It’s not all about performance
Throughout the financial crisis, economic shocks and scandals have damaged investor trust, but there is good news too. According to a PwC/Caceis study titled “Taking the Reins”, external asset managers are performing reasonably well in the eyes of institutional investors. Overall satisfaction is good, but investors have mixed feelings in certain areas. That is why asset managers have to take closer interest in the needs of institutional investors, whose relative weight is increasing.
As of the end of 2007, institutional investors accounted for 65% of total European assets; this market share has since then increased to 69%. The volume of assets these investors hold exceeds 12 trillion euros. Dariush Yazdani, partner at PwC Luxembourg, Market Research Institute, underlines that there are several reasons for this trend.
“If you look at the pension provisions, you can see a shift in responsibility from the state to the individual. This shift implies that corporations and individuals will put more money into pension funds or into insurance companies for their long-term pension provisions. During the crisis, institutional investors have been relatively spared due to their risk averseness and their long-term investment horizon, and though the overall assets within the industry were hit during the crisis, their market share has risen”.
The sample, with total assets of 4.5 trillion euros - close to 40% of European institutional assets - indicates the strong representation of the industry in the survey. If you look at the breakdown of participants by type, 52% are pension funds, followed by insurance companies (34%). The survey was conducted in 21 European countries.
Speaking of statistics, another survey reveals that after a lengthy period of poor returns, institutional investors have increasingly diversified their assets. Mercer of the UK showed a rise in bond allocation from 36% to 43% between 2007 and 2011, whereas equities dropped from 61% to 47% over the same period. Making up the difference for this considerable drop were alternative investments, which rose from 3% to 10%.
Dariush Yazdani says the following about the rising appetite for alternative investments like hedge funds, private equity and real estate: “Given the low returns and volatile environment, you see a rising interest in alternatives. The main reason being the demand for diversification of portfolios through uncorrelated sources of income and relatively higher returns than the main asset classes. If you look at the current yield of the German government bonds on the one hand, and the targeted return of European pension funds on the other hand, you can understand the need to add on to booster to your portfolio”.
A relationship built to last
PwC and Caceis Investor Services have been collaborating for the past four years in publishing various Thought Leadership pieces on the asset management industry which is presented at the International Fund Forum in Monaco. The goal of this year’s report is to investigate and identify the needs of institutional investors, and to create a debate among asset managers as to how the industry can best service this investor segment. According to their study ‘‘Taking the Reins’’, asset managers are scoring an average of 6.9 on a scale of zero to nine.
This result is based on respondents being asked to rate their level of satisfaction with external asset managers on a number of criteria. From the analysis, four Key Performance Indicators (KPI’s) were identified in which asset managers were meeting their clients’ expectations: operational strengths, expertise, quality of advice and independent verifications of controls and procedures.
“Performance is surely important, there is no question about that however investors want to understand the ability of the managers to deliver consistent performance and adapt to changes within the industry through strong operations and controls and processes. In addition, expertise was another aspect perceived as important by investors.”
The study also identified some areas for improvement. The authors of the survey encouraged asset managers to focus on these if they wish to continue to be successful in the institutional market. Performance, fees, risk transparency and quality of reporting are the KPIs where asset managers have performed below expectations. Dariush Yazdani explains:
‘‘Looking at performance, investors are looking for alpha generation. If you are only providing market performance, why would they then pay a premium for active asset management and not switch to ETFS with lower fees. So, it is important to correlate the fees to the performance.’’
Help is on the way
Based on the survey results, PwC and Caceis have developed the Assurance Model as a basis for discussion. Both believe that if applied properly, it will strengthen the relationship between asset managers and institutional investors. The Model is based upon four key action areas – i.e. governance, operational strength, risk-based performance over fees and transparency - each area containing recommendations for asset managers so that they can adapt their operations to the key issues facing them.
“First, you have to get your fundamentals, such as a strong governance model, right. You need to give your institutional investors the confidence that your operational strengths are viable and that your internal processes are at a high enough level that you can provide consistent performance over the long term. But you also need to continue delivering value".
"That means that you need to correlate your performance to your fees so that investors feel that they are being treated fairly. Further, asset managers must tailor their operations and reporting toward a more transparent and explanatory framework to keep institutional investors informed of their actions, leading to a sustainable relationship on the long term”, explains Claude Michaux, Head of Marketing and Communications at Caceis.
The message to the industry is clear: asset managers that are best able to adapt to the changes in the industry are those that will succeed in the long run. The information and the know-how are on the table, now it is just a matter of putting all this into practice. CW