Recent research and white papers

AIFM DIRECTIVE HAS BEEN PASSED – CHALLENGE , CHANGES AND OPPORTUNITIES FOR THE INVESTMENT MANAGEMENT INDUSTRY

Since the initial draft of the Alternative Investment Fund Managers (AIFM) Directive was issued, there has been a significant amount of regulatory uncertainty surrounding the alternative investment management industry in Europe. However, after 19 months of intensive debate, negotiations on the AIFM Directive reached a conclusion and the text passed during the European Parliament plenary session on 11 November 2010. The vote at the European Parliament can be seen as a major step towards closing this chapter of the AIFMD and will eliminate much of the uncertainty that has hindered the industry. The successful vote has finally permitted the global alternative investment management industry, their stakeholders, and investors to move forward and begin to prepare for the two-year implementation phase of the AIFMD. This phase will see the technical guidelines for implementation being formulated, as well as implementation laws being drafted, all of which will require close monitoring from the real estate industry to ensure that the current framework translates into sensible and appropriate measures. Two reports by major consultancies present and analyse the challenges, changes and opportunities faced by the investment management industry with the passing of the AIFM Directive.

‘A new dawn for alternative investments – Navigating the challenges and opportunities of the AIFM Directive’
Ernst & Young, 30 pages, November 2010

‘AIFM Directive – Crossing the finish line’
Deloitte, 6 pages, January 2011

THE SOLVENCY II CHALLENGE : ANTICIPATING THE FAR-RANGING IMPACT ON BUSINESS STRATEGY

Insurance companies are making tremendous efforts to comply with Solvency II, but to date their responses have been more mechanical than strategic. To recast Solvency II as a source of value rather than simply a driver of costs, insurers need to look beyond mere models and metrics. They must capitalise on the new rules by revisiting their business strategies, product portfolios, distribution approaches, and risk management practices. Some insurers may need to chart an entirely new course for their businesses. In this report, the Boston Consulting Group brings forward the importance for insurance companies to use the Solvency II regulation as a source of strategic value and not just as a driver of costs. The report is based on workshops and interviews with senior executives at large and mid-size insurers in Europe and North America.

‘The Solvency II Challenge: Anticipating the Far-Ranging Impact on Business Strategy’
Boston Consulting Group, 2010

SOLVENCY II : QUANTITATIVE & STRATEGIC IMPACT – THE TIDE IS GOING OUT

As the Solvency 2 deadline moves closer, and the framework itself becomes clearer, the strategic implications for the industry come to the forefront. This report takes the viewpoint that Solvency 2 will act as a catalyst for significant change with profound strategic impacts. Oliver Wyman, jointly with Morgan Stanley, has applied the Solvency 2 framework to the industry overall and on individual business models. Based on this proprietary analysis, the report shows among its findings that the solvency ratios of European insurers will decrease from ~200% under Solvency 1 to ~135% under Solvency 2 on average; a fundamental reappraisal and restructuring of traditional participating business can be expected; cost of capital is likely to increase in the short-term; reinsurers will be winners of Solvency 2, while geographically localised, smaller insurers – including many mutuals – may suffer; a step change in ALM capabilities and an adjustment of investment strategies is required; and European groups may need to reconsider their competitive position in markets with ’non-equivalent’ regulation, as the USA is likely to be. 

‘Solvency II: Quantitative & Strategic Impact – The tide is going out’
Oliver Wyman & Morgan Stanley Joint Report, 92 pages, January 2011

LIFE INSURANCE CFO SURVE Y #27

This report is based on a web-based survey among US life insurance CFOs and points out key challenges facing life insurance companies in 2011 and the likely responses to those challenges. The report highlights that the economic environment is the key challenge for companies in 2011 to achieve their growth, profit and risk objectives. Growth rates in sales, expense and cost management, and the current and future regulatory, tax and legislative environment are also important, but compared to the economic environment they are less of a challenge. In order to handle these challenges, companies are focusing on improving management discipline, enterprise-risk management and distribution productivity.

‘Life insurance CFO survey #27’
Towers Watson, 6 pages, November 2010

US LIFE INSURANCE OUTLOOK

In this report, Ernst & Young presents four issues that will influence the US life and annuity insurance industry in 2011. The first issue is the changing regulatory environment with, for example, the Dodd-Frank Act challenging insurers to preserve their financial strength. The second issue for organisations is to make sure to hold enough capital and also be able to control risks as a consequence of the recent financial crisis. The third issue on the list is the need to improve operational efficiency to reduce costs. Last on Ernst & Young’s list is the need to reinvent products and services and use their distribution channels to enable growth. 

‘US life insurance outlook’
Ernst & Young, 4 pages, January 2011

INCHING TOWARD PRODUCING A UCITS IV KID

With the deadline for producing Key Investor Information Documents (KIDs) looming, managers urgently need to focus on how they will be able to meet the logistical challenges of production and distribution. While transitional arrangements exist, all new funds launched after 1 July 2011 will require a KID, and therefore time is of the essence. This update from PwC indicates that, despite the fact that the KID is mandatory for all UCITS-based funds as of July 2011, many firms do not have a readiness plan in place. The article outlines the steps companies need to take in order to be compliant, as well as addressing the challenges faced by companies that outsource all or part of their investment management processing to a third party.

‘Inching toward producing a UCITS IV KID’
PwC, 5 pages, November 2010

TOP 10 TRENDS IN SECURITIES AND INVESTMENTS, 2011

This report from Aite Group breaks down the top 10 issues facing the investment management industry in the upcoming year. Aite Group sees regulation as a key influencer on securities and investments, with the Dodd-Frank Act, various European regulations and the move of OTC trades to exchanges among the key factors cited. The report also discusses challenges in data management and investor-buying behaviour.

‘Top 10 Trends in Securities and Investments, 2011’
Aite Group, 25 pages, January 2011

INVESTMENT MANAGEMENT: TOP 10 TECHNOLOGY INITIATIVES FOR 2011

After the wild ride that investment managers experienced in 2008 and 2009, 2010 was a better year, with mutual fund assets and hedge fund assets rising markedly. But investment firms will not forget the impact of the financial crisis on their revenues and margins, investor attitudes and asset allocations, and universal perceptions of risk. TowerGroup‘s annual Top 10 Research Note for the asset management business discusses the business drivers and strategic responses resulting from these events and lessons and focuses on the top 10 technology initiatives for investment managers for 2011. This reports shows how some of the key ramifications of the financial crisis will manifest themselves in earnest in 2011. Regulation both in the US A (i.e. the Dodd-Frank Act) and Europe (i.e. UCITS IV, IFRS 9 and AIFMD ) will reshape how business is done and cause investment managers to focus as much on risk management as generating returns. Among other factors, the growing influence of mobility, social media and cloud computing for investment managers is also covered in the report.

‘Investment Management: Top 10 technology initiatives for 2011’
TowerGroup, 11 pages, January 2011

2011 TRENDS TO WATCH: FINANCIAL MARKETS TECHNOLOGY – DEALING WITH VOLATILITY AND REGULATION

The financial markets sector has seemingly emerged from the financial crisis in relative health, with the restoration of growth and profitability. However, the repercussions of the crisis are still being worked through and the sustainability of future growth is a key question for 2011. This report from Ovum Datamonitor weighs in with views on the trends and challenges that will shape the investment management industry in 2011. Not surprisingly, regulation and market volatility are seen as the main drivers of change going forward.

‘2011 Trends to Watch: Financial Markets Technology – dealing with volatility and regulation’ Datamonitor, 23 pages, November 2010

FINANCIAL REFORM INSIGHTS – DODD-FRANK‘S VOLCKER RULE CHANGES L ANDS CAPE FOR INVESTMENTS BY BANKS AND OTHER ENTITIES

Of all the provisions included in the 2,300 and plus pages of the Dodd-Frank Act, perhaps none has generated more attention than Section 619, more popularly known as the Volcker Rule. This briefing paper from Deloitte Touche Tohmatsu discusses the impetus for the Volcker Rule, when and how it is to be implemented, as well as what investment managers investing in US markets need to be aware of.

‘Financial Reform Insights – Dodd-Frank‘s Volcker Rule changes landscape for investments by banks and other entities’
Deloitte Touche Tohmatsu, 4 pages, October 2010

EUROPEAN FUND MANAGEMENT INDUSTRY NEEDS BETTER GRASP OF NON -FINANCIAL RISKS

This publication looks into how non-financial risks and failures have impacted the regulatory agenda in Europe and traces the management of liquidity, counterparty, compliance, misinformation, and other financial risks in the fund industry. By identifying the distribution of risks and responsibilities in this industry, the publication examines how convergence between country regulations could be achieved. Finally, the publication assesses how fund unit-holders can be protected in the best way with appropriate regulations, improved risk management practices, and greater transparency.

‘The European Fund Management Industry Needs a Better Grasp of Non-financial Risks’
EDHEC-Risk Institute, 92 pages, December 2010

New reports published and information which could be relevant for listing can be submitted for review to: Co-Editor Mette Trier, mette.trier@simcorp.com