SGSS Global Investment Management Survey - Part 3
Within this challenging context, remaining competitive and leveraging new opportunities requires more than a marginal improvement in current activity.
And indeed buy-side firms taking part in this survey are engaged, in most cases, in a comprehensive review of their commercial strategy, and therefore their business model.
Four domains have been highlighted by respondents as the main strategic levers for future success:
- For Asset Managers, the distribution strategy, which is benefitting from new perspectives thanks to new technologies.
- Obviously investment diversification, which appears essential to many institutions in order to sustain performance and balanced risk.
- In this respect, it is also important to note the inexorable growth of ESG and Carbon free investments, which are tending to become mainstream.
- Lastly, consolidation, which is regarded as a major issue.
Taking all these factors into account paints a picture of a very different buy-side industry in 5 years’ time compared with the current one.
And in fact the story has already begun!
Asset Manager Distribution
Pushing back frontiers
We want to develop our retail clientele and are hiring sales for this. We have set a very high inflow target.
Leveraging digital tools and Artificial Intelligence, 37% of Asset Managers mentioned retail distribution in their development strategy. The most committed players (the larger ones) intend to use robo-advisors, web platforms and even the possibility of buying an existing retail Asset Manager. This is an impossibility for small ones because of the size of investments and weight of regulatory obligations.
Putting aside the largest players who already have a global strategy, 36% of mid and small size Asset Managers have defined geographic expansion projects, which often remain vague (international, Europe, Scandies, Asia). In Europe, Spain, Italy (each at 25%) and Switzerland (15%) are the most frequently mentioned countries.
To support their distribution strategy, Asset Managers have identified two main courses of action.
- 41% of them mention cooperation. For 52% of this population, this cooperation is geared at distributors, and 19% at cooperation with other AMs (either small or peer AMs, or with the purpose of an acquisition); it should be stressed that 14% explicitly stated that they do not want any cooperation to avoid losing clients, the remaining intend to build distribution partnerships within their group.
- 25% want to improve client knowledge. This group only comprises large Asset Managers with a dedicated marketing team and French AMs that lack information on their end-investors because of the local CSD distribution model.
A lever for generating yield and growth
Diversification of investments is fundamental. The objective is to reach between 20 and 30% of alternative assets.
Diversification is the best way to balance a performance model, but also to benefit from the most dynamic fundamentals.
PE/RE players are the most committed to diversifying their investment strategies:
- 30% are looking into non-performing loans, social housing or rental approaches.
- 30% are specialising in new sectors (art, wood, digital, fashion, tourism, aircraft, infrastructures and renewable energy).
Asset Owners and Asset Managers are equally going towards two routes:
- invest in alternative assets including loans, PE and RE funds.
- increase ETFs part in their portfolios or develop ETF range.
Nevertheless, diversification is only being considered by mid-size and large Asset Managers. Indeed, for smaller players it remains difficult or costly to attract new expertise and launch new activities.
Please note that ESG is not viewed as a diversification.
Environment, social and governance: how strong is the commitment?
Sustainable investments are dictated […] a real standard is still missing. The market needs pragmatic solutions.
ESG criteria are an important component of all the French PE/RE players’ strategies, and this is no surprise given that France has the most advanced regulatory framework in this domain. The respondents’ strategies range from close monitoring, with the support of consulting firms, to a full BREEAM* property holdings approach. On the other hand, Italy is considered to be lagging and to be a late adopter in Europe regarding ESG, due to lesser interest from domestic investors and to fewer regulations.
Among Asset Managers and Asset Owners, some respondents (30%) show a very high level of commitment and are clearly aiming to become leaders on this segment.
They do consider that, within the new investor framework, value matters and drives returns as clients require purpose or meaning on top of financial performance.
Almost half of the Asset Owners surveyed have an ESG approach with a majority of opportunists and beginners.
There is little doubt that SRI strategies will keep expanding market share as both investors (retail and institutions) and larger players make it mainstream.
* BREEAM is a recognised methodology to assess sustainability of buildings, including management, energy, health, transport, water, materials, land use, waste and pollution.
Pace is increasing
There is a move towards two extremes, with little room left for mid-size players. Those without critical size will disappear
It is becoming obvious for a large number of Asset Managers that critical size has grown in recent years. Indeed, several respondents quoted 1 trillon euros in AUM as a market target. The market is therefore in desperate need of consolidation.
PE/RE players are also seeking to increase critical size, with the threshold starting at EUR 2 billion for some of them, reaching EUR 5 billion in order to be selected by Asset Owners.
Asset Owners are definitely not spared from this consolidation movement, although our sample didn’t mention it.
36% of respondents are considering a soft consolidation through partnerships with peers. In any case, we can ask ourselves whether such an option would meet the objective of reaping the expected benefits of consolidation in terms of economy of scale and flexibility to accommodate client requests.