at the left-hand end); with multi-boutiques and joined-up franchises as the two dominant groups in the middle.

The latter two are the outcomes of M&As and, to a lesser extent, organic growth. They have overtly aimed to give autonomy and space to investment professionals so that they can generate high conviction ideas and execute them. Many have achieved this aim. However, there have been inevitable tensions in areas like revenue sharing, capacity sharing and governance oversight: thanks to the familiar law of unintended consequences.

On the upside, at least two in every five asset managers report that going global has delivered "positive impacts" in a range of areas that collectively influence their ability to grow their business. These include investment performance, business brand, talent process, client attraction, relationship with local regulators and cross-border alliances, to name a few.

On the downside, at least two in
five also report "negative impacts" in areas like creativity, enterprise, decision-making and bureaucracy. Together, these have frustrated efforts to drive down the cost-income ratio and jack up profitability.

So far, only 45% of the sample reports a positive impact on profits, 25% report negative impact and 30% report no impact. Further analysis shows that the winners so far are spread widely across the four camps: with disproportionately more among those operating open networks and independent subsidiaries. In all four models, however, successful asset managers have relied on four key ingredients.


Ingredients of success

The first ingredient concerns product and cost synergies. Special incentive structures have been created to promote cross-selling of products within and between the regions. They also aim to avoid bun fights on revenue sharing between investment professionals and their product distributors.

On the cost side, too, pragmatic arrangements have been put in place. They ensure that overseas units have operational autonomy in the area of manufacturing but a significant degree of integration in the middle and back offices; the latter via alliances with best of breed service providers.

The second ingredient concerns leadership. Until the 2000-03 bear market, business leadership was often confused with the buzz of the investment function, not least because most CEOs were former portfolio managers. In successful companies, leadership is seen as the glue that holds together a global organisation. Leaders at the centre as well as in the regions are encouraged to develop five sets of skills that are known to leverage people, products, process, and organisational synergies across the world.

The skills in question focus on: delivering strategic leadership, displaying cultural sensitivity, raising the bar on all aspects of business, balancing contradictions inherent in global businesses and building teams. They command leaders to go beyond the craft of investment and understand people and cultures in very diverse settings in ways that are different from what they have been used to hitherto. In a mean-reverting world, that sounds like mission impossible. But successful asset managers have enhanced their leadership gene pool by developing these traits through a number of avenues identified in the report.

The third ingredient concerns a culture of strategic thinking and personal accountability. Three in every five asset managers do not hold their senior executives - at the centre or in the field - individually accountable for delivering strategic goals. In contrast, the successful companies have adopted a strategic framework that enjoins top executives to hold regular forums, involving all the movers and shakers in the company worldwide, to debate new ideas and subject them to a reality check by tapping into the "collective memory" of the company. From it emerges a set of strategic goals for the near term, along with the list of required actions.

Necessary resources are then allocated, key metrics set, accountabilities identified, incentives agreed, outcomes monitored and the course correction agreed, as and when necessary. The final ingredient relates to innovation. Worldwide, many asset managers have often penetrated the new markets with freshly-minted products under the banner of innovation, as part of a leapfrogging game that relies on herd mentality driven by new lingo, fear and greed. In contrast, successful asset managers have overtly promoted innovations via well crafted routes that deliver clients' needs in diverse cultural and geographical settings.

Globalisation is here to stay. It offers opportunities and challenges alike. Our report offers recommendations on how senior managers can minimise the inherent tensions in their transnational aspirations by implementing a strategic performance process that promotes integration, innovation and accountability that are central to a vibrant global funds business.

*Globalisation of Funds: Challenges and Opportunities. Available free from

Prof. Rajan is CEO of CREATE-Research and Jervis Smith is managing director, financial institutions group, head of international managed funds and Middle East at Citi.