Asset Management CEOs very confident of growth over next three years: PwC

Financial crisis and pressure on pension plans creates more awareness to save for retirement

TORONTO, March 18, 2011—A PwC global survey of asset management CEOs predicts a new a period of growth for their companies, fuelled by emerging markets, an aging population and a general heightened awareness among investors to put more away for their retirement. Sixty-eight per cent of the CEO asset management respondents were “very confident” about their company’s growth prospects over the next three years.

While the world economy is still in recovery in many developed markets, PwC’s 14th annual global CEO survey found that 1,200 business leaders in 70 countries are surprisingly optimistic, says Raj Kothari, national asset management practice leader for PwC. From the larger global survey, 31 asset management CEOs responded. The full report is available on the PwC website at www.pwc.com/ca/am

“Much of this confidence stems from the huge market potential opened up by an aging population, not just in the developed world, but in Asia as well. While this potential has been evident for some time, the financial crisis has created further opportunities for asset managers by accelerating the pressure on defined benefits pension plans and greater strains on public pension plan provisions. The result is increasing uncertainty over retirement income and greater readiness to put money aside,” Kothari says.

“With this new period of expected growth, competition will increase among asset management firms. Canadian firms will have to be more vigilant in reducing costs, increasing their efficiencies and adjusting their product lines,” says Kothari. “At the same time, investors will be looking for increased transparency and more frequent reporting while regulators are placing more pressure on managers to provide this transparency.”

The PwC report says that in order to encourage people to invest their growing savings in fund products rather than simply putting them in deposit accounts, asset managers will need to provide investment vehicles that combine reasonably secure income with sufficient yield to pay for longer retirements. They will also have to deal with an increasingly knowledgeable, demanding and empowered client base, which has been made more sceptical and risk-averse by the financial crisis.

Other survey highlights include:

• New product development. Asset managers are increasing investment in new product development and technology to reduce costs, improve productivity and enhance customer relations. Over 80% of asset management CEOs believe that innovations will lead to significant revenue opportunities for their business over the coming three years. More than 50% are stepping up product innovation, as well as upgrading their customer profiling and other systems to support growth initiatives.
• Emerging market growth. Further opportunities stem from the increasing level of affluence in China, India and other emerging markets. The report indicates that while New York will remain one of the leading “clusters” for asset management business over the next 20 years, Singapore could overtake today’s other top three centres, London and Boston, by 2025. Emerging markets feature strongly in the target regions for M&A, with 40% planning an acquisition in Eastern Europe and 30% looking to buy a business in Asia and Latin America.
• Driving down costs. The renewed focus on fees and charges in the wake of the financial crisis is heightening the pressure on costs. Three-quarters of asset management CEOs believe that consumers will focus more on price and value for money. Nearly 70% have responded by initiating or continuing a cost-reduction initiative over the past 12 months. Outsourcing is a significant element of the drive to control costs, with 42% having outsourced a business process over the past year and a further 29% planning to do so over the coming year.
• Contending with regulation. Asset management CEOs see over-regulation as the greatest threat to growth. It will be important to take account of national and regional differences in regulation and the impact of potential conflicts between the various regulatory developments. This could also lead to a more conservative risk appetite for M&A which will present asset managers with an even tougher challenge in balancing return maximization and risk minimization.
• Closer focus on risk. A more systematic approach to risk management will be critical in sustaining investor confidence and complying with new regulatory demands. Nearly 90% of asset management CEOs are modifying their operating models to manage risk more effectively. Over 80% will be focusing more of their senior management’s attention on risk management and more than 60% intend to formally incorporate risk scenarios in their strategic planning.
• The people to succeed. As growth picks up in the sector, so will the competition for talent. Sixty-five per cent of asset management CEOs see the availability of key skills as a significant concern and 36% believe that it is the biggest threat to their growth prospects.

While confident is high in the sector, there are still challenges ahead such as a customer base that is becoming savvier and more price-conscious. Regulation is increasing expenses and opening up asset managers to greater investor and market scrutiny, says Kothari. In the Canadian market in particular, consolidation between medium-sized players is a likely scenario to achieve scale, specialization and cost reduction. Outsourcing and shared services is being examined more commonly in Canada as a way of creating savings and increasing time to spend on core services, he says.

Technology will also be a crucial competitive differentiator, helping firms to control costs, improve efficiencies and respond to evolving investor demands. Greater transparency will also be critical in attracting funds by providing a clear indication of the strategy, risk appetite and performance of the funds and helping to assure investors that the business is properly controlled and governed.