For the next three to five years, money managers plan to rely, as they do now, chiefly on investment performance to differentiate themselves from competitors, according to a report, "Tomorrow's Leading Investment Managers," prepared by the Economist Intelligence Unit, a London-based research company for PricewaterhouseCoopers. Executives from 200 companies of all sizes in the U.S., Europe and Asia were surveyed for the report.
After investment performance, they will rely on customer service, product specialization and investment style to make their companies stand out. Small firms will be more likely to choose product specialization while larger firms will most likely choose customer service, said the report.
But, the report concludes that to be successful, money management firms will need to rethink their strategies, develop a global perspective and pay attention to developing deeper relationships with service partners and customers.
The report found that to stand out, future asset management leaders will have to take stock of their companies and identify inherent strengths. They will need to decide whether they are better suited to be a product manufacturer or integrator'- a combination of manufacturer and distributor.
"The value in the investment management process will shift more toward the integrators who will increase their overall share of the market," said Simon Jeffreys, leader of the Global Investment Management Group of PricewaterhouseCoopers in London. Jeffreys, who oversaw the report, spoke in an interview from London.
Though some very large companies will be able to successfully play both roles, most small- and medium-sized firms will lack the necessary capital and will be forced to focus on one or the other.
"They will need to choose their roles very carefully," Jeffreys said. "We see the future of the industry as being much more competitive and very sophisticated."
According to the report, managers must also become more responsive to the needs of "instividuals" as the retail marketplace merges increasingly with the institutional. Mass marketing is out. Customized products, like hedge funds for high net worth investors, and customized pricing will become the norm. Moreover, asset managers will have to meet these challenges in the midst of a marketplace which is becoming increasingly global as a result of technological advances, the report said.
Many forces are simultaneously at play within the industry. One of the most significant of these is a major shift in demographics. Baby boomers, now producing a steady stream of assets flowing into securities and mutual funds, will begin drawing on those retirement assets within a dozen years. Asset managers no longer able to rely on the baby boom generation to build assets will have to identify new markets to pursue. But there are opportunities.
While Generation Xers represent a smaller group, studies have shown that they are more dedicated to investing and are starting to save earlier. High net worth investors will continue to be a fertile segment for asset managers to target. High net worth investors - those with $1 million in investable assets - now account for $4 trillion in invested assets, and that group is growing. Growth of the defined contribution market will also continue.
"Firms will have to start thinking in terms of marketing to reach these people," said Cathy Lazere, senior project manager in The Economist Intelligence Unit's New York office. Leaders will have to become more "visionary" and think creatively about everything from distribution, to image and branding, to how to apply a "holistic" approach for servicing investors who want a one-stop-shopping experience.
Globalization will continue to spread throughout the money management industry as firms establish subsidiaries abroad, form strategic alliances with leading global players and forge far-reaching distribution arrangements, said the report. Some firms will focus exclusively on one vehicle; others will use all of them to varying degrees. Still others will pursue acquisitions as a way to tap local markets abroad, manage cultural differences and retain close control over strategies, said the report.
Europe will be the next major growth area with an expected inflow of new assets of between $7 trillion and $13 trillion within the next dozen years. European growth is being fueled by a variety of factors including the formation of the European Monetary Union (EMU).
Anticipated shortfalls in European pension plans will occur when the number of retirees exceeds the number of workers.
"One study indicated that Europe's (pension plan system) is under-funded by as much as $2 trillion," said Garry Moody, National Director of the Investment Management Services Group of Deloitte & Touche's Global Financial Services Practice. That translates into opportunities for investment managers as governments are forced to privatize pension plans, said the report.
Meanwhile, Asia is laying the foundation for a financial comeback, said the report. Investment firms are aggressively securing alliances in local markets hoping to participate in the expected rebound. Mutual fund managers are looking to "establish operations now to take advantage of future opportunities," said Moody. "They hope to take the knowledge base they have and replicate it."
To become leaders in the investment management industry, companies will have to expand by excelling in three areas: risk, technology and knowledge management, the report said. Risk management will grow beyond market risk to include preventing staff turnover, managing the security and privacy risks of consumers, and protecting the brand franchise while in the hands of third-parties.
"One of the key indicators that will determine the success of tomorrow's leading managers is technology management," said PricewaterhouseCoopers' Jeffreys. In the past, investment managers relied on technology as a support function rather than as the source of new ideas, said the report. Not surprisingly, the use of most technology is expected to dramatically increase within the next few years, said the report (see chart on page 10.)
Cutting-edge technology that meets consumers' thirst for 24-hour/seven-days-a-week service will be mandatory. Internet strategies will have to keep up with customers' online demands. Firms will need to consider outsourcing non-core functions like transfer agency and some customer service.
Tomorrow's leaders must also fully integrate various computer systems across all business lines. Successful firms will realize the necessity of data marts or warehouses that can provide detailed profiles of investors and allow firms to effectively target individual needs with customized products or services.
While investment managers will have to deal with lots of operational issues, they will also still have to deal with performance, said Mark Hurley, president and ceo of Undiscovered Managers Funds of Dallas, Texas.
"Investment performance is becoming more and more important," said Hurley who was the co-author of a 1995 report, "The Coming Evolution of the Asset Management Industry" while at Goldman Sachs. "While gathering assets is an economies of scale business, managing assets produces dis-economies of scale." Studies have shown that mutual fund returns fall as assets rise, he said. Tomorrow's leading money managers will have to address the concerns of investors as well as 401(k) plan sponsors looking for outstanding performance by agreeing to close the fund at a certain asset level, he said.