The Key to Future Growth—A Digital Revolution?
Many forecasters see a very bright picture for asset managers around the globe, with many expecting the overall asset pool to grow significantly. But there are also obstacles asset managers will have to overcome to ensure they survive strong competition in the mutual funds industry.
The market environment for asset managers is changing very rapidly, and the mutual fund industry needs to adapt to these changes as they happen. One threat that can be solved relatively easily is the new regulations, since it is clear how asset managers must act to comply with the rules. But, to solve investor needs that develop from changes in behaviour and/or social trends in the global society is much harder, since no one can predict exactly what customers will want next. In this regard, the KPMG report “Investing in the Future” finds that demographic trends, environmental and social responsibility factors, developments in technology, and the changing interactions between humans are four topics that will redraw the landscape for asset managers. From these expectations KPMG concludes that today’s propositions from asset managers are unlikely to be suitable for the broader client base of the future. The KPMG analysts think one solution to overcome these hindrances might be a massive investment in technology, since digital platforms may be the tool of choice for future investors in selecting and buying funds.
What are the drivers of future growth?
The latest research report from State Street, “Manning the Frontlines: Global Asset Managers Rewrite the Rules of Engagement,” unveils that the majority of the 300 industry participants surveyed by State Street want to generate growth by developing new products for their existing country markets and by expanding their product offerings into new markets. In addition, the fund promoters plan to target growth from new client segments as well as from the expansion of their distribution channels. The vast majority of the participants agree that those managers who offer the greatest degree of transparency will have the upper hand in attracting new assets. Having said this, the participants in the State Street survey see regulatory barriers and distribution challenges as the main obstacles for their growth strategies.
From my point of view these results go hand in hand with the findings from KPMG: fund promoters will need to adapt new technologies to achieve their goals. A proper IT infrastructure will be the key for cross-border fund distribution as well as for communicating with investors via digital platforms and social media channels. When thinking about a future-proof strategy, one needs to bear in mind that a vast number of people today have never thought about investing in mutual funds, since they have no access to these products and/or the appropriate information. But there is also a change in investor behaviour in well-developed countries. The demand for transparency is increasing; institutional investors and regulators are setting permanently higher standards for the transparency of mutual funds. In addition, the younger generation is using the Internet much more efficiently. This means asset managers need to change their information policies, since these investors demand availability to all kinds of information, anywhere, at any time.
Multi-Asset Strategies—The Products of Choice?
In the current low-interest-rate environment many investors are looking for higher returns by building portfolios from all kinds of assets. These highly diversified portfolios are often seen as the strategy of choice to enhance the risk/return profile of a portfolio. With this trend emerging, a number of fund promoters have launched new products to participate in the trend. Therefore, it is not surprising that the majority of the participants in the State Street survey think multi-asset products will be a major source of growth for their business over the next three years.
From my point of view, multi-asset products are, generally speaking, a good building block to enhance the risk/return profile of a portfolio. However, since the results of multi-asset products depend on the quality of the management team, the success in terms of net inflows of the products is highly correlated with their performance. This means fund promoters have to invest in their capabilities in terms of staff and an efficient IT infrastructure to manage these products and to produce very transparent reporting to meet investor demand. Meanwhile, investors have to do intensive due diligence to avoid investing in funds or other products that do not have an appropriate management team or that are lacking resources.
Are ETFs the Product Type of the Future?
Future growth is driven not only by the asset classes offered to investors. Another question that asset managers need to answer is how to bring their strategies to market. The answer to this question can vary from producing segregated accounts managed for a single client to a mutual fund that might be held by a million investors. Since the global exchange-traded fund (ETF) industry shows an above-average growth rate, a lot of product promoters think they should use an ETF format. This thinking is also backed by the PwC study, “The next generation of ETFs–Why every asset manager needs an ETF strategy,” published in November 2013. But it takes much more than just an innovative product to be successful within the ETF segment. Many asset managers underestimate the obstacles coming from their lack of relationships with brokers and market makers or their missing knowledge about effective distribution strategies for ETFs. Traditional asset managers who want to bring a strategy to market may better stick to their existing distribution channels or build partnerships to expand their product offerings into new markets or market segments.
I personally think the fund management industry will see a healthy growth pattern in the future. But it is also foreseeable that not all asset managers will survive the increasing competition. This means fund managers who want to participate in the future growth of the market need to do their homework and invest in all kinds of resources to ensure their technology and their staff base are able to serve all the needs of future clients. One should not forget that selling mutual funds is a 24/7 business, since nobody knows when and from which domicile a fund selector is searching for investment opportunities.
With regard to fund sales, it is already clear that the old sales approach based on products alone won’t work in the future. Investors are already looking for new solutions to achieve their saving goals—whether a retirement plan or any other kind of savings target. This means that the successful asset managers of the future must not only change their product offerings but also their sales approach in order to meet the needs of investors.
The views expressed are the views of the author, not necessarily Thomson Reuters’.