Asset managers afraid to leave the safety of the herd are missing out on crucial opportunities for growth in international and emerging markets.
If U.S. firms continue their reluctance to globalize, they may see their best managers and customers get snatched away by bigger, global firms.
New York-based management consulting firm kasina recently interviewed 23 senior level executives from the top 50 U.S. asset management companies to find out how they plan to compete in the future.
"We thought we would get inspired," said Steven Miyao, CEO of kasina.
Instead, kasina found that most of the top companies are too timid to take risks, even in the face of overwhelming evidence.
Despite their agreement on the importance of innovation, few executives had unique ideas for innovative strategies, and their actions suggested they were going to "stay the course" over the next 1-3 years.
"This is really not the right time to be complacent," Miyao said.
"People said they are going to focus on the ABC's of asset management, but everybody does the ABC's," he said. "There are 8,000 mutual funds competing for the same shelf space. Everybody's trying to be within Morningstar's nine boxes, but everybody's doing exactly the same things."
Although 73% of the executives believe future product development efforts would need to focus on "products that are not available in the market today," almost none of them know which types of products to develop, and only a few indicated that the emphasis would have to shift from manufacturing products to devising solutions.
Same Old, Same Old
The majority of the industry is using the same old methods, focusing on the same distributors and advisers, and they are overcrowding large distributors like Merrill Lynch, Smith Barney and UBS, kasina said.
"A lot of these managers grew up in the industry and learned the trade from the bottom up," Miyao said, making them reluctant to use new methods that vary from the tried and true.
But times are changing.
The mutual fund industry in China saw inflows of $442 billion in 2007, up nearly 400% from $118 billion a year before. Asia's overall mutual fund industry could quintuple over the next five years from $1.5 trillion to more than $8 trillion, according to recent news reports.
There is so much money flowing around China right now, the country's top asset managers are beginning to leave the mutual fund industry in favor of "private investment" or hedge funds.
China's private investment industry is similar to our concept of hedge funds, but Chinese laws prevent private managers from issuing shares by themselves, making it much more complicated to manage multiple client accounts.
USA For Sale
International headhunters are bound to target the U.S. mutual fund industry next, stealing the best and the brightest asset managers who aren't afraid to go global.
Without question, the biggest growth opportunities exist outside the U.S., kasina said. Europe and Asia have continued to see growth rates nearly double that of the U.S.
Despite this knowledge, only 36% of executives expect international markets to play a significant role in their firms' growth over the next one to three years.
The credit crisis in the U.S. and the weakened U.S. dollar have put America on sale for foreign investors, and sovereign wealth funds and other foreign groups have pumped billions of dollars into the U.S. in recent months.
Asset management firms in China, the Middle East and other emerging markets seeking a bigger share of the U.S. are already looking to acquire U.S. talent via sub-advisory relationships.
Changing regulations in emerging markets will open the door for foreign investors to invest in U.S. products, and smaller asset management firms with unique areas of expertise should pounce on this opportunity for growth, kasina said.
"You have to go global," Miyao said. "Larger firms have the capital resources to be across the globe, and they should be."
Sub-advisory firms are being presented with a huge opportunity for long-term growth, and smaller firms can also reap huge benefits by going international.
Emerging markets are ready to grow and need good management, and U.S. managers have the skill and experience to help.
Sub-advisory experts predict that international sub-advisory firms will continue to gain more market share in 2008, and lower fees from international mandates could further undercut domestic shares subject to heavier regulatory demands. Asset management firms may look at partnering with hedge funds to get around some of these regulations.
Industry consolidation and internalized fund management in the U.S. could pose challenges to growth, but the sub-advised marketplace is increasingly ever becoming multi-national.
Firms without the sufficient capital to bet on a range of innovative products should pursue fewer, but specific offerings, kasina said.
"With so many copycat products being offered today, distribution, not performance, should be viewed as the means by which firms can differentiate themselves," the study said. "Despite evidence of change, the 73% of executives who are committed to developing outside the box' products in 2008 do not have the necessary processes in place to do it."
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