Driving growth and aligning interests
Global regulated funds survey 2014
Optimism is high among asset managers, according to our Global regulated funds survey 2014. Despite the amount of recent asset flows into passive management, most managers believe they will achieve significant growth through actively managed products.
Our survey examined product development practices and processes, current compensation structures and future trends, as well as the role of social media in the industry.
Across these topics, a common theme emerged: the need for enhanced alignment between the interests of investors and managers. Relationships built on transparency, education and trust are now a greater focus in the industry than ever before.
Managers are targeting an average annual growth rate of 9% for net new money in regulated funds during the next five years. The sources of that growth, however, vary significantly by region (see chart).
Not surprisingly, core product sets that leverage current expertise (namely active equity and fixed income) with increased distribution and penetration are a top approach for most organizations.
Many managers also see “solutions-based” products (absolute return strategies, lifestyle products and guaranteed capital products), with a clear focus on client expectations and desired outcomes, as additional sources of growth.
In North America and Europe, respondents expect new money to flow from a combination of both retail and institutional clients. In Asia and Latin America, managers think the retail market will be most important.
Managers looking to expand geographically see Asia as having the biggest growth potential, particularly mainland China and Hong Kong, fueled by announcements of future cross-border fund arrangements and passporting.
Managers in Europe and Asia are more bullish on the influence of social media than their counterparts in North America. They believe social media will help develop brand awareness and improve customer interaction (while partially replacing expensive in-person or phone interactions).
The relative lack of enthusiasm in North America might stem from a reliance on intermediaries for product distribution. The impact of social media will therefore depend on how those intermediaries leverage new technologies.
Institutional and retail client demand and successful product offerings from competitors — not the regulatory environment — are driving product development at the “idea” stage. Consistent with other survey findings, European managers are more focused on the regulatory impact of new products than are managers from other regions.
More than half of organizations involve third parties in product development, with the greatest collaborations taking place in North America.
Organizations are seeking guidance on new and existing investment strategies to improve the odds of successful product launches. In Europe, where managers face complex intra-jurisdictional tax issues, tax advice is particularly important.
Product development takes between three to 12 months for most managers. The process takes longer in North America (six to 12 months) than in other regions, perhaps due to higher levels of third-party involvement.
Our survey indicates that management preferences influence compensation structures more than market-related and regulatory factors do.
The exception is Europe, where UCITS V and AIFMD will have a major impact. These regulations are not just a European issue, and managers in other jurisdictions must understand the extraterritorial effects these regulations have on their organization and compensation structure.
Most managers employ multiple compensation models. Going forward, they expect to increase their use of equity or co-investment arrangements and defer more compensation.
However, managers still believe nearly 70% of compensation should be in cash and paid without deferral, underscoring the industry mantra to “pay for performance, but pay in cash now.”
European managers are less likely than North American managers to use equity as a component of compensation. However, all European respondents require some compensation deferral, compared to barely half of North American managers.
Four out of five managers use formal compensation committees, but surprisingly 20% do not use a formal body.
Bonuses are typically comprised of a formula-based amount and a discretionary component. 40% of respondents stated that half of their organization’s total compensation is discretionary, which seems remarkably outsized.
The regulatory environment and investor sentiment for enhanced alignment will continue to challenge this discretionary component and might ultimately drive managers to a more formulaic approach.
When managers look five years ahead, most (79%) see regulation as the biggest driver of change.
Managers should view regulatory change strategically. Opportunities exist for proactive innovation, not just reactive compliance to regulatory demands.
Firms must understand client needs and develop customized products to meet those needs, and they must employ transparent compensation structures that square the interests of investors and managers. Taken together, these alignments will help ensure mutual success.