John, PricewaterhouseCoopers recently conducted the “Global Investment Management Survey 2006”. Could you provide us with some background?
This is the second time PricewaterhouseCoopers have conducted an Investment Management Survey on a Global scale. There were 81 investment management organisations of varying sizes and disciplines taking part from around the world, representing around USD 9 trillion in assets under management. The answers to the survey were mostly supplied by Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs). In addition to the questionnaire-based part of the survey, we also ran a series of round table discussions and one-on-one meetings with senior executives.
What do the survey results say about the current situation of the industry?
Since 2003, when we conducted our first Global Investment Management Survey, the business environment for investment managers has changed considerably. While 2003 was a difficult time and most participants concentrated on cost control and were rather pessimistic regarding about their future, the overall picture is much brightermore positive now. Revenues have risen, and prospects for further growth in revenues are ratherquite good and generally speaking the participants now clearly focus on growing their business through entering new markets and plan to launching new products.
What kind of products will they be launching?
The participants anticipate an increase in AUM of alternative products such as real estate funds, private equity funds and hedge funds. Their share of total AUM is expected to rise from 12% to 17% in the next three years (see figure 1). Consequently, almost half of participants plan to launch or increase their hedge fund offering and 30% are keen to offer more real estate and private equity funds. Consequently, the alternative segment will account for a materially larger proportion of revenues in three years according to the participants. Over half theof participants are also planning to increase their offering of “traditional” funds such as equity, fixed income and money market funds within the next three years. These products are expected to represent on average 78% of assets under management (AUM) in three years’ time, which compared to the current situation, however, is however a decrease of 6 percentage points to the benefit of the alternative segment.compared to the current situationNonetheless, the participants anticipate an increase in AUM of alternative products such as real estate funds, private equity funds and hedge funds. Their share of total AUM is expected to rise from 12% to 17% in the next three years (see figure 1). Consequently, almost half of participants plan to commence launch or increase their hedge fund offering and 30% want are keen to offer more real estate and private equity funds. The alternative will account for a materially larger proportion of revenues in three years according to the participants.
So, we can we expect the number of funds a still growingto grow in the future number of funds? What is the impact for Luxembourg?
CertainlyAbsolutely. Although quite a number of people in the industry have been saying for a while now that there are too many funds around, especially in Europe, and that the industry needs to look at rationalisation and the issue of fund mergers; but participants have included new products as form part of participants’ their strategies to generate future growth. This is favourable good news for Luxembourg as most of the international players are launching new types of funds from the Grand Duchy.
However, there are other important sources of growth revenue that the participants are also focusing on. These include entering new geographic markets and above all expanding the distribution in existing markets. This is by the way good newsbodes well for financial centres like Luxembourg which are well positioned to function as hubs for international growth.
Surprisingly though, few participants expressed confidence in their distribution capabilities, especially small and medium sized investment managers. Large and very large companies were more confident here and in addition more than half of them are looking into mergers and acquisitions to expand their business.
What are the trends in fund distribution?
The answers suggest that participants expect existing sources of distribution will to eventually consolidate, be it banks, financial advisors, multi-managers or others. Regarding the distribution to retail clients, the internetInternet is considered by the participants as to be an emerging distribution channel. As a consequence of the tendency towards consolidationWith existing distributors consolidating, the respondents expect that increasingly powerful distributors will be in a position to demand higher fees.
How do investment managers intend to distinguish themselves in their fight for space in the distribution channels?
In a phrase, the perceived way forward is “brand backed by substance”. This means that investment managers should have a strong, well-known brand, with a good investment performance and a solid investment process. While both retail and institutional clients look at brand and performance, the quality of the investment process was mentioned as an important criterion to win mandates from institutional clients. A key success factor on the retail side is furthermore also the quality of the distribution arrangements in place.
Although Luxembourg is not in the same investment management league does not have the same weight in investment management as London, Paris or Frankfurt, it is clearly a European centre of expertise in the administration of investment funds. According to your survey, what are and will be the major operational issues?
While during the past three years the focus in operations was on improving operational effectiveness, participants said that in the future they will concentrate more on improving service quality in the future. Major challenges for fund operations will include assuring compliance with numerous regulatory changes, recruiting and retaining the best employees and dealing with new asset classes and instruments like derivatives. Although the survey was conducted on a global basis, I believe the results also apply to fund operations in Luxembourg.
Regarding IT investments, in IT the survey participants said that the highest proportion of their budgets goes to portfolio modelling, expressing the need to improve the investment process and performance. The biggest increase in IT spending concerns Customer Relationship Management. This is in line with what participants said about their strategic priorities in the future which include improving service qualitythe improvement of the quality of service.
Will Luxembourg third party service providers benefit from a growing trend towards outsourcingtendency to outsource operations?
According to the survey results, participants expect strong growth in outsourcing over the next three years, mainly because. The main reason for doing so is the intention of many investment managers intend to concentrate on their core competencies. Consequently, tThe functions that tend to be outsourced include accordingly investor administration and servicing, investment operations and fund accounting. I think that a number of Luxembourg third party service providers are well positioned to benefit from this global tendency to outsource.outsourcing trend. However, it should be noted that quite a large proportion of participants considered the quality of services received from third party providers as to be lower being worse than those provided in-house. This excludes tax and custody services, though, with which the participants were quite happy. Service providers who get their service quality right will be in a strong position to attract outsourcing business.
Do you see other opportunities for Luxembourg?
In the survey we found that Chief Financial Officers (CFOs) are increasingly focusing on tax planning opportunities. Over the next three years, a significant proportion Double asof many participants plan to actively usewill be paying more attention to tax planningstrategy and tax risk in three years time than do now. Although, surprisingly, survey respondents expressed little interest in VAT received only low interest from the respondents, the issues surrounding transfer pricing, respectively and global profit allocation issues on the other hand rated highlywere, on the other hand, high on the agenda of CFOs, especially those of large organisations. I think that Luxembourg should be more widely more active in promoting promote the opportunities it can offer in this area.
Finally, what will be the key challenges for the industry and Luxembourg in the coming years?
There are several points important points to I would like to mention. On the product side, we observe that products and investment management styles are becoming more and more sophisticated, for example through the increased use of derivatives and the development of the alternative segment. This has repercussions on the administration side which will need to accommodate bring its processes and procedures to in line to cater for with these more complex products. In this context, risk management will needhave to improve compared to where it is now. The growing complexity and sophistication in the industry requires highly skilled staff and I think that more emphasis will be put on training and retaining qualified people. Finding enough skilled persons is certainly today the greatest challenge for Luxembourg. The financial centre needs to work on a common approach for the development of local expertise and recruitment abroad in order to ensure a sustainable development of its activities.
Another key challenge is innovation. After the rather heavy EU regulatory agenda of the recent past years, it is essential for the future of Luxembourg that the Centre repositionned itself as a pioneer in this industry and to demonstrate leadership through a strong process that delivers innovative products and servicesAnother key challenge is innovation. Under the growing pressure of EU regulatory initiatives, Luxembourg positioned itself as a follower rather than an innovator. It is essential for the future to address this issue and to demonstrate leadership through a strong process that delivers innovative products and services.
