Investment Management Association

The IMA's annual Asset Management Survey

“While the industry has ridden through the financial crisis well, it finds itself at a strategic crossroads. The mood among firms is generally reflective, as they consider how to confront new challenges and best meet investors’ needs.

“With some 20 different European legislative measures hitting the industry over the coming two years, it is clear there is a real fear of the adverse consequences of misguided regulation. Ultimately these consequences filter down to the investor.

“Concerns remain over the UK as a financial services centre. When asked about their long term outlook, many senior figures reported rising unease and diminished confidence in the UK. We all want the UK to retain its pre-eminence as a global financial centre, but this will need continued focus from the Government.”

Richard Saunders, Chief Executive of the Investment Management Association

What is the Asset Management Survey?

The IMA’s Asset Management Survey is a comprehensive account of the structure of and key trends in the UK’s asset management industry. It also examines the main current issues affecting the industry.

The 2010-2011 edition is the ninth annual survey.

A wide-ranging questionnaire is sent to all IMA member firms. The questions cover issues such as asset classes, mandates and market interaction. The results are collated and combined with other relevant research.

This year 76 firms responded, who between them manage £3.3 trillion in assets. Jonathan Lipkin, IMA’s Head of Research also met with representatives of 23 firms from a cross section of the asset management industry, mostly meeting with Chief Executives, for a themed interview lasting around an hour. The findings from these interviews are used to inform the analysis and quotes from them are used in the final version of the report.

What are the key statistics on the industry?

As at December 2010:

£3.9trn
Total assets managed in the UK by IMA member firms

£1.3trn
Assets managed in the UK on behalf of overseas clients

£579bn
Managed in UK-authorised funds (OEICs and unit trusts)

£2.2trn
Assets managed worldwide on behalf of UK institutional clients

£617bn
UK-managed funds domiciled offshore

38%
Percent of shares IMA members own in UK companies

£11bn
Revenue earned by UK-based asset management firms in 2010

What are the key interview findings from this year's Survey?

Investment is becoming increasingly globalised and product focus less specialist:
- Clients are particularly interested in global emerging markets
- There is a growing emphasis on solutions and client-centric asset management.
- There is increased interest in multi-asset approaches
There is a need to improve trust and communicate more effectively what the industry can offer.
- The industry needs to do a better job of selling its USP
- Transparency should be at the top of the list as new products are developed
Regulation should not have adverse impacts on the end investor
- Although acknowledged that regulation can be beneficial there are concerns about the widespread impact of new UK and EU regulation
- The regulatory response to the credit crisis has increased operating costs – but some see this as a competitive advantage
There are still concerns about the UK’s ability to maintain its pre-eminence as a leading global asset management centre
- Technology and globalisation are eroding the natural advantages enjjoyed by the UK
- New business is increasingly likely to locate away from the UK
- The UK needs to lay down a marker and signal that is business friendly

What are the challenges facing the industry?

Although revenues are buoyant, many of those we interviewed are conscious of the growing appetite for index-tracking funds, increasingly in the form of exchange-traded funds, as well as the growing importance of platform intermediaries. Both developments could have implications for industry business models in the future.

Many of our interviewees believe that ten years of highly volatile stock market returns and a huge credit crisis in the Western world have left some investors nervous and distrustful of financial markets. In the retail funds market, we have seen strong inflows into managed and absolute return funds. And our interviews revealed growing interest from institutional investors in multi- asset strategies, although single-asset mandates still predominate.

How is the asset management industry responding to these challenges?

Firms are focusing on investor trust and confidence. The majority of managers we spoke to believe that association with problems in the banking sector has contributed to a decline in trust among the industry’s clients. But firms believe there is more that the industry itself should be doing.

This is why many managers are actively seeking to focus on meeting specific client needs by moving towards more outcome-oriented products and strategies: these include liability matching strategies for defined benefit pension funds and other clients; default fund strategies within defined contribution pension schemes, which aim to provide appropriate asset allocation strategies for scheme members which evolve over time; funds which aim to provide constrained levels of risk for clients, particularly retail investors, such as absolute return products.

Through a greater emphasis on areas such as asset allocation and an approach based upon specific client needs, many interviewees felt this could mark the beginnings of a renewed relationship with end clients.

What are the regulatory concerns?

Regulation has risen significantly up the list of industry preoccupations. This is inevitable in the wake of the credit crisis, and indeed to some extent welcome. But concerns are growing about the volume and appropriateness of new (mainly EU) regulation affecting the industry.
There is unanimity that it is near impossible for regulation to prevent future financial crises and 70% of those we interviewed identified the current regulatory environment as a key area of concern for them in four ways:

1. Regulatory initiatives perceived to be disproportionate or wrongly targeted, notably:

The original proposals for the Alternative Investment Fund Managers Directive (AIFMD)
The remuneration code
Changing capital requirements for asset management firms.

2. Risks of unintended consequences.
This is always a risk with rapid regulatory change. The example cited by several of those we interviewed was centralised clearing. The direction of travel was right but, there were fears that the way in which proposals were being implemented could result in considerable cost for end clients.

3. Lack of adequate international coordination.
Strong and credible regulation can be a comparative advantage for individual jurisdictions. But in an international environment characterised by different political pressures and economic competition between financial centres, any lack of coordination can result in regulatory arbitrage and poor outcomes. However, where European harmonisation is taking place, interviewees strongly felt that legislation should be carefully considered and driven not by politics but by single market considerations that will ultimately benefit industry and consumer.

4. The way in which regulatory oversight is exercised.
The UK retail funds industry has been hit heavily by compensation levies as a result of the default of Keydata Investment Services Ltd.1 This followed earlier compensation payouts to investors relating to the defaults of Pacific Continental Securities and Square Mile Securities. The retail firms we interviewed cited Keydata as a source of major irritation with respect to the quality of regulatory oversight. Equally, there is some recognition of the fine balance between the kind of scrutiny that can avoid such failures and what might be perceived as a regulatory ‘heavy hand’.

What about UK regulation?

The Retail Distribution Review is the main current regulation affecting the industry. Investment managers support its objectives of a more transparent and consumer-friendly market, but have concerns about whether this would actually transpire. Some fear that the fund management industry might be put at a competitive disadvantage to life insurers. And there was widespread agreement that middle and lower income groups would find it more difficult to access advice in the future.

A further challenge will be the impact of the legislation to replace the FSA with two new regulators, the Financial Conduct Authority and the Prudential Regulation Authority. This will inevitably result in further disruption as relationships with regulators undergo a fundamental change.

How competitive is the UK as a location for asset management?

Over the last few years we have heard increasingly that the many advantages the UK has as a location for an investment management business may be eroding. We heard this even more strongly in 2011. Several interviewees said that massive improvements in communications and a shifting balance of global economic power were making the case for a global “cluster” for asset management less compelling. And, importantly for an industry drawing on talent globally, a lack of certainty about the stability of the fiscal, regulatory and immigration regimes could further erode the UK’s position.

Nobody expects established firms to leave London in the immediate term. But several members suggested that we could see more marginal decisions about incremental investment go against the UK in future. Just as mutual fund domiciles have migrated to Dublin and Luxembourg, so we may see other such moves over time.