European asset managers have not had to seek their troubles in 2002. Very difficult market conditions, combined with the continuing fall-out over corporate accounting irregularities and question marks over the impartiality of investment research, have raised major concerns in both the retail and institutional fund management sectors. With research by Oliver, Wyman & Company and UBS Warburg suggesting that European asset management revenue growth will be only 5% p.a. between 2001 to 2006, the question is this: are we moving towards fundamental change in the industry, or is this merely a temporary blip?
Managers can rarely have experienced such pressure to explain what has gone wrong and the reasons behind it. Investors of all types have had their faith shaken in the conventional wisdom about the value of long-term equity investment. Now they are asking their managers to defend their decisions and justify their asset allocation strategies.
With the exception of the UK and the Netherlands, European investors have been relatively slow to adopt the equity culture. In part, this has been because of investment restrictions and the structure of the industry, but the introduction of the euro, and the growth of e-trading, were meant to liberate investors and broaden their horizons. However, the evidence to date suggests that the equity culture is failing to dominate the retail market: since the middle of 2000, equity-based European investment fund assets have declined from a high of €1.5trn to €1.2trn, whilst money market and bond fund assets now stand at a combined total of over €1.5trn.
As the power of the self-directed investor grows in Europe, there are interesting parallels with the US experience. According to data compiled by the Investment Company Institute, equity funds have declined by nearly $650bn since December last year, whilst bond and money market funds have grown by $76bn over the same period. In July of this year, equity funds had a record outflow of nearly $52bn, the second largest outflow in percentage terms since October 1987. In the same month, bond funds had a record inflow of $28bn, and money market funds had an inflow of nearly $55bn. The big question is whether this is a temporary phenomenon or a longer-term shift.
If individual investors are changing their perception of the risk/reward ratio, and are prepared to accept lower returns as a trade-off for reduced risk, institutional bodies are beginning to call into question the validity of tactical asset allocation models and initiate a major re-evaluation of asset allocation strategies. Many of the market’s models are based on theories that were first developed in the fifties and sixties, taking no account of the dramatic changes that have occurred since then: the globalisation of markets and economies, tighter regulation and changes in the underlying economic background in respect of inflation and interest rates.
Managers will also need to think about their attitude towards risk. Typically, the first priority of a fund manager is not market risk, but business risk – the risk of failure of their own operation. As a result, they have a tendency to make their contractual obligations over risk as vague as possible, an attitude that will have to change as individual investors focus even more closely on the asset allocation and stock selection process. The shortcomings of current risk evaluation techniques and the underlying theories are being called into question.
New models are required for this new age of investing, giving rise to a whole new range of decision support tools and analytics. In particular, we foresee a growing demand from individual investors for the type of risk measurement tools that have previously only been available to institutions. If markets are fuelled either by fear or greed, individual investors have most definitely been running on fear in 2002, and they therefore need to be equipped with the data and analysis to help them to make impartial, informed decisions.
This focus on the end-investor highlights another important trend – the convergence of demands from retail and institutional clients. Historically, fund managers have tended to treat these two client groups as having very different requirements, but that is no longer the case. Pension funds, for example, worry just as much about the transparency of asset management fees and transaction costs as mutual fund investors do. All investors want clarity, whether in the stock selection process, the tariff, the risks or their communication with the manager.
Getting the communication strategy right will be a critical success factor for European asset managers. The call for greater openness has led fund managers to invest a lot of time and money into improving their communications. In many cases, specialist client relationship teams have been established to take the message to the investor, leaving the manager free to concentrate on the core business, but this has led to charges that the real decision-makers are inaccessible.
The solution to this conundrum will be delivered through new technology. With the wider application of mobile technology, managers will be free to leave their desks without the fear that something will go wrong in their absence. At the same time better IP delivered investor communications will replace some of the more traditional forms of communication, as investors become more familiar and comfortable with the media.
Better technology will also be required to help those individual investors who are struggling to understand their options for retirement planning. In the UK, for example, the rise of defined contribution schemes has led to a much greater demand for investment advice, as employees take over responsibility for managing their own pension. The whole industry – plan sponsors, managers, and distributors – needs to devote more time and energy to the process of getting unbiased information and advice to these investors.
To answer our own question, we believe that fundamental changes are already underway in the European asset management industry, and that the models on which saving and investing strategies have been based for the past forty years are being reviewed in the light of new theories and tactical conditions. Innovative investment methods, and technology that enables better levels of flexibility for the manager and broader access to data for the investor, should deliver a better run, more transparent market for individual investors.

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