Asset management models are in transition, and it is time for them to be re-worked, according to the latest study from Create-Research, backed by Citi’s Global Transaction Services unit and Principal Global Investors.
Key catalysts for future growth will be recovery in the US, China, Europe and Japan, plus rising prosperity in emerging markets, according to the report, generated by interviews with 237 manufacturers and buyers of asset management.
Growth in the wealth management and private pension segments, as responsibility for long-term saving to fund retirement swings from state to individual, will drive the restructuring of the funds industry for years to come.
But there is a healthy dialogue about the ideal template for long-term savings products and whether the American blueprint is suited to Europe.
“Everyone in Europe wants to assume the American 401k defined contribution system, but the reality is it doesn’t work,” was the provocative message from Daniel Enskat of consultancy Stategic Insight during a heated debate on product innovation, at the recent FundForum in Monaco.
“Americans are not generally worried about retirement,” was the message from Mr Enskat, who stresses 90 per cent of long-term US savers fail to switch from default allocations during a product’s lifecycle. “They think ‘we have 401k plans, so we’re OK,’ but at the end of the term, they might have $10,000 when you need $1m (€780,000) to live.”
Banks in Europe will not switch to independent, fee-based advice unless they are forced to, which is what happened in the US, he says. The level of kick-backs from fund managers to intermediaries will continue to play a huge role in asset allocation strategies.
The negativity often surrounding 401k plans has been put into context by Principal Global Investors’ CEO Jim McCaughan. “Switzerland, the UK, the Netherlands and Ireland are all going down the US route,” he says. “They are creating viable tax breaks for DC plans and building a regulatory system which suits them.”
Yet Principal itself decided, 10 years ago, not to become a major pension provider in Europe, as the markets were too fragmented. Instead, they will concentrate on countries such as Brazil, where such skills are more in demand.
The defining factor in the debate is whether the banks and investment houses which make asset allocations can ever be truly independent. The onus will be on asset managers, whose asset allocation skills are now developing to a much greater level than the intermediaries they service, to show they can match strategies, with a fiduciary mindset, that is always in clients’ best interests.
The involvement of distributors and asset managers in a new-style allocation process will be crucial to the development of the industry, with the Create survey’s respondents aiming to blend caution, diversification and opportunism.
Liquidity and capital protection will top the client agenda, with beta absorbing the lion’s share of new assets, forewarns the report’s author, Create-Research CEO Amin Rajan. “Complex overlays will be shunned; they cost too much and deliver too little. Boring will be beautiful, as investment becomes more nuanced.”
In this not-so brave, new, beta-led world, highly disillusioned with active investment by two recent bear markets, a wall of “dumb” money will flow into passives.
Yet the subsequent price anomalies which will emerge will create a once-in-a-lifetime set of opportunities for active participants in high-risk strategies such as distressed debt, hedge funds, real estate and private equity.
It is for these opportunities that private clients may increasingly be looking to family offices, rather than established private banks, according to Dale Gabbert, partner and financial services lawyer at Reed Smith, specialising in setting up bespoke investment structures for
wealthy families. Where multi-family offices are currently challenging wealth managers, believes Mr Gabbert, is in their flexibility and willingness to make responsible calls on specific deals.
“A lot of them are sitting on large levels of cash,” he confirms. “If you set up a family office, you are more interested in being opportunistic. It’s not really about traditional asset allocation any more, as the informed consumers know where to go for the more standard stuff. You go to a family office for opportunistic deals in private equity and insurance. The truth is – there is nothing they won’t look at. They do more interesting stuff than the private banks, although they discard a lot. You see a more bespoke type transaction.
“The minute you start to worry about theoretical considerations of asset management, the more you limit the opportunistic type approach and the less chance you have to make money. It will be interesting to see if family offices remain more buccaneering than the institutions.”
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