SimCorp StrategyLab Copenhagen Summit 2011:

key investment management industry challenges analysed

Thought leaders representing the investment management industry convened with renowned academics at the SimCorp StrategyLab Copenhagen Summit 2011 to discuss key investment management industry challenges in the post financial crisis environment. They articulated their findings in three thought-provoking white papers now published and which are summarised in the following article.

by Professor Ingo Walter, Director of SimCorp StrategyLab

With the passing of the global financial crisis of 2008-09, many things have changed for global finance and for the asset management industry in particular. As we now know all too well, major financial shocks can no longer be contained. They spread with amazing speed, both geographically and across asset classes and financial intermediaries. Financial interconnectedness can bring great benefits, but it also generates large systemic risks, and there are few places to seek refuge from its consequences.

As expected, the asset management industry is one area of the global economy that has not been spared. Massive losses at the apex of the crisis in late 2008 affected assets under management (AUM) in all but a few hedge funds that correctly bet against the asset classes in question – losses that would have been even larger had not the financial intermediaries involved invested in the same assets that proved to be toxic and that otherwise would have been fully passed on to asset managers.

As it turned out, most investment managers took some very large hits, impairing pension funds’ ability to meet their defined benefit obligations, forcing large losses on defined contribution clients, and eroding accumulated assets in investment funds. The crisis has led to fewer and larger, even more complex and interconnected financial intermediaries, and its aftermath has increased rather than decreased the world’s exposure to systemic risk. Living in this new world poses a whole new set of challenges for investment managers, both in serving their clients well and in devising new business models.

BEYOND ‘BUSINESS AS USUAL’

It is hardly surprising that global finance is again facing a new regulatory environment, something that has characterised the aftermath of every significant financial shock in modern history. Taxpayers continue to show very little patience with behaviour they regard as posing new risks to the system and, worse, ‘privatising returns and socialising risk’. The memory of taxpayer losses and risks borne at the height of the crisis remains fresh in people’s minds and underpins the political will to move beyond ‘business as usual’ toward a more robust financial infrastructure. Bolstering capital is the centrepiece everywhere, with few reminders needed how undercapitalised major financial intermediaries were at the height of the crisis.

Beyond that, key initiatives focus on asset origination, assessing asset quality and the role of rating agencies, incentive-compatible approaches to compensation, carve-outs or ring-fencing of activities that do not belong in systemically-sensitive financial intermediaries, and reaching into consumer protection in asset origination. The task is to significantly bolster the safety and soundness of financial intermediation, while at the same time preserving as much as possible of the industry’s efficiency, innovativeness and competitiveness. As this effort proceeds, no part of the banking or shadow-banking system, including asset management, will be spared the need to respond in a sensible and sustainable way.

For asset management, these challenges focus from a functional and technological perspective on managing risk, controlling costs and enabling growth, and from a sectoral perspective on investment funds, pension funds and alternative investment funds. The immediate impact of the turbulence in all three sectors involved dramatic declines in assets, affecting clients as well as revenue based on AUM and investment performance. This clearly stressed existing business models, with much greater pressure on both risk management and cost control on the part of asset management companies. Many clients have become much more risk-sensitive as well as expense-sensitive in an environment in which asset management outperformance is hardly assured.

RISK, COST AND GROWTH MANAGEMENT REBUILD TRUST

The importance of convincing clients that cost control – and the investment management software system supporting it – lies close to the heart of an asset manager’s strategy, and that risk management techniques are as close to the state of the art as possible, is surely more crucial today than before the financial turbulence. Both dimensions of asset management lie at the core of any credible and durable strategy in this industry, and one that will translate into an equally convincing growth profile. To be sure, global assets under management in all sectors of the industry will continue to show disproportionate growth, but that growth will have a different geographical profile than before and will require serious progress on the risk management and cost management fronts to be harvested.

SIMCORP STRATEGYLAB PERFORMS THOUGHT LEADERSHIP

In its capacity as an independent research institution, SimCorp StrategyLab earlier this year undertook a major effort to bring together leading academics and practitioners in a series of thoughtful and lively debates in the form of the SimCorp StrategyLab Copenhagen Summit 2011. Each of the meetings addressed each of the following three industry sectors: investment funds; pension and insurance funds; and asset management. The meetings were based on the observation that each of these sectors follows its own dynamic and faces some unique challenges. The objective of the SimCorp StrategyLab research programme for 2010-11 was to identify and analyse these challenges and to draw some conclusions of strategic value to the industry.

Up for discussion were 12 key challenges facing the three individual industry sectors, related respectively to risk, cost and growth issues. Three esteemed academics headed up teams of high-profile academics from renowned research institutions, such as INSEAD and Stern School of Business, NYU, as well as senior executives from major international associations, consulting and investment organisations, including the European Fund and Asset Management Association (EFAMA), TowerGroup, Danske Capital, Nordea Investment Management & Life and Schroders.

Each of the three academics presents the main conclusions drawn from the three meetings in three white papers that form one of the main deliverables of the SimCorp
StrategyLab research programme for 2010-11. The white papers combine the consensus reached in each of the discussions, as well as on-going research among academics, policymakers and industry associations. We believe each white paper is both definitive and defensible in its analysis and implications for firms in the global asset management industry.

 

Ingo Walter, Director of SimCorp Strategy-­­Lab, is Vice Dean of Faculty and Seymour Milstein Professor at the Stern School of Business, NYU. Professor Walter has had visiting professorial appointments worldwide and remains a Visiting Professor at INSEAD in Fontainebleau, France. Professor Walter‘s principal areas of academic activity include international trade policy, international banking, environmental economics and economics of multinational corporate operations.