Market Overview
There is evidence that confidence is returning to the fund management industry after the turmoil of 2008 and subsequent nervousness of 2009. With the worst of the recession seemingly over, investment managers and advisers are looking ahead, planning and preparing to execute strategies to help them recapture growth.
A number of themes have prevailed and there are challenges which will continue to face the fund and wealth industry going forward.
Consolidation
As the markets declined, there was pressure on banks to enhance their liquidity leading to the sale of a number of investment management operations. This was demonstrated by the sale of BGI to Blackrock, Artemis to AMG, Societe Generale Asset Management to GLG and Insight to BNY Mellon. Others have seen this as an opportunity to "bulk up" assets by strategic acquisition such as Henderson's acquisition of New Star and Aberdeen taking on Credit Suisse Asset Management.
Private Equity firms have also continued to seek opportunities such as Hellman & Friedman and Bain Capital Partners joining forces to acquire Neuberger Berman from Lehman Brothers. Consolidation is likely to continue to be a feature in the coming 12 - 18 months.
Polarisation of Assets
Over the last two years, hedge funds, alternatives and high alpha managers have suffered as investors have sought lower cost offerings such as index/passive, enhanced index and ETF products. As the recovery takes hold, money is returning to the unconstrained, absolute return and high alpha managers. Firms are seeking to upgrade and to hire high alpha and specialist managers to introduce new investment capabilities.
There is evidence of new cash flows in the institutional space but the competition for this money will be fierce as new entrants (American Century, Vanguard and AMG to name a few) continue to see this market as an opportunity to gather assets. There is, and will continue to be, a demand for strong relationship managers to retain assets as well as distribution expertise to attract new business.
Compensation & Retention
Following new guidelines from the US and UK regulators, many asset management firms have had to review the way in which they compensate their fund managers. There is an increased emphasis on longer term (3 to 5 year) performance and deferred reward. In some firms, co-investment schemes have been introduced ensuring a more powerful alignment of interests between the fund managers and their clients.
To some extent, the migration of talented specialist managers to hedge funds and boutiques seen early in the 21st century has been reversed as many sought the stability of the larger asset management groups. The boutiques ability to contract a revenue share deal, generated on both management and performance fees, has been challenged by the more enlightened established investment houses. For key managers, they have changed their compensation models to accommodate revenue share schemes. Houses with strong brand and efficient product distribution capability can make a performing fund manager a good deal of money and perceivably can provide a more stable platform.
Hedge Funds / Absolute Return
As low interest rates prevail, the demand from the more sophisticated investor for absolute return products, be they hedge funds or concentrated alpha-seeking long-only portfolios, is returning. The more traditional asset management firms are under pressure to introduce contemporary and innovative products as well as to enhance and upgrade their investment capabilities.
The historic level of gearing achieved via derivative / OTC contracts and disclosed in some of the recent credit related hedge funds that have failed is truly staggering and also very concerning! As Regulators pay far closer attention to how hedge funds function, boutiques are being forced to professionalise. There is strong demand for Chief Operating Officers who understand the regulatory framework and how to structure asset management businesses as well as for experienced Risk Managers. Hedge funds are also seeking to harness longer term client commitment via innovative fee structures and hence their interest in attracting institutional asset gatherers who can access this market.
Wealth Management
High Net Worth institutions/Private Banks seemed to weather the storm better as demand for teams and private bankers continued throughout 2009. The modern private banker is required by his / her clients to possess a thorough understanding of a broad range of financial products and services from vanilla equity and bond offerings to complex structured products, tax and asset protection schemes, absolute return, private equity and real estate. Bankers with these qualities and a book of transportable client business remain in very high demand.
The environment within which Private Banks operate continues to be highly regulated and EU regulations relating to money laundering, client disclosure rules, and the shift in the location of assets from "offshore" to "onshore" has levelled the playing field. Despite the Government's recent changes to the taxation status of "non-doms" the UK should continue to remain in the forefront of global private banking. If the recommendations of the RDR prevail, those offering investment advise, be it wealth managers, private bankers or IFA's, will be under enormous pressure to ensure their advisers meet QCF level four by the end of 2012. The implications of this, combined with the migration to fixed fee advice have yet to be fully addressed.
