SGSS Global Investment Management Survey - Part 2
A highly challenging backdrop for buy-side institutions
The buy-side industry environment in Europe has been facing in-depth changes that are substantially challenging existing business models and will reshape the market in the coming years.
Respondents highlighted 3 structural components of their global environment that are impacting their development strategy:
- The regulatory burden is considered as the most challenging by all the interviewees.
- Low interest rates are also making things difficult.
- Fee pressure, notably due to passive investment’s aggressive fee policy, is becoming a highly sensitive issue for traditional asset management.
On the other hand, it is worth noting – especially at the time we performed the interviews that were completed in early 2018 – that Brexit did not seem to be a concern for our sample.
Key market drivers for the entire sample
A blunt test for business models and profitability
Regulation is like global warming. Asset Managers are like polar bears, whose natural habitat is becoming more and more endangered.
Nearly all respondents mentioned regulations as a game changer, especially as they are driving sensitive cost increases for them, according to 62% of respondents.
Asset Managers are the most concerned by the costs of adapting to the rapidly-changing regulatory framework, particularly the smallest establishments. MiFID II is regarded as the most disruptive of them all by 63% of respondents, putting distribution model, pricing and cost structures at risk.
Asset Owners have furthermore noticed that domestic regulations also directly impact their investment strategies or can even severely call into question their very purpose. 41% of them highlighted this issue.
Furthermore, 50% of Swiss respondents evoked the double impact of the combination of European and local laws, which has consequences on level playing fields.
Low interest rates
When asking Asset Owners – who are those in our sample the most concerned by low rates – what the main negative factor in their environment is, the no. 1 issue for half of respondents is pressure on margins, specifically due to low interest rates. 85% of them consider this to be an obstacle to development, because it generates a lack of visibility and difficulties generating yields.
30% of PE/RE respondents emphasised the high volume of liquidity as one of the consequences of low interest rates, with the risk of a ‘bubble’ effect. This market is expected to keep growing for the next 5 years, but some players are focusing attention on markets that could be insufficiently diversified or too sensitive to the impact of financial markets. Thus, a real-estate crisis is feared by some respondents.
It seems to be less an issue for Asset Managers, who are either neutral or even positive regarding the end effect for 50% of them, some considering that it could even be a catalyst for seeking more stable returns.
Surprisingly, Money Market Funds are not mentioned by our sample. Is it because their assets have slightly increased during the past two years?
Low interest rates put pressure on investment results, and therefore on cost management.
Will passive management fees become mainstream?
Passive management is overtaking active management.
To address the Passive versus Active fee issue, Asset Managers have developed different strategies: some large Asset Managers are simultaneously developing a passive and an active fund range, other large AMs have only developed a multi-boutique approach. Mid and small players are trying to differentiate their active management by becoming even more specialised or by developing new speciality management close to their franchise. Mid-size players are trying to explain that benchmarked active management should not be confused with passive management.
The ‘other’ reasons mentioned for fee pressure mainly concern:
- fee discounts offered by large Asset Managers to gain market share, which mid-size players can do little about, except promote their level of expertise and specialisation.
- the substantial pressure from institutional investors on fees that some Asset Managers are trying mitigate by increasing the development of their retail investor base
Lastly, some large Asset Managers are addressing the issue by switching to a performance-based fee structure (low fixed fees and performance-based incentives).
On one hand Asset Owners and Private Equity/Real Estate players simply do not mention fees. In fact two insurance companies indicated that they are launching or expanding their own asset management unit in order to benchmark the performance and fees of their external Asset Managers.
On the other hand, more than half of Asset Managers mentioned fee pressure. The main reason (46%) comes from the comparison with passive management, which usually has substantially lower fees than active management.
Not a game changer after all!
Brexit: no fundamental change. Changes will affect business models in 5 years.
BREXIT is a no-brainer for Asset Managers in the short term, and could even be an opportunity for some of them in Switzerland or for the largest ones. Concerned large players have begun to roll out their adjustment plan.
It is not appearing to have an impact on Asset Owners. All respondents said that it is “not a concern” for them.
On the contrary, PE/RE players have been quite talkative about BREXIT. In their opinion, London will remain the principal place to meet investors, especially for LBOs and large capitalisations. However, the UK capital is considered to be too exposed to the financial sector. Brexit could thus increase flows onto the continent, especially for small and medium capitalisations. The downside effect would be increased competition in the pricing of targets and assets on the continental market.