Are asset managers on the threshold of a new era?

Costs under scrutiny and new competition from non-traditional players. Lamanna (SSGS): “Asset managers reshape the product mix around new client’s needs and look for acquisitions”

Costs under scrutiny. Clients that want “more bang for their buck”. And competition that is also intensifying, not just from traditional rivals, but from tech-savvy challengers. These are the main risks for the asset managers, that are on the threshold of a new era. So, the players are finding new ways to create value for their clients.

Positive outlook
“There is a great feeling for optimism. Managers are in a positive mood”, said Riccardo Lamanna, Country Head for Italy of State Street Global Services, commenting on the State Street 2015 Asset Manager Survey conducted by FT Remark. “We have been seeing both a strong growth in the AUM and the launch of new products. Moreover, there are new needs and all players are trying to place themselves to catch a large portion of this growth”, he added.
The major issues are change and/or renewal and modernization of investment strategies, but also cost related aspects. “In a market that is changing very quickly, some asset managers have to fill the gap concerning their lack of competence in specific products – Lamanna said – In addition, we see very important issues related to both the risks originated by the growing AUM and the new kind of competition from non-traditional players”.

Competition
79% of asset managers surveyed by State Street Global Services (SSGS) expect new competition from a non-traditional market entrant such as a technology firm.
“Asset managers are now under pressure, or expect to be in the future, because of new comers in the industry, with strong technology skills, a large distribution capacity and a strong knowledge of customers’ needs: we’re referring, for example, to Google, Alibaba, etc”, Lamanna explained, adding that these players are currently operating without a clear regulatory framework, but this environment is about to change in the future.
“New comers’ strength and power are very high and these factors are increasingly recognised also by the same asset managers”, Lamanna continued.
Asset managers also find themselves competing with their clients’ own investment talent, as large investors bring more asset management in-house.

Acquisition
“We were surprised that 95% see positive scope for acquisitions, with 46% pursuing acquisition targets today – Lamanna said – So the market is about to change a lot in the future”.
Looking at the Opportunity Index of the SSGS report, the perceived potential for acquisition activity has increased significantly over the past 12 months. The 95% of this year have to be compared with the 74.5% in the 2014. Leading players will move fast to plug any capability gaps while increasing their penetration of the fastest-growing customer segments.
This new competitive landscape requires asset managers to invest in new talent and capabilities.

Reshape the product mix around new clients’ needs
The State Street survey identifies some emerging “key drivers” that may shape success in the future industry landscape. “The first one is that asset managers are reshaping the product mix around new clients’ needs”, Lamanna said. 42% of asset managers in the survey are preparing to enter into a new product category for the first time. In particular, when requested whether the firm expects to launch a product for the first time in the next three years, a 5% answered that they are considering to launch smart beta mutual funds, while 7% is planning to launch smart beta ETFs.
“What clearly emerges from the research is that all players are shifting to multi-asset solutions and liquid alternative strategies, i.e. products aimed at offering a total return, not related to the performance of specific markets, but to the requests and needs coming from clients”, Lamanna explained.
As a matter of fact, almost a fifth (19%) will launch a product in the multi-asset solutions space for the first time over the next three years, and more than one in five (22%) will launch a liquid alternative product. This is a major test of the capabilities of the asset managers.

The capabilities of the asset managers
“Obviously, this trend creates a number of problems. Designing multi-asset, rather than liquid alternative strategies, puts the asset managers under pressure, because they are not likely to be fully equipped to face this challenge and specific skills have to be built up over time; as a consequence, players able to anticipate this trend are now in a better position, but other must still find the way to fill the gap – Lamanna continued – Multi-asset solutions do not require to hire an equity or fixed income fund manager, while it is crucial to gain a deep risk knowledge and put in place adequate management processes”. Obviously, these are solutions requiring some investments; hence, the trend to seek for talent in the market. In this scenario, acquisitions go in to the right direction.