Fund management companies will face tough times in coming years, leading to changes in the way they ...
Fund management companies will face tough times in coming years, leading to changes in the way they do business, according to Mark Campbell, head of UK retail at JP Morgan Fleming Asset Management.
In a speech to delegates at the the Investment Week conference in Portugal, Campbell outlined his view that the three-year bear market and regulatory reform, such as that proposed by Ron Sandler, means fund managers will have to adapt to a changed environment.
Figures from Oliver, Wyman & Company and UBS Warburg show a fund management company will have to produce an operating margin of around 25% before it can start making profits in future, Campbell said. This presents a tough challenge in current market conditions, he noted.
Even if markets recover, mutual fund investment may not come back into vogue, he warned, citing the example of Japan, where sales into mutual long-only funds have not recovered since the market crashed in 1998, despite their popularity before that date. There is a risk this trend could be repeated in the UK, he added.
Campbell believes providers need to consider whether they should offer a broader palette of products in the retail market, rather than just the traditional equity-dominated offering.
He said: 'Typically in the UK, portfolios are overweight equities. However, there is a much wider range of products, such as hedge funds, currency, property, protection/derivatives, private equity and credit.'
The trend in the pension industry indicates equities could become less popular, Campbell continued. With-profits funds are divesting from equities in favour of bonds while pension funds are also reducing exposure to equities, the most obvious example being Boots, which is now purely a bond portfolio, he said.
'Generally, we are seeing equity weightings in pension portfolios come down from 80% in the late 1980s to around 64% or less across the industry,' he added.
In this environment, providers need to be more competitive than ever to achieve and maintain a place on distributors' panels, Campbell argued. This involves ensuring they provide products that achieve what they set out to do rather than changing market focus, performance objective and tracking error. 'It comes down to quality assurance,' he said.
Campbell feels the introduction of Sandler's reforms is generally positive for the industry, as they would open up the market to fund providers. However, there are other considerations such as the fee structure and whether there is adequate provision for advice within that system, he noted.
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