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Study shows asset management model is in transition

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Asset management business models are in transition as the industry adapts to dominant investor concerns about liquidity and capital protection in a new, competitive landscape, according to a study from Create-Research commissioned by Citi’s Global Transaction Services and Principal Global Investors. 

Respondents to the survey estimate that asset growth will be dominated by significant rebalancing of existing allocations, with the volume of new money in motion remaining small. 

Over the next three years, only a third of assets will mark fresh inflows from sovereign wealth funds, national pension funds/central bank reserve funds and DC and DB plans.

The rest will be switched assets from wholesale packagers, DC plans helped by the closure of DB plans and outsourced insurance assets. As a result, competition is expected to intensify further as money moves between geographic regions, asset classes and client segments.

With an increasingly professional, more diverse and more demanding client base, asset managers are already improving their product proposition by enhancing capabilities in asset allocation (54 per cent), absolute return (21 per cent) and product innovation (53 per cent).

Furthermore, they are improving service standards and raising technical collaboration with consultants and fund platforms, to broaden distribution.

Amin Rajan (pictured), chief executive of Create-Research and the study’s author, says: “The credit crisis is in the rear view mirror. But its after-shocks continue to rattle the markets and a thick fog of uncertainty is presiding over the competitive investment landscape. The small group of asset managers who suffered least had clear financial and non-financial alignment of interests with their respective clients, backed by operational excellence. As a result, asset managers are turning the spotlight on their own offering. They are attacking inefficiencies that have long tended to conspire against the interests of their clients.”

Currently, 50 per cent of asset houses operate as integrated producers. According to the study, the number will decline and multi-boutiques will become the dominant operating model among medium and large asset managers over the course of the next ten years.

Currently independent boutiques represent seven per cent and integrated boutiques represent 28 per cent of the market. Creating a small company mindset in a large company environment helps to foster principles of meritocracy, personal accountability and leadership. Being more nimble and focussed, boutiques will be better placed to meet client needs.

Furthermore, over the next three years a fiduciary overlay will differentiate the winners from the losers. Success will require asset managers to exercise duty of care by developing a fiduciary overlay that delivers five things: consistent returns, a deep talent pool, exceptional service, a value-for-money fee structure and a state of the art infrastructure. 

The overlay seeks a three-way financial and non-financial alignment between: asset managers and their clients; asset managers and their professionals; their professionals and clients. 

Neeraj Sahai, global head of Citi Securities and Fund Services, says: “The new alignment of interest will have to cover not only financials like fees, charges and returns but also involve non financials like service quality, product innovation, risk tools and operational excellence via outsourcing. For the second time in a decade asset managers are concentrating on their core capabilities and outsourcing the non-core areas.”

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