Traditional active funds management, where long-only equities and bond managers charge asset-based fees, will plummet to less than half of the total industry market over the next five years, according to a report from the advisory firm Putnam Lovell.

More than half of the market in funds management will be derived from performance fees, alternative investments and the proliferating long/short extension strategies by 2012, the report says. Putnam Lovell, a US-based investment bank and M&A advisory firm focused on funds management, estimates that the traditional active component of the industry makes up about 69 per cent of all industry revenue, as of the end of last year. The latest report, written by Ben Phillips, managing director and head of strategic analysis, says that the traditional controllers of the funds management industry – banks, insurance companies and investments banks – will also lose ground over the next five years. Independent and exchange-listed firms, both traditional and alternative in styles, will increase their share of the market from 24 per cent to 33 per cent during that period. “Increasingly, (banks, insurance companies and investment banks) will find it more lucrative to assemble unaffiliated products and play the role of professional buyers rather than fight a losing battle for market share with independent managers,” the report says. “Captive funds management operations of banks and insurers will agitate for more autonomy and spin-offs will become more common, particularly in Europe and Japan.” Phillips said that yield, rather than asset accumulation, would increasingly be the focus of investors, boosting demand for a new generation of products. “More than ever in funds management, performance, not capital or brand, will separate the winners and losers. But investor inertia is fading and the price for adjusting slowly to this new environment will rise dramatically,” he said. Some of the forecasts in the Putnam Lovell report include: . ETFs and low-cost products will increasingly endanger active managers . Hedge funds will be more easily distinguishable but about 20 per cent of all hedge funds will disappear in the next five years . Firms reliant on long-only mutual funds will face dwindling prospects unless they reinvent themselves . Sub-advisers (underlying managers of multi-managers and funds of funds) will capture increasing share, and . Demand for performance fees and customised benchmarks will rise.

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