14 | BUSINESS REVIEW|
Our view of the market
The spectre of the ongoing European sovereign debt crisis continues to cast a long shadow of uncertainty over the global economy. De- leveraging remains the dominant global theme as governments persist with implementing austerity programmes against a backdrop of anaemic economic growth.With interest rates in the US, UK and Eurozone already at historically low levels and debt reduction targets curtailing the scope for tax cuts, the policy options for stimulating growth are limited, so we expect any recovery to take place over a protracted period. This backdrop, combined with upheaval in the Middle East andmounting concern over Iran’s nuclear ambitions, presents the assetmanagement industry with near-termheadwinds in the formof volatilemarkets and fragile investor sentiment.
However, despite these current challenges, in our view the long-term prospects for the assetmanagement industry remain attractive.We see considerable opportunities both fromstructural reformin developedmarket pension systems and fromthe growth of the emerging economies where the rapid spread of wealth is creating new pools of assets for the industry tomanage.
In the developed world, governments are under pressure to pull back fromincreasingly unaffordable universal welfare provision asmortality rates have improved. In the UK the number of retired people will rise by more than a third by 2050, while the working population is expected to decline. Governments are therefore encouraging individuals, and companies on behalf of their employees, to take increased responsibility for their long-termfinancial well-being. For example, commencing this year it has become a legal duty for UK employers to provide workers with access to a qualifying pension scheme with gradual phasing in of auto-enrolment which will extend to all employers by September 2016. Alongside this the UK government has established the National Employment Savings Trust (NEST). NEST will provide an occupational defined contribution pension scheme for those employees who do not currently have access to one, typically those working at smaller firms.
The assetmanagement industry is itself going through a period of structural upheaval driven by new regulation, changing client needs and developments in the distribution landscape.
In the institutionalmarket, the long-standing trend of Defined Benefit (DB) pension scheme closures has continued with Royal Dutch Shell, believed to be one of the last companies in the FTSE 100 currently operating a final salary scheme open to newmembers, recently announcing that it too will close its final salary scheme to newmembers next year.We therefore expect to see rapid growth in the Defined Contribution (DC) pensionsmarket, as companies shift risk away from their balance sheets and on to the shoulders of individual employees. As the DC pensionsmarket grows, this will increasingly blur the boundaries of institutional and retail assetmanagement, as schememembers are presented with pooled fund choices inmuch the same way as they would select froma range ofmutual funds for an investment portfolio outside of a pension wrapper.
Notwithstanding the closure of DB pension schemes to new members, these will remain very significant pools of capital formany years to come.Within these schemes, the emphasis hasmoved increasingly towards de-risking and the immunisation of future liabilities. Fixed income has become the core asset class for these schemes, with a steady decline overmany years in their exposure to equities. In this respect we see a growing convergence between the needs of DB pension schemes and insurance companies where changing solvency requirements are resulting in greater use of asset and liabilitymatching strategies.We expect to see continued, and
growing, demand for both corporate credit and emergingmarket debt frompension schemes and insurers, as logical steps along the risk/return spectrumfromdevelopedmarket sovereign bonds and as these governments seek to reduce their debts.Within institutional equity allocations,mandates are increasingly global in nature, focused either on developed or emergingmarkets. There is reduced institutional demand for long-only activelymanaged regional equity strategies although these do remain core products for retail investors and discretionary wealthmanagers.
As the needs of pension schemes have changed, newmodels have emerged fromboth assetmanagers and investment consultants to support themin the formof fiduciarymanagement (an asset-manager led proposition) and implemented consulting (a consultant-led proposition). These services broadly seek to integrate advice on asset allocation, risk budgeting andmanager selection. Unlike traditional balanced pensionmanagement, these new providers ofmulti-asset services are prepared tomake greater use of both passive strategies and alternative asset classes.We anticipate that these services, which are well established in the Netherlands and of growing importance in the UK, will expand into further pensionmarkets.
The retail and wholesalemarket is also undergoing significant change, due to the growth of platforms and regulatory reformimpacting the distribution landscape. In the UK a key driver of change is the Retail Distribution Review (RDR) which will be implemented by the end of 2012. These reforms seek to improve the advice received by consumers in the UK Independent Financial Adviser (IFA)market through the replacement of commission-based businessmodels with the explicit pricing of advice through fees charged to the end-investor and new professional qualification standards. RDR is promptingmany IFA firms to fundamentally change how they do business, with one outcome being an increased propensity to outsource themanagement of client investment portfolios through either the use ofmulti-manager funds or by partnering with discretionary wealthmanagers. The growth of these ‘gate keepers’ is leading to a greater institutionalisation of fund buying processes and accelerating the blurring of institutional and retail assetmanagement referred to above. Formanagement groups offering coremulti-asset andmulti-manager products to the intermediarymarket, the shift towards greater use of “outsourced” investmentmanagement solutions by IFAs should providemore stable fund flows and longer termholding patterns. However, in other single strategy product areas where the principal clients are increasingly multi-managers and discretionary wealthmanagers rather than IFAs, we expect to see a reduction in the average holding periods as these investors aremore inclined to shift in and out of products depending on changing views on asset allocation or underlyingmanagers. Asset managers are currently reviewing their fund pricing strategies and product ranges in preparation for this new distribution landscape.
Finally, the financial crisis that began in earnest in 2008 has raised important questions about the extent to which institutional investors have adequately held companies, and banks in particular, to account in areas such as remuneration, riskmanagement and effective Board oversight. Across the assetmanagement industry there is amuch greater focus on corporate governance issues, as exemplified by the Stewardship Code, a set of principles released in 2010 by the UK’s Financial Reporting Council.We see a similar trend towards higher expectations of shareholder engagement and improved transparency over voting activities across a number of developedmarkets and therefore we believe that the strength of expertise assetmanagers can demonstrate in this field will become an increasingly important factor in overall competitive positioning.
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