Investors are interested in innovative investments that meet specific principals, according to a study by CREATE Research, commissioned by Citi’s global transaction services and Principal Global Investors.
The survey of 500 asset managers in 30 countries, “Investment Innovations: Raising the Bar,” also found that the U.S. has been a principal innovator and an early adopter in asset management, and that defined contribution plans are likely to adopt more accumulation and decumulation options in the decade ahead.
The survey asked respondents which innovations they believe had worked, which have not, what should be the main thrust of innovations over the next three years and what specific improvements and actions they want to see related to these innovations.
The financial executives said 2008 was a watershed year, as many financial products, asset classes, return-enhancing tools and asset allocation techniques proved fallible as the financial crisis took hold. At this point, financial executives are keen on working more closely together to develop innovative solutions.
“The global economy is still in a state of uncertainty, and strong headwinds in the shape of financial regulation, scarcity of talent and revised client expectations are buffeting the industry,” said CREATE-Research CEO Amin Rajan, who authored the study. “Against this backdrop, there has to be a clear line of sight between innovations and client needs. Asset owners will demand creative solutions that deliver tangible value. New products developed without such fundamentals and without clear client engagement will struggle to gain tractions.”
The study identified 35 innovations that gained significant adoption in the past decade, with 57% pointing to emerging markets equities funds as delivering the most value. The least-favored innovation was leveraged products.
Fifty percent of pension plans believe a switch from products to solutions will be a key driver of innovation in the next three years.
While 64% of asset managers think further product innovation will deliver genuine value over the next three years, only 39% of clients think so.
Lack of client engagement is seen as a major cause of failed innovation; 75% of pension funds said they are only rarely or occasionally engaged when asset managers innovate their financial products.
Eighty-eight percent of asset managers foresee further product innovations in the next three years, but 52% think they will only be incremental innovations that improve existing products rather than create new ones.
In the U.S., products of most interest are high income-producing, given the 70 million Baby Boomers who are about to retire. American investors are also interested in diversifying into emerging markets funds.
The report also found that investors expect great innovation in defined contribution plans in the next decade, particularly into additional target-date and target-risk funds.
“The current marketplace for investor services has evolved to a place where client focus on the elements of risk management and control are driving them to seek more holistic investment solutions from their providers, as well as the fact that they are increasingly concentrating their buying with fewer providers,” said Bob Wallace, North American head of Citi’s securities and fund services. “A comprehensive set of innovative solutions across the entire asset class spectrum has become a necessity for winning business as well as the ability to provide tailored services that meet individual client objectives.”