Seismic Shifts in Investment Management

Critical changes: Opportunities and Threats

The UK investment management industry is undergoing vast structural changes. Platforms are disrupting traditional distribution. Distinction between retail and institutional investing is blurring. Passive investing is reducing fund inflows to traditional asset managers

What does this mean in practise for UK-based global asset managers? This report, produced by The Economist Intelligence Unit on behalf of Deloitte, explores the drivers behind these fundamental changes in the industry.

Emerging: Four key trends

Based on research and interviews with senior executives at UK-based global asset managers, the report identifies four emerging key trends which are emerging resulting from the current industry shake-up.

  1. Retail-isation: Pension liabilities around the world are moving from the state and employers to the individual, via defined contribution schemes. As a result the retail investor is becoming increasingly important.
  2. New intermediation models: Asset managers have historically controlled a significant part of the value chain but are in danger of losing out as others seek greater control, including:
    •    platforms
    •    wealth managers
    •    insurance companies
  3. Internationaliation: Asset managers are adapting to demands from UK investors for increasingly global products. At the same time, wealth in emerging markets is growing, creating new client bases for asset managers in these local markets.
  4. Pricing and cost pressures: Pricing pressures come from several sources. By directly comparing funds, platforms can force down fund management charges. In addition, the continued growth of low-cost passive funds can directly challenge active funds that only achieve “marginal alpha”. Regulatory costs add to the pressure.

Four key industry responses

The report identifies the following four key industry responses to these trends:

Distribution: Asset managers are faced with two choices:

  • Build direct retail businesses
  • Strengthen intermediated approaches

The majority of asset managers interviewed stress the importance of building deeper partnerships with their intermediaries as their primary route to market.

Products: Asset managers targeting foreign markets are either:

  • Taking UK manufactured products via global distribution networks
  • Building a domestic presence in a smaller number of geographies using specifically targeted products

Many active managers are also responding to pricing pressures by choosing one of two routes:

  • Offering higher, more differentiated alpha performance or
  • Lower-cost, semi-active funds with reduced costs

Pricing: Interviewees accept that there is a significant pricing pressure on UK-focused asset managers, and there is evidence of feed being reduced in places. Most are seeking ways to reduce prices selectively by moving to variable pricing models.

Costs: Many firms have introduced cost-cutting and more disciplined spending regimes. Although interviewees display an appetite for more radical cost savings through outsourcing, they struggle to understand which functions are key.

The Deloitte View

Throughout the report, we weigh up what these shifts mean in practice for asset managers in the UK. The revealed white-space opportunities – and threats, indicate that to stay ahead of the competition, asset managers need to understand where the industry is headed and adapt their model.

Given the drivers identified in this research, we believe asset management boards have four sets of strategic choices to make:

  • What client segment mix will be optimal – retail or institutional?
  • Which distribution model will best achieve goals – direct or intermediated?
  • What should be the preferred product and management style – active or passive?
  • How to best capture demographic change – configure for local markets or global?

Successful competitive strategy and scenario planning over the next 3-5 years will depend on understanding how these factors interact.

“The UK investment industry is at a turning point. Those asset managers with winning funds and high-performing strategies will continue to thrive and be able to charge premium prices; those with poor or mediocre performance will be squeezed by passive investment funds. The result is likely to be consolidation among wealth managers and platforms and a reduction in the number of funds.”
Mark Ward,  UK Head of Investment Management, Deloitte

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