As the asset management community reaches a crossroads, argues Dave Ferguson of the Abacus, only the firms who can truly add value will profit
Although this column tends to focus on advisers and the life and pensions sector, there is, of course, another body of firms striving to keep pace with the changing environment in which we all operate.
In some senses it could be argued that the asset management community has already covered the greatest ground in the adoption of new technology and distributed business models. That said the market remains hopelessly oversupplied, often with poor to mediocre propositions. No-one has ever been able to explain to me why there are so many supposedly differentiated fund offerings in, say, the UK equity income sector.
Keen to protect the retail/institutional differential, the sector is at something of a crossroads. Not only are platforms such as fund supermarkets and wrap services set to squeeze margins on retail business in return for taking on some of the administration burden, it seems that the asset management community is set to be squeezed further as semi-institutional terms start to emerge.
It is fairly well known that fund groups have already ceded about half of their gross margin to either advisers or supermarkets and it seems inevitable that this margin drift will continue as firms seek to retain market share.
When one considers that the true cost of managing money is probably around about 15-20bps it is perhaps no surprise that client margins are under pressure - particularly given the general underperformance of the market. After all if one can buy into a tracker fund for as little as 10bps how many people would choose to pay 75bps in the expectation that the manager will add 65bps each and every year? While an extreme example, it does highlight the problem for asset managers in justifying their role in the value chain. More than this, the focus on performance has never been greater and the ease with which people may move funds in a platform world makes persistency a more difficult feature to manage than ever.
In the light of such margin pressure how should fund managers react? To my mind they can either surf an optimistic wave that relies on constant strong performance or they can get closer to their distribution in the hope that the added-value provided will stabilise business flows in times of weaker returns.
Move with the times
One company that has been extremely successful in this area and which adds value to advisers is F&C. Not only do John Yule and his distribution team have a deep insight into the different ways that advisers operate they are continually seeking to make the adviser's life easier or more profitable.
This approach is in stark contrast to a major UK fund management firm who asked me last year how they should get into the Sipp market. Not only did the question belie a remarkable lack of market knowledge there was no desire to spend real time understanding that market and how it might develop over time. In the end, the firm elected to pursue a performance-led strategy and if it has achieved any meaningful penetration by now I would be surprised.
F&C on the other hand have excellent market knowledge and a desire to genuinely help advisers. I have heard several advisers talking about F&C's Trust Review service which has wide appeal and can help both in the management and revenue of an adviser's business.
I have no idea of where F&Cs pricing may go in the future but I am certain that the depth of their adviser relationships can only help them when the great squeeze arrives, particularly as the group is widely diversified and should therefore have a strong investment proposition in at least one area or another.
So as the market continues to change and progress, asset managers are just one more group that is required to reinvent itself and to demonstrate just what it adds to a client's portfolio. Clearly in this case the most important thing of all is strong investment performance but it must always be remembered that other than the very best groups, performance is generally patchy through time. Those companies that continue to plough a narrow furrow will come to be heavily exposed to periods of weaker performance and as such will trade on lower multiples due to the implicit risk in their retail business.
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