December 2010

EXECUTIVE PANEL: a world view (extract 3)

RT_Dec10In part 3 of FE's roundtable discussion, panellists discuss how competition for asset management business in emerging earkets will shape up... Funds Europe: How will competition between European and North American asset managers versus indigenous managers develop? Will product offering be complementary or competitive? Will the indigenous managers find regulation, which is a familiar challenge to everybody here, a particular problem? Todd Ruppert (T Rowe Price): Again, I think you need to focus on the end customer, and it’s different for a retail investor than for an institutional investor. The large sovereign wealth funds, the large insurance companies and the large established pension funds are going to have more sophisticated personnel and will be looking for the best-of-breed manager, whereas when competing for the local retail investor it is very difficult to compete with the locals. If you look at the top-selling firms in every country, they are all local, so you will offer a complementary product in that respect. Massimo Tosato (Schroders): I agree. You need to differentiate between the offering to individuals versus the offering to the institutional marketplace. In a way, I think some of us that have been in those countries for many years and have learnt how to manage the local rules, culture and the attitude to investment, have certainly found the intermediary channels for individual investors more complex and more expensive. You need a lot of coverage to really understand what helps to satisfy those needs.

It is then very differentiated country by country. Some, like Brazil and Indonesia, are more difficult. Others tend to be a little more volatile like for tax rules in Korea and Taiwan, and can very much change the success of one product versus another with just a tilt in regulation, such as in favour of domestic investment versus non-domestic investment, or domestic wraps versus non-domestic wraps. Gary Withers (First State): It is the emergence of the skill set. We have all benefited coming from markets where either our companies or the places we work from have a long tradition of investment management. In new countries that is not the case. We talked earlier about India and China, where local asset managers are rapidly acquiring the knowledge they need to be successful. It does not come back out in two or three years – it comes out over ten years to 15 years. There is probably a lot more going on than we realise in terms of how that skill set is building and I think the big firms that have managed to integrate locally will continue to be successful.
However, I would expect a number of local investment firms to demonstrate that skill set over time, in places like China, India and Brazil. We are all facing a much more competitive landscape, not on a twelve-month view but on a five-year view. Clive Bellows (JP Morgan): We are seeing asset managers from Asia and the Middle East coming to Europe and launching European-domiciled funds. If I look at our funds business in Luxembourg, we see more enquiries and more clients coming from outside of the more traditional Anglo-Saxon asset manager client base. Funds Europe: How significant is the economic situation at home in terms of less access to loans for many businesses going to affect the financing of international expansion? Helena Morrissey (Newton): Going back to my original comments, I said, ‘Can we afford not to? Can we afford to ignore it?’ I don’t think any of us are saying that we are or that we can, but I think that if you’re in a profitable business and managing quite well through the recent difficulties in the financial markets, then it’s a question of weighing up the relative arguments for focusing your investment money in one place or another.

You might get a very different set of questions and answers from people who have had a severe testing of their finances over the last couple of years, but for the group around the table we are probably all in a position where it is a question of where we are going to choose to invest that marginal dollar or pound or euro. Ruppert: You can then look at the market split between independent asset managers and those that are subsidiaries of a large financial conglomerate that may have had a lot more financial difficulty through the crisis. Independents are continuing to expand pretty aggressively in some cases. There are a few asset management subsidiaries of banks that have pulled in their horns, but most of them are still expanding. So despite the draconian problems that have occurred, they are still expanding and that gets back to Helena’s point that we can’t afford not to. Withers: This is a growth opportunity for those institutions too, so unless they have been really critically hurt, if they are strong enough, they will want to invest. Tosato: I agree. But there are two critical differences between affiliated businesses versus independent businesses. The affiliated businesses that were building their client bases mainly from the network within their parent institution are the ones that had been suffering the most. Secondly, the difference is between those companies that have been delivering the promised performance to clients, versus those that have suffered with their investment performance.

All those companies that have had good results and that always had an independent positioning with a diversified client base are actually doing very well. 2010 is going to be one of the best years in the industry for those companies. In our case, for example, the domestic UK market is quite long-term oriented, solid, stable and it’s always been one of the best markets in which we operate. Furthermore, today 72% of Schroders’ revenues are international. This is likely to be a record year in terms of both net new business and profitability. Our main question is how to maintain it. That is what concerns me, rather than how to overcome the difficulties! Funds Europe: So we are likely to see some acquisitions next year? Tosato: We don’t have a very acquisitive culture; we believe that in a talent-driven business, organic opportunities longer term are always better. Withers: And most of the opportunities available would have to be organic, because there are very few acquisition opportunities in the markets we have been talking about. Funds Europe: Many in the market have talked about the rise of the boutiques. But are these smaller players likely to face financing problems as bank lending continues to be tight?

Withers: Their existing business is going to be more expensive because of the way the regulatory frameworks have tightened. While it is fashionable in the industry to argue against that, you can see why the regulators are pushing down that path. So yes, the boutiques are not only going to struggle to invest in new areas, but they are also going to struggle with the economics of their existing business.

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