Because of clients’ need for further alignment, perhaps, multi-boutique business structures are becoming more popular, Rajan writes. Boutiques within an institutional stable have the freedom to strike customised deals, build close rapports with investors and put some skin in the game. They also provide parent companies with diverse products, meaning they aren’t reliant on one or two big strategies to gather assets and capacity won’t be reached so quickly. Rajan finds the financial crisis “profoundly” changed clients’ needs. They now want a fiduciary overlay that checks the behavioural biases which have influenced managers in the past, and stops asset managers from selling products that are not “fit for purpose”.

Investors also want meritocratic incentives in which “gains and pains” are shared equally between themselves and managers, and in which common investment beliefs and time horizons for performance are set. Such an overlay can bind the interests of asset managers and their clients, and investment staff within asset managers, Rajan reckons. It demands that managers fully disclose risks, costs and strive for product integrity. The proximity it creates allows managers to know their clients’ goals and fears so they can design suitable solutions. Managers identified the next phase of asset growth to be “one-third organic and two-thirds displacement”: new flows will come from major sovereign, government and retirement funds, but the largest allocations will come from DC funds spinning out of definedbenefit (DB) structures, wholesale managers selling products through advisory channels and insurance funds outsourcing asset management to external managers.

Large-scale asset rebalancing will take place as baby boomers near retirement and DB funds change their investment approaches, but the volume of new “money in motion” will be small until at least 2012. Lifecycle strategies are a major opportunity for managers. The report predicts that by 2015, between 35 and 50 per cent of all DC funds will be invested in some permutation of target-date funds.