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Back to the core as competition heats up

tube_tunnelDistance provides perspective, and so it is that the further we travel away from the 2008 global financial crisis, the better we are able to see its consequences. Or to quote Amin Rajan, CEO of Create-Research, commenting today on Create's latest study of the asset management industry, 'The credit crisis is in the rear view mirror.'

That is not to say that all is clarity. “After-shocks [from the credit crisis] continue to rattle the markets and a thick fog of uncertainty is presiding over the competitive investment landscape,” says Rajan, whose new study, entitled Exploiting uncertainty in investment markets, seeks to provide “an early indication” of how asset managers globally are adapting to the post-crisis environment.

What has Create-Research discovered this time? Having spoken to a global sample of 237 asset managers from 29 countries with a combined AUM of $29 trillion, Create identifies three main trends in its latest study, commissioned by Citi’s Global Transaction Services and Principal Global Investors. First, multi-boutiques – a great pre-crisis buzzword – will become the dominant operating model.

Secondly, clients will focus more on operational excellence when making purchasing decisions, and thirdly alignment of interests will become critical.

These last two trends will basically lead to more outsourcing, as asset managers seek to demonstrate their business resilience and the robustness of their operations.

“The new alignment of interest will have to cover not only financials like fees, charges and returns but also involve non financials like service quality, product innovation, risk tools and operational excellence via outsourcing,” says Neeraj Sahai, global head of Citi Securities and Fund Services. “For the second time in a decade asset managers are concentrating on their core capabilities and outsourcing the non-core areas.”

Outsourcing is set to spread from the back office to the middle office, the study finds. Ninety percent of respondents have outsourced or are planning to outsource custody and settlement, while the figures for valuation of illiquid investments and risk management are 50% and 28% respectively.

These developments – which are not exactly new – will take place against a background of intensifying competition. Respondents to the study predicted that new asset flows would diminish over the next three years and that asset growth would be “dominated by a rebalancing of existing allocations”.

“The small group of asset managers who suffered least [in the crisis] had clear financial and non-financial alignment of interests with their respective clients, backed by operational excellence,” says Rajan. “As a result, asset managers are turning the spotlight on their own offering. They are attacking inefficiencies that have long tended to conspire against the interests of their clients.”

The success of this enterprise will depend on whether an old tune like alignment of interests with the client can be sung with new vigour and that scarcest of commodities: sincerity.

Fiona Rintoul, editorial director
©2010 funds europe