Growth and Value Creation in Asset Management: how to in in the 'new normal'
by Alfred Metter
After the substantial losses as a result of the global financial crisis and all the discussions about new regulations in financial services, it is tempting to ask
(1) if and how asset management would be able to create value in the future, and (2) where potential future growth could come from.
Based on an interestingly assembled collection of original and thought-provoking articles, this book makes a convincing case that the current situation could allow for a true recovery and emergence of the asset management industry as one of the most dynamic parts of the global financial services sector.
First of all, it is argued that general trends like the movement towards professional management of discretionary household assets, the displacement of defined benefit pension plans, increases in individual wealth in various parts of the world, the reallocation of portfolios towards less risk exposure, and changes in various areas of regulation (for example UCITS IV in the EU) will be the underlying growth driver. On the other hand, industry consolidation could allow successful competitors to exploit economies of scale and operating cost efficiencies, and therefore potentially result in value creation for them as well as for their clients.
WINNERS AND LOSERS IN THE ‘NEW NORMAL’
The evolution of the asset management industry will – as another one of the articles predicts –lead to a ‘new normal’. A heavier regulatory hand, a pronounced differentiation between large-scale "beta factories" versus true "alpha entrepreneurs", and a fight for regional as well as global pole positions will make the ‘new normal’ a very competitive place.
Growth, profitability, and market share will decide between winners and losers, and the main focus will increasingly be on client service/client profitability. Furthermore, it is predicted that in this environment it will be essential for asset management organisations to align IT with their business strategy and treat IT investments not just as cost reducers, but also as growth drivers.
Two interesting points are made about the investors. One deals with the "reluctant investor", who has limited financial knowledge, does not want to make detailed investment decisions and would therefore prefer that experts do it on his/ her behalf. Based on findings from behavioural finance, it is recommended to focus on the development of a few well-designed and effective products whose benefits are transparently communicated. In a more general way, another article argues that performance evaluation of mutual funds is mostly illusory. While in the past the non-performance of individual funds seems to have been counterbalanced by performance persistence at the fund family level, this could change in the future. Investors may find it more economical to either invest in cheaper index funds (beta strategies) or in better performing hedge funds (alpha strategies) than to stay with fund families.
As the final article points out, clients are no longer focused only on returns; they are also concerned about liquidity and transparency, which will of course change the value equation. Nevertheless, as the book concludes, "… sustained value creation and profitable growth will always result from strategies which create and deliver superior value to clients …"
There is no doubt that the ideas outlined in this book provide essential reading for the asset management community.
Alfred Mettler is a Clinical Associate Professor at Georgia State University, Atlanta, USA, and an Adjunct Professor with the Swiss Finance Institute. His principle interests are in selected areas of International Banking and Finance, Risk Management of Financial Institutions, and Financial Education. He is active in various Executive Education Programmes in Europe and the USA, and has
