These are uncertain times. The subprime mortgage crisis weighs heavily on the financial markets and it is starting to cause considerable collateral damage to the wider economy. The outlook for 2009 is bleak, and the major economies in the US and Europe can expect deep and prolonged recessions. Some asset managers have felt the full force of the downturn, as collapsing investor confidence has sparked a massive withdrawal of funds.
It may take several years before global assets under management return to the level witnessed in 2007: $59,000bn (£37,120bn, €45,800bn). This year, we expect this figure to dip as low as $53,000bn. Next year, it may fall further still. Yet, for all this, there will be opportunities for all kinds of asset managers – so long as they are astute, agile and quick-thinking.
What distinguishes the successful asset managers in the current crisis is not their type, but rather their approach to investors, risk management, costs and growth.
In a report, published today, Winning Strategies in Uncertain Times*, we identify several positive long-term trends. For a start, investors, having moved into cash as a short-term safe haven, will look to move back into actively managed funds. Moreover, the retirement funds of ageing populations, the asset pools in the Asia -Pacific and Latin America regions, and the sovereign wealth funds are all expected to grow significantly and to become ever more important sources of new business.
To take advantage of these trends, asset managers need to do four things: regain the trust of investors; introduce tougher risk management; exercise greater control over costs; and pro-actively prepare for the upturn.
First, to restore the faith of investors, asset managers need to exert greater influence over the way distributors sell their products. The fact is that few asset managers provide distributors with the necessary information to ensure that the right product is matched with the right client. Also, sharing information with brutal honesty – not only about what is attractive but also what products should be avoided – will go a long way towards maintaining good distributor relationships, which are more important than ever.
Second, as well as regaining investors’ trust, asset managers need to review their risk management operation. It is clear that some asset managers did not appreciate the level of risk in some of their investment funds – notably derivative products – and strategies. As a result, they badly let down their investors. Going forward, asset managers should ensure the risk team is organisationally distinct from the investment management team; that the chief executive or a board member sits on the risk committees; and that risk analysts are routinely involved in decisions concerning new products and investment strategies.
Third, to cut costs – which will face downward pressure as equity markets (and thus revenues) fall – asset managers need to introduce tough efficiency measures. There is fat that can be trimmed, as is shown by the wide variation in the cost base of different asset managers: we have found that those focusing mostly on retail investors have costs ranging from 53 to 21 basis points; for institutional specialists, costs range from 33 to 2 basis points.
Unsentimental cost squeezing should involve a radical renegotiation of supplier contracts for custody and other fund-related services, the freezing of compensation and the rethinking of long-term bonus schemes. This alone will only cut overall costs by up to 7 per cent. Meaningful cost savings of more than 20 per cent can only be achieved through strategic transformation: pruning the product portfolio and associated fund management resources, refocusing on the most profitable distribution channels, and replacing poorly performing staff with better-skilled professionals.
Fourth, to prepare for growth, asset managers need to explore M&A opportunities – which may become easier, given that valuations are lower and some banks want to sell off their asset management divisions – as well as opportunities in emerging markets and sovereign wealth funds.
In 2007, assets under management grew by 27.3 per cent to $6,700bn in the Asia-Pacific region. Although those funds have been hit too, the long-term trend is towards growth. Meanwhile, we expect SWFs to grow from $3,000bn of assets to £12,000bn by 2015.
Asset managers face considerable challenges. For those that take swift action, there are opportunities amid the gloom.
*Winning Strategies in Uncertain Times: Global Asset Management 2008 is published today by The Boston Consulting Group Kai Kramer is a partner and Andy Maguire is a senior partner at The Boston Consulting Group.