12 | BUSINESS REVIEW|
Our view of the market
We remain positive on the long-term outlook for the asset management industry. Reform of pension systems in developed markets provides opportunity for growth, and increasing personal wealth in emerging economies continues to create new pools of assets for the industry to manage.
Governments across much of the developed world continue to seek ways of reducing liabilities arising from universal welfare provision – something that is increasingly unsustainable against a backdrop of longer life expectancy. In many developed countries individuals are likely to spend more than 20 years in retirement. For example, in the UK the number of retirees is expected to rise by more than one-third by the mid point of the century, whilst the working population is expected to decline. Similar trends are forecast in other countries and these changes are prompting governments to encourage individuals and employers (on behalf of their employees) to assume greater responsibility for their future financial well-being.
October 2012 saw the introduction of a legal obligation for UK companies to auto-enrol employees between the ages of 22 and the state pension age and earning more than £8,105 into a pension scheme and make a minimum contribution on their behalf. This new initiative is aimed at overcoming savings inertia. The National Employment Savings Trust (NEST) similarly seeks to encourage long-term savings, providing an option for individuals with no access to a company pension scheme.
The number of open defined benefit pension schemes continues to fall with schemes now having to counter the problem of underfunding and achieve a balance between de-risking and return generation. These trends provide opportunities to the asset management industry and asset managers capable of providing innovative and dynamic liability management and return-generation solutions should be well placed going forward.
The defined contribution (DC) pensions market is likely to see rapid growth with further impetus provided by the auto-enrolment and NEST initiatives outlined above. Within DC schemes the emphasis continues to shift from a focus on return generation towards de-risking and immunisation of future liabilities. Fixed income remains the core asset class for DC schemes but, again, we believe that asset managers need to create new solutions capable of delivering returns within defined risk parameters. We expect to see greater demand for credit and emerging market debt as well as more esoteric options such as diversified alternative strategies.
Corporate governance-related issues remain to the fore and pension schemes are under increasing pressure to be transparent and active owners with regards to sustainability, governance and engagement issues. Asset managers capable of assisting clients alleviate this burden through demonstrable expertise are increasingly at a competitive advantage over their peers. Sustainability-related issues and developments are also growing in importance from a return generation perspective and solutions capable of leveraging themes, such as climate change, water and agriculture, are likely to be well placed for future asset gathering.
The retail and wholesale markets continue to undergo structural change, primarily through the growing importance of platforms and regulatory reform, both of which have a significant impact on the distribution of investment funds. The end of 2012 saw the implementation of RDR, which has already prompted advisers to restructure their business models and shift from commission-based remuneration to an explicit fee-based structure. As well as increasing the popularity of lower cost passive options RDR has given significant impetus to ‘outsourced’ investment solutions. Advisers are increasingly compelled to ‘outsource’ the management of client portfolios to either Multi-managers or discretionary fund managers. Management groups capable of providing high quality differentiated Multi-asset and Multi-manager products should benefit from stable and reliable fund flows into their ‘outsourced’ investment management solutions.
The broader application of fee-based charging models was widely anticipated to prompt an increase in the size and importance of the self-directed channel as investors shunned ‘paid-for’ advice and chose to make their own investment decisions. Early indications suggest this trend is likely to be significant, with Hargreaves Lansdown attributing a 27 per cent increase in new client numbers to RDR. A number of high street banks have also announced changes to their financial advice propositions and we believe they add further impetus to the self-direct channel. Asset managers with a strong brand and capabilities in areas such as Multi-manager could see a significant increase in inflows from this area.
RDR is widely cited as being a positive development for the investment trust sector. The wider application of fee-based advice has certainly levelled the playing field between investment trusts and open-ended funds. In order to generate momentum, however, we believe that investment trust providers have an ongoing responsibility to educate advisers about the benefits of investment trusts and their inherent characteristics and we believe it will be some time until the full implications of RDR are reflected in fund flows.
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