Report Summary
The UK investment management industry is at a turning point. Traditional active managers have already had to adapt to changes in the institutional market, but now they face a confluence of trends – from regulation to pension auto-enrolment to the growth of passive investing – that could radically reshape the retail side of their industry as well.
As the industry experiences these seismic shifts, several key trends emerge.
▪ Retailisation: With pension liabilities around the world moving from the state and employers to the individual via defined contribution (DC) schemes, the retail investor is becoming increasingly important. As retail investors are generally poorly engaged with investment decision-making and often use the default funds offered by their pension provider, becoming the default fund is extremely attractive - regular, large fund flows that are likely to remain in place for decades are an asset manager's ideal. But the market requires scale to penetrate.
▪ New intermediation models: Asset managers who have historically controlled a significant part of the value chain are in danger of losing out as platforms, wealth managers, insurance companies and other parts of the chain all aim to control a greater slice of the cake. These intermediaries – made up of around 150 decision-makers – are acting as “gatekeepers” by standardising the criteria for fund selection and launching their own funds, sub-advised by asset managers. This is significantly concentrating fund flows and putting pressure on fund charges, with many asset managers struggling to differentiate themselves and justify their fees in the eyes of these powerful new intermediaries.
▪ Internationalisation: Asset managers are adapting to demands from UK investors for increasingly global products. At the same time, wealth in emerging markets is growing, creating new client bases for asset managers in these local markets.
▪ Pricing and cost pressures: Pricing pressures are coming from several sources. Platforms, in directly comparing funds, can force down fund management charges. In addition, the continued growth of low-cost passive funds can directly challenge those active funds that only achieve “marginal alpha”. Regulatory costs add to the pressure.
Research, including interviews with a number of senior executives at asset managers operating from the UK, suggests that the key industry responses to these trends are as follows.
▪ Distribution: Insurers are faced with a choice between building direct retail businesses or strengthening intermediated approaches. The majority of asset managers interviewed stress the importance of building deeper partnerships with their intermediaries as their primary route to market.
▪ Products: Asset managers targeting foreign markets are using two approaches – either taking out UK-manufactured products via global distribution networks or building a domestic presence in a smaller number of geographies using specifically targeted products. Active managers also are repositioning alpha products in light of the growth of hedge funds and pricing pressures from lower-cost passives, with many choosing to offer either higher, more differentiated alpha performance or lower-cost, semi-active funds with reduced costs.
▪ Pricing: Interviewees accept that there is significant pricing pressure on UK-focused asset managers, and there is evidence of fees being reduced in places. However, most are seeking ways to reduce prices only selectively by moving to variable pricing models, such as pricing by type of product (actives establishing higher prices for complex products and lower prices where automated processes can be introduced), by style of fund, and by type of distributor (discounting only for the largest independent financial advisers but sustaining price differentials with smaller intermediaries). Avoiding wholesale reductions in pricing is the name of the game.
▪ Costs: To date, many firms have introduced cost-cutting and more disciplined spending regimes. Although interviewees display an appetite for more radical cost savings through outsourcing, they are struggling to understand which functions are key. Outsourcing data to cap escalating data costs raises concerns about cyber-risk and regulatory requirements.
