With the slowdown of Emerging Market (EM) economy growth and the volatility of the European markets at the end of 2013, both investors and fund managers alike are optimistic of the coming 2015 year.
As the asset and investment management industry matures over time, firms that have weathered the 2008 GFC are optimistic on the financial conditions in 2015.
The asset management industry faces many challenges as new regulations and financial reporting standards are being enacted. This article focuses on how this affects cash in and out-flows in the industry, particularly in a British/ European setting and whether or not these in/outflows are as a result of out/ underperformance or by marketing means.
WHAT’S IN IT FOR INVESTORS?
Although advertising and marketing are one of such ways to attract potential investors, survey shows that investors have a higher likelihood to allocate more capital to asset managers under positive economic conditions.
Unfortunately it appears that from the EY Global Funds and Investors survey, investors appear not to share the optimism that their fund managers have on the global economy which has resulted in either no change in capital allocation or, in some cases, a decrease in capital allocation, as “investors uniformly appear to say that they are unlikely to increase allocation”.
Furthermore, fees and performance continue to be the biggest obstacle for investors followed by risk tolerance, as investors are still cautious after significant underperformances in years after the GFC, particularly in an industry that builds itself on performance promises.
OTHER SIDE OF THE COIN?
Fund managers are always looking for new fund raising strategies where traditional marketing tactics are slowly decreasing in use, especially in current economic conditions as the majority of investors have a bearish view on the global economy.
In the KPMG Investment Management Outlook Survey 2014, 57% of fund managers agree that political and regulatory uncertainty pose the biggest threats to their business models, while only 38% of companies are prepared for these changes (This is a result of new financial regulations and reporting standards are being enacted in the industry).
This risk of increase in cost to accommodate these new regulations have created negative sentiment among potential and existing investors which has dramatically affected cash inflows for asset managers.
However, it is also suggested that performance (although a key factor) is not the only factor that encourages investor capital allocation into asset management firms. There is a growing demand for customised investment portfolios and strategies from investors, and survey is of the opinion that the demand for customised solutions is being met.
EY hypothesised that a firm’s ability to meet a customised portfolio for the individual investor with personalised risk profiles and investment needs is an attractive feature for potential investors.
Further, as smaller AM firms struggle with meeting the demands of their client’s individual needs through CIPs as compared to their larger competitors, it will eventually result in more investors changing their capital allocations to AM firms that are more likely to facilitate their personal investment needs.
Naturally with this, larger AM firms will gradually attract more capital and clients until they reach a potential critical mass amount of capital and clientele-base that would result in the decrease of the firm’s TER (Total Expense Ratio), as they capitalise on the economies of scale.
From a forward looking perspective, as AM firms delve into the new regulatory environment, both investors and managers must be aware of the increased expense implications of this. While managers must also recognise the importance of individualised CIPs as a capital attraction feature to remain competitive in a somewhat volatile operating environment.
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