The Hindu Business Line : `Future for investment management looks bleak'

A GLOBAL survey involving 185 firms that collectively supervise 19 million euros has drawn shocking conclusions about the rapidly mutating world of investment management, which holds a lesson for India, a country that is still scratching the surface on this front.

Simply put, it has written off a part of the industry on the premise that the long-term future looks bleak for many players.

The survey, conducted by KPMG International and an independent think-tank called CREATE, refers to the "fault lines" that have emerged in recent years. Hidden by what is described as "the longest bull run in living memory", these fault lines have driven the industry from growth to maturity in record time.

A number of factors have created the blemishes that the survey underlines: Excessive emphasis on AUM (assets under management), under-performance, lack of focus, inability to scale, leadership vacuum, etc. In more specific terms, there are too many products with little regard for customer need, profits have become an arithmetic certainty on the back of rising markets, pay has escalated and business strategies have more hype than content.

Incidentally, the marketplace in which investment management outfits operate has demonstrated many deficiencies as well. "Consumers were mesmerised by the relentless rise in equity prices and became undiscerning in evaluating many products. The trustees' approach to managing billions of pension fund assets started to creak as investment returns turned negative, exposing the true risks," it is stated.

Customers, in both retail and institutional segments, are disenchanted and are ever more demanding of their investment managers. They want, inter alia, higher and consistent performance, quality service, brands they can trust and transparent investment processes as well as effective management of risks.

The survey has observed that consolidation is still evident in the industry. M&A deals are a strong feature reflecting among other things the need to create critical mass. In contrast, genuine product innovation is less evident. Instead there has been significant diversification into hedge funds, real estate, private equity and guaranteed products.

It is also pointed out that a whole range of new regulations is moving closer. In the US for instance, the SEC is reviewing the way products are offered, determination of fees, choice of directors, corporate governance and financial reporting. In fact, regulations and volatility are making life progressively difficult for investment managers.

Volatility has accelerated in the past few years because of a number of factors:

Buy-and-hold investors, once a powerful stabiliser, are fleeting, replaced by trigger-happy traders.

Shorting is rife in all markets, thanks to the growth of hedge funds.

Insurance companies and pension funds are re-basing their equity portfolios.

The conclusions, based on views expressed by senior executives in 20 countries, are clear enough: One, investment managers will always have a role in the global financial markets of the future. Governments will increasingly encourage individuals to save and private pension will be called upon to cover lengthening retirement years. Two, many firms will be sold or be compelled to undergo fundamental changes. They will either have to go global or become niche players

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