An independent study from Create-Research, commissioned by Citi’s Global Transaction Services and Principal Global Investors (Principal), has found that asset managers worldwide are divided over the future of their industry post credit crisis. The study found that respondents anticipate that increased regulation will raise costs, intensify competition, create fee compression and hasten mergers and de-mergers.
The report, entitled ‘Future of Investment: The Next Move?’, is based on a survey of 225 asset managers from 30 countries, responsible for a total of US$18.2 trillion of assets.
While no dominant scenario was predicted for the next five years, 70% of respondents expected the industry to become more polarised, with large players rising to positions of dominance within one of three scenarios: commoditisation, vibrancy or segmentation.
At one extreme, 34% of respondents expect their industry to become commoditised as a result of increased regulation and risk aversion on the part of clients, as investors seek capital protection. Under this scenario, scale will be the key to success as commoditisation delivers standardisation of products and processes that are consistent with economies of scale.
At the other extreme, 17% of those surveyed expect their industry to become more vibrant with a closer alignment of interests between clients and asset managers. Under this scenario, innovation that adds value to clients will be critical.
In between the two scenarios is the one that envisages a segmented industry characterised by consolidation, separate centres of excellence that best serve different client segments, alliances across front, middle and back offices which allow a greater concentration of capability, and a changed fee structure which delivers a closer alignment of interest. Almost half (49%) of respondents anticipate this scenario.
The report indicates that business models associated with the segmentation scenario have started taking root, with larger fund management houses already decoupling manufacturing and distribution. Forty percent of respondents expect this to continue.
The report also cites that outsourcing of non-core activities will continue apace, freeing senior management to concentrate on four strategic business areas that are critical in delivering a vibrant industry: investment capabilities; increased alignment with client’s interest; service proposition; and business capabilities.
Neeraj Sahai, global head of securities and fund services at Citi, said: “Asset managers are now responding to the realities of the new environment and are increasingly exploring opportunities to adopt variable-cost models by outsourcing administration functions. This is an important structural shift in the model for the industry’s value chain, and the ultimate reward could be a more efficient use of capital and maximisation of alpha.”
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