Outsourcing of asset management functions is leading to increasing concerns over risk management, consultant PricewaterhouseCoopers says.
Its 2006 Global Investment Management Survey – the second since 2003 – suggest asset managers responsible for $9trn globally have these concerns because of increasing regulatory factors.
These include Basel II, anti-money laundering/financial crime laws, the EU Savings Directive, MiFID, corporate governance, privacy protection, International Financial Reporting Standards and Ucits III.
These are driving asset managers towards use of automated risk management tools – especially to address concerns “the current move towards use of derivatives in investment management is not matched by risk management expertise” – as well as towards outsourced specialist portfolio management.
Respondents to the survey, PwC says, “believed the greatest need for improvements in risk and compliance lies in oversight of outsourced relationships. This was followed by compliance with investment management contracts.”
The key issue is that with increasing use of specialist outsourced services, risk control systems and a lack of risk management expertise will result in problems for providers over the next few years.
“Many houses now consider their [risk] systems inadequate in the light of tomorrow’s higher standards,” the survey states.
The use of derivatives is noted in contrast to the previous report in 2003, as asset managers look to alpha to drive performance in light of increasing pressure to perform coming from institutional clients.
“By contrast, retail investors are not becoming more sophisticated. In most markets they are tending to buy the latest hot performers and then stick with them – just as they have always done. In addition to performance, brand image and quality of distribution arrangements were also important factors in increasing retail sales.”
Consolidation is expected in distribution, the survey goes on to state, including banks, financial advisers, multi-managers, etc. This is expected to be coupled to increasing use of the internet as a distribution channel, posing some tough questions for providers of investment products.
Some provider executives responding to the survey suggest the consolidation of banks/brokers and internet retailers will result in powerful distributors able to command higher fees.
Others see a need to compete more aggressively on retail distributors’ platforms and on companies’ defined contribution platforms.
“This would require ‘brand backed by substance’, ie, a strong brand backed by good investment performance and robust investment processes."
|% of asset managers planning to increase/commence product in three years|
|Equity/fixed income/ money market funds||55%|
|Domestic pension products||38%|
|Private equity funds||30%|
|Cross border pension products||23%|
|Exchange traded funds||16%|
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Short-term noise or something sinister?