Challenges in Product Sales and Service – The Demands of Product Innovation; The Impact of Shifting Demographics; and Increasing Regulatory Oversight

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by PwC AM on March 11, 2014

By John Siciliano, Managing Director, Asset Management Advisory and Strategy Lead

 Wow!  Isn’t that a title?  And that doesn’t even cover the half of it.  In the post-Great Financial Crisis (GFC) world, the single-minded pursuit of yield and low volatility has caused a great shift in product offerings, i.e., a demand for product innovation.  In the old days, it was easy enough to focus on large-cap stocks – regardless of where you lived in the world, as your local markets were viewed as safe and liquid – as the asset class of choice.  If you were really conservative, bonds were the answer.

Today, it has been proven that all markets have a high degree of correlation and that the opportunity to misstep, even when you think you are being conservative, is high.  Thus, the intense focus around the globe by all types of investors on what we used to call “alternative” products:  high-yield debt, distressed debt, unconstrained bonds, local currency, leveraged loans, real estate, infrastructure, timberland, commodities, long/short equities/debt, etc. These products have been limited, until recently, to large institutional investors and the ultra-high net worth community.  Now, in the post-GFC environment, they are available in liquid form (mutual funds in the U.S./UCITS elsewhere).  The impact?  This product set has upended the traditional manager and caused a race among the most investment-savvy managers to develop effective and compelling products which, oh, by the way, produce great returns – consistently – and with low volatility.

What do demographics have to do with this?  Three things:   First, the world is aging with the exception of a few countries, which means the need for income continues to increase.

Second, defined benefit plans, whereby your employer takes care of you with a monthly stipend based on your historical income, are frozen or closed.  In fact, less than 20% of the DB plans in the UK remain open, and approximately 40% in the U.S.  As a result, the world has moved to defined contribution plans, which means that individuals have to contribute to their own retirement with a modest employer match.  More importantly, it’s up to the individual to determine how to invest their assets.  Thus, the global demand for yield.

Third, as more countries with growing populations (e.g., India, China, Malaysia) shift from savings to investing cultures, the need for different types of products also develops – as these markets are much larger in the aggregate than North America and Western Europe and have a very different focus, which is on their home market or region.

This means that asset managers of scale and substance, who are typically based in the Western world, need to think ambitiously regarding the products they develop and how to distribute them in these newly developing markets.  While they need to think globally, these asset managers need to act regionally in order to properly penetrate these markets, which is a big challenge because Western traditions will not necessarily work.

Finally, let’s discuss regulation — some of which is thoughtful, some reactive, some punitive.  Regardless of its motive, we must comply with it.  As we look at markets around the world, there are a few key headlines: “Reduced fees and greater transparency”; “Value delivered for services (i.e. investment performance) received”; and, “Increased access to diversified products.”

To a certain degree, there is inherent contradiction in these headlines.  Yes, greater transparency is not an issue – nor should it be – as that benefits the buyer.  Reduced fees are good but, actually, it is less about reduced fees and more about eliminating undisclosed and mysterious sales charges (or making them more transparent) that has fueled the reduced fee engine.  Similarly, the concept of justifying value for services delivered has more to do with the frustrating investment performance during the GFC than with anything else.  In addition, “value delivered” is a relative term:  what one person thinks is great value, another may think is only “good” value.  Thus, attempting to regulate the meaning of value is a slippery slope for manager, investors and regulators alike.  The answer, then, is for an asset management firm to communicate with its investors about how it expects to deliver value.  It should provide frequent, e.g. quarterly, assessments of why the strategies are or are not successful.  In the end, hopefully, the manager will also deliver value.

Finally, how can access to diversified products be increased?  Thoughtfully develop a range of vehicles (e.g. UCITs) that provide investors with appropriate diversification, while still retaining ample liquidity, at a fee level that is better than the competition’s.  In addition, provide education to the investor on these products.  This is not only good for the investor but shows the regulator the good intent of the manager.

That’s the quick view.  If you have questions or comments, I am glad to hear them. Thanks.



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