In order to be bullish about their businesses, most investment managers need to take a long-term view. Globalisation, which involves the further integration of financial markets and economies, should promote the growth of pools of organised savings over the next decade or two. Because of ageing populations in developed and developing countries, demand for retirement-savings solutions should also increase steadily over that time.
In the short-term, though, it is the challenges that are more important. Political and economic uncertainties are much greater than they were prior to the global financial crisis. Interest rates will remain extremely low in most developed countries for the foreseeable future. In many countries, regulatory reforms are complex and extensive. For most investment managers, the reforms are consistent with higher costs at a time when there is downward pressure on prices and revenues.
What goes up…
Joseph Antonellis, vice chairman of State Street Corporation, argues that this has produced a new normal for investment managers globally.
Speaking at the Conexus Financial/ACSA Investment Administration Conference in Sydney on February 13, he highlighted some of the challenges that have become evident since 2007:
A higher percentage of a reduced profits pool is being paid to distributors.
There has been a movement away from traditional long-only domestic standalone products towards passively managed products, alternatives and emerging-markets offerings that are highly profitable for relatively few managers. In many countries, risk-averse savers have clearly preferred bank deposits to managed products (including money market funds).
Most crucially though, the global asset management industry has stopped growing. Research undertaken by Boston Consulting Group (BCG) shows that worldwide, assets under management at the end of 2011 amounted to US$58 trillion or marginally less than the US$59 trillion of the end of 2007.
Antonellis notes that the outcome would have been worse but for the 7-per-cent annual growth in assets under management in emerging markets.
…keeps going up
In this context, the investment managers who serve Australia’s super funds have fared well. According to the Australian Prudential Regulation Authority (APRA), super funds’ assets under management rose from $1.17 trillion at the end of June 2007 to $1.35 billion four years later. And the regulator suggests that the figure had risen above $1.4 trillion by the end of September last year. Of course, these figures would look even better in US dollar terms.
In essence, the superannuation guarantee has continued to support the growth of super funds at a time that they have had to deal with many of the headwinds that are being faced by institutional investors in other countries. Research undertaken by Economist Intelligence Unit for State Street found that 37 per cent of European investment managers are looking to grow assets under management by 4 to 7 per cent over the next two years. In Australia, it is reasonable to suggest that the corporate planners in the investment management industry would be more upbeat than this.
Analysis by State Street Center for Applied Research (SSCAR) suggests that the growth has not been because retail investors are enamoured of investment managers. It has found that over 50 per cent of retail investors globally agree to some extent that financial institutions are most likely to offer products and services that are in the firm’s best interests. The figure was slightly higher in Australia. Most importantly, the number of retail investors in Australia who strongly agreed with the proposition was significantly higher than the number globally. Conversely, fewer Australian retail investors strongly agreed with the counter-proposition, that financial institutions are most likely to offer products and services that are in the clients’ best interests.
In short, Australia’s investors share a global mistrust of their service providers. This may be because of dissatisfaction with investment performance and the advice that they are receiving. Research from SSCAR found that over 40 per cent of Australian retail investors – significantly more than the number of investors globally – ranked performance in the top three value drivers. Over 25 per cent of Australian investors – again, a relatively high number in global terms – see unbiased high quality advice as a key value driver. Conversely, Australian retail investors appear to be relatively unconcerned about transparency, convenience or client-service excellence.
Looking forward, the issue of trust is likely to become more important in this country as increases to the superannuation guarantee boost the super funds’ assets under management even further. Australia’s investment management industry is abnormal in that it is clearly growing: this will bring new challenges.