REPORT & ACCOUNTS ASSET MANAGEMENT SURVEY

Transcription

1 INVESTMENT MANAGEMENT ASSOCIATION REPORT & ACCOUNTS ASSET MANAGEMENT SURVEY

2

3 CONTENTS 1 EXECUTIVE SUMMARY 2 2 METHODOLOGY AND DEFINITIONS 3 3 THE SURVEY 4 Industry Size Ownership Client Type Client Mandates Asset Allocation Costs and Revenue Staff Soft Commission Arrangements Transaction Costs 4 CURRENT INDUSTRY TRENDS 12 5 APPENDIX 1: SURVEY PARTICIPANTS 16 6 APPENDIX 2: AGGREGATE RESPONSES 18 The IMA would like to thank all participants for their contributions, particularly the interviewees who gave their time. Prepared by Georgina Bound Investment Management Association,

4 1 EXECUTIVE SUMMARY This annual survey aims to measure the size of the UK asset management industry and assess the main drivers and trends shaping its evolution. SIZE AND STRUCTURE OF THE INDUSTRY The survey covers 113 groups, employing over 23,000 people. 1 As of June 2003, they managed 2 trillion in the UK and a further 5 trillion globally. One third of assets under management in the UK are in funds which are domiciled offshore though the investors may be either domestic or non-uk. PROFITABILITY Average revenue was 27 basis points, as a proportion of assets under management, while average operating costs were 22 basis points, indicating average operating profitability of 21%. SOFT COMMISSIONS Less than half of all respondents entered into soft commission arrangements. The average proportion of business subject to soft commission arrangements fell from 5.8% in June 2002 to 5.3% in June Industry concentration has fallen slightly from June The five largest operators now manage 28% of the UK market compared to 29% last year, while the ten largest groups account for 46%, down from 49%. CURRENT INDUSTRY TRENDS Interviews were conducted with representatives at Chief Executive Officer level from ten firms covering 40% of the industry. On a global basis, managers that are owned by investment banks account for the largest proportion of assets with 28%, followed by insurance company owned groups with 22% and stand-alone fund management houses with 18%. In contrast, nearly 40% of UK managed assets are controlled by groups belonging to insurance companies. Investment bank, retail bank and fund manager owned groups account for 19%, 18% and 13% respectively. CLIENT STRUCTURE Nearly 40% of assets managed in the UK are owned by insurance funds, and 37% by pension funds. Retail funds account for 13% of client assets. Approximately 12% of assets are managed on behalf of non-uk clients. ASSET ALLOCATION Nearly 50% of assets managed in the UK are invested in equities, 60% of which is UK equity. Bonds account for 36%, split almost evenly between Government and investment grade debt, money markets 8% and property, venture capital and other alternatives 10%. Insurance funds allocate almost half of their assets to bonds, but just under a third to equities. This is in contrast to pension funds that hold more than half in equities and a third in bonds. At over 70%, retail funds have the highest allocation to equities. While liability based mandates for pension funds have been under discussion for some time, there have been few signs to date of a concerted move by pension fund clients. This is now starting to change, and all of those interviewed believed that there would be significant moves in this direction in the near future. Running in parallel is a continued shift in asset mix towards bonds, away from equities, coupled with increasing use of cash flow matching techniques. There are indications that not all consider liability benchmarking the best solution for pension fund liabilities. Defined Contribution (DC) schemes are growing but still represent a relatively small pool of assets compared with Defined Benefit (DB) schemes. As more DB schemes become closed to new entrants, asset allocation over the next three to five years is expected to approach that of life assurance funds, which is thought to have reached the limit of their migration to fixed income. Interest in absolute return mandates is coming from private clients, pension funds and other institutional investors. Equity demand will however be supported by some open DB schemes, DC schemes, and the retail funds market. 2 1 Employment number relates to 51 respondents representing 81% of the UK asset management industry by funds under management.

5 2 METHODOLOGY AND DEFINITIONS This year the survey has been conducted in two parts: a statistical survey of assets managed in the UK and globally; and interviews with ten Chief Executive Officers of asset management companies in order to survey qualitatively current trends in the industry. 2 In a series of structured interviews we asked for their views on the impact on their organisation of the key issues facing the industry, including developments in client base, mandates requested, the consequent asset allocation implications and possible business implications. The principal focus of the questionnaire was the value of total assets managed within the UK regardless of fund or client domicile. We have asked for assets managed to be broken down by client type and further by mandate of each client type and asset allocation of each client type. Not all groups were able to supply this information based on the assets managed in the UK; some responses are based instead on assets managed globally. Results have been separated accordingly. Not all respondents have been able to provide information for all questions, and not all questions have been answered on the same basis (some have been based on what the group manages globally and some based on UK assets). Response rates and coverage is indicated with each result. Slightly fewer categories have been used for mandate types this year than in and have been defined as follows: Passive managed against an index with tracking error of fifty basis points or less Customised Benchmark managed against a blend of indexes. There could also be single index mandates if the mandate is active rather than passive Absolute Return managed according to a set target level of return for example LIBOR plus 2% Peer Group managed in relation to an identified group of comparable accounts or funds Specialist specific asset class or geographic exposure, but also includes 'preservation of capital' We asked for asset allocation across 13 categories, divided for most of the analysis as follows: Equities UK, North American, European, Japanese, Emerging Markets and Other Fixed Income Government Debt, Investment Grade Bonds and High Yield Bonds Although the survey has been designed with comparability to the 2002 survey in mind, matched samples on particular questions may be quite small. Some groups may have responded to a question last year but not this year or vice versa, and they may have used global numbers this year and UK numbers last year. Meaningful comparisons have been made where possible. Money Market Cash and Money Market Alternatives Property, Venture Capital and Other Again, some responses are based on assets managed globally and some based on assets managed in the UK. Although this report analyses only UK based responses, all responses at an aggregate level are available in the appendices. 4 The client categories are, for the most part, self explanatory, but a couple of clarifications do need to be made. In 2002 we split insurance between unitised and in-house, while this year we have combined these into the Insurance category. As such the Insurance category contains products that may be viewed as retail, as they are held by individual investors. 2 See Appendix 1 for a full list of direct respondents and contributing firms. 3 Categories used for the 2002 survey: Index Benchmark/Tracker, Customised Benchmark, Absolute Return, Preservation of Capital, (Relative) Peer Group Performance, and Specialist. 4 See Appendix 2. 3

6 3 THE SURVEY INDUSTRY SIZE The survey covers 113 IMA member firms. As at the end of June 2003, assets managed globally totalled 6.97 trillion. Of that, 1.99 trillion was actually managed within the UK, a slight fall from last year s 2.04 trillion. 5 Industry concentration is illustrated in Chart 1. It has fallen slightly since 2002, with the five largest operators - Legal & General Investment Management, Barclays Global Investors, M&G Investment Management, Morley Fund Management and Standard Life Investments - managing 28% of the UK market, compared to 29% last year. Similarly, the ten largest groups (shown in Chart 2), account for 46% of assets managed in the UK, compared to 49% as at June CHART 1 Groups Ranked by Assets Managed in the UK bn CHART 2 Assets Managed in the UK - Ten Largest Groups Legal & General Investment Management Barclays Global Investors M&G Investment Management Morley Fund Management Standard Life Investments Scottish Widows Investment Partnership DWS Investments Henderson Global Investors Insight Investment Schroders Plc OWNERSHIP Firms were asked to indicate the type of group to which they belong. Those who form part of Investment Banks account for the largest proportion of global assets under management with 28% followed by Insurance Companies 22%, Fund Managers 18%, Retail Banks and Custodians, 14% and 13% respectively. See Chart 3. CHART 3 Assets Managed Globally by Parent Type 6.97 trn bn 60 Custodian 13.2% Retail Bank 14.3% 40 Diversified Financial Services 2.7% Pension Fund Manager 1.6% 20 0 Rank Fund Manager 17.8% Investment Bank 28.4% One third of assets under management in the UK are domiciled offshore, according to responses from 47 groups representing 77% of the industry. Insurance Co 21.9% Chart 4 shows the comparable picture in terms of assets managed in the UK. Insurance Companies dominate with 39% of ownership, reflecting the fact that at the time five of the top ten were part of insurance groups, followed by Investment Banks 19%, and Retail Banks 18%. 5 Direct responses were received from 56 groups managing 6.69 trillion globally (96% of 6.97 trillion) and 1.71 trillion managed in the UK (86% of 1.99 trillion). Compared to 55 respondents last year managing 4.12 trillion globally (including an amendment to last year s response by one group) and 1.73 trillion in the UK. Estimates for non-respondents and groups operating only UK authorised collective investment schemes, were obtained from internal IMA sources, assuming asset management takes place in the UK only. 4 6 Based on total industry numbers, 106 groups for 2003 and 102 groups for Of the 113 groups for 2003 we do not have comparable figures for 7 so the sample has been adjusted accordingly. The 2003 sample reflects the net addition of 4 groups.

7 CHART 4 Assets Managed in the UK by Parent Type 1.99 trn Diversified Financial Services 2.5% Fund Manager 12.0% Custodian 3.5% Retail Bank 18.1% Pension Fund Manager 5.7% CHART 6 Assets Managed in the UK - Client Type by Parent Type 1.27 trn bn Insurance Co 39.4% Investment Bank 18.8% CLIENT TYPE Respondents were asked to allocate assets under management across client types; responses from 42 groups managing 1.3 trillion in the UK are displayed in Chart 5. 7 Nearly 40% of assets managed in the UK are invested in Insurance Funds and 37% is managed in Pension Funds. Investment by the public in Retail Funds is the third largest source of clients at 15%. CHART 5 Assets Managed in the UK - Client Types 1.27 trn Retail 14.7% Private Client 1.0% Insurance 39.1% Other 6.1% Pension Funds 36.6% Central Banks 2.5% Groups owned by insurance companies dominate management of Insurance Funds, with over 70% of the total. Insurer-owned managers also have 30% and 27% respectively of Pension and Retail Funds. Investment Banks dominate Private Client and Government business with nearly two thirds and one half respectively. Chart 6 shows the detailed picture. 0 Pension Funds Custodian Investment Bank Ctrl banks/ Gov't bodies Insurance Diversified Financial Serv. Pension Fund Manager Private Client Retail Fund Manager Retail Bank Other Insurance Co. Of the sample, 25 groups estimate 149 billion is managed within the UK on behalf of non-uk clients. CLIENT MANDATES Respondents were asked to provide mandate information based upon assets managed in the UK; this section analyses the responses from 38 groups managing 1.2 trillion in the UK for both UK and non-uk clients. We have included in Appendix 2 corresponding information from those groups who responded instead on the basis of assets managed globally. The majority of assets are managed against a customised benchmark. Fund management groups may have different interpretations of what constitutes a customised benchmark but respondents chose this description above the other categories for 54% of assets under management. 8 Passive was the second most common with 18%, followed by Specialist 16%, Peer Group 8% and Absolute Return 4%. See Chart 7. 7 Further client information is available in Appendix 2 covering groups that provided their client split based on assets managed globally. 8 See Methodology and Definitions section for explanation of this category. 5

8 CHART 7 Client Mandates of UK Assets Under Management 1.19 trn CHART 9 Client Mandates of UK Managed Pension Funds 343 bn Specialist 16.0% Absolute Return 4.3% Specialist 23.9% Peer Group 8.2% Passive 18.0% Passive 32.1% Peer Group 6.7% Customised Benchmark 53.9% Customised Benchmark 37.3% Of the 37 respondents providing mandate information by client type for UK assets under management, representing 1.1 trillion, we can see in Chart 8 that over 80% of Insurance Funds invest against a customised benchmark, leaving relatively minimal allocations to Peer Group 7%, Specialist 6% and Passive 3%. CHART 8 Client Mandates of UK Managed Insurance Funds 471 bn Peer Group 7.4% Specialist 6.1% Passive 2.6% Chart 10 shows the mandate split for all client types, illustrating that Retail Funds and Pension Funds have the broadest mandate spread. We can also see that it is not only pension and insurance funds driving the heavy proportion described as Customised Benchmark, as with the exception of the Other category, all client types utilise customised benchmarks more than any other mandate types. CHART 10 Assets Managed in the UK - Client Mandates by Client Type 1.07 trn bn Customised Benchmark 83.9% At 37%, Customised Benchmarks are also widely used in Pension funds. Passive and Specialist mandates also contribute significantly, with 32% and 24% respectively, as shown in Chart 9. 0 Pension Funds Absolute Return Peer Group Central Banks Insurance Passive Specialist Private Client Retail Other Customised Benchmark 6

9 ASSET ALLOCATION Respondents were asked to provide asset allocation information based upon assets managed in the UK; this section analyses the responses from 35 groups managing 1 trillion in the UK. We have included in Appendix 2, corresponding information from those groups who responded instead on the basis of assets managed globally. Chart 11 shows assets under management in the UK broken down into Equities, Bonds, Money Market, and Other. Chart 13 splits the bond component of Chart 11 with Government Debt and Investment Grade Bonds, sharing almost half each. Only 1% is allocated to High Yield Bonds. CHART 13 Assets Managed in the UK - Fixed Income Allocation 366 bn High Yield Bonds 0.5% CHART 11 Assets Managed in the UK - Asset Allocation 1 trn Investment Grade Bonds 48% Other 10.1% Money Market 7.7% Equities 45.8% Government Debt 51.5% Bonds 36.4% Property makes up over half of the Other category; the remaining asset types include hedge funds, private equity, and other alternative assets. Looking at only the equity component of Chart 11, Chart 12 shows UK Equities contribute the majority at 60%, four times the size of the second largest category European Equities. North American Equities make up less than 10% while Japan and Emerging Markets contribute an equal 4%. All categories of asset allocation have been included in Chart 14. UK Equities not only dominate equity allocation but also total asset allocation for groups managing funds in the UK. CHART 14 Assets Managed in the UK - Asset Allocation across all Categories 1 trn CHART 12 Assets Managed in the UK - Equity Allocation 459 bn UK Equities North American Equities 4.0% 27.6% Japanese Equities 4.0% Other Equities 7.9% Emerging Equities 3.8% UK Equities 60.2% European Equities Japanese Equities Emerging Markets Equities Other Equities 7.0% 1.8% 1.7% 3.6% European Equities 15.4% Government Debt Investment Grade Bonds High Yield Bonds 0.2% 18.7% 17.5% Cash Money Market 7.7% North American Equities 8.8% Property 5.5% Venture Capital 0.1% Other 4.4% 7

10 Twenty seven groups, managing 674 billion, or about one third of total UK assets under management gave information on asset allocation by client type. This sample indicated that Insurance Funds have a relatively heavy reliance on bonds, allocating almost half to the asset class, but just under a third to equities, as set out in Chart 15. CHART 17 Assets Managed in the UK - Asset Allocation by Client Type 674 bn bn CHART 15 Asset Allocation of UK Managed Insurance Funds 293 bn Money Market 8.7% Other 11.7% UK Equities 22.7% 0 Pension Funds UK Equities Central Banks Insurance Overseas Equities Private Client Retail Bonds Other Money Market Other Bonds 48.9% Overseas Equities 8.0% This is in contrast to Pension Funds, Chart 16, that tend to hold the opposite; more than half in equities and a third in bonds roughly equating to the proportion of pension fund money managed in line with a customised benchmark. At over 70%, Retail Funds hold the highest proportion of equity. CHART 16 Asset Allocation of UK Managed Pension Funds 193 bn COSTS AND REVENUE Thirty one groups managing 1.2 trillion reported costs and revenue as a proportion of UK assets under management. The results are summarised in Chart 18. CHART 18 Costs and Revenue by Group as a Proportion of Assets Managed in the UK b.p Money Market 3.7% Other 8.3% UK Equities 32.9% Bonds 32.5% 0 Costs Revenue Respondents 1-31 Overseas Equities 22.5% A summary of asset allocation across all client types is presented in Chart 17. The weighted average revenue was 27 basis points, as a proportion of assets under management, while weighted average costs were 22 basis points, indicating average operating profitability of 21%. 9 Table 1 shows that 70% of respondents do not meet the average profitability level. 8 9 Profitability calculated as the net of revenue and costs over revenue.

11 TABLE 1: Operating Profitability Range No. of Groups <0% % % % % % 1 The weighted average of profitability has been broken down further across ownership types. Table 2 shows that managers owned by insurers and retail banks have the highest levels of operating profitability, between 24% and 25%. TABLE 2: Weighted Average Profitability by Ownership Type Weighted Average Profitability FUM Custodian 12% 69,832 Pension Fund Manager 0% 18,674 Insurance Co 24% 531,966 Investment Bank 19% 157,550 CHART 19 Costs by Group as a Proportion of Assets Managed in the UK - Split by Client Types b.p Pension Funds Private Client Central Banks/Gov't Bodies Retail STAFF Staff numbers were gathered from 51 respondents representing 82% of UK assets under management or 1.6 trillion. This is summarised in Chart 20. Respondents in general were unable to split analysts from fund managers, suggesting that, as in-house research and investment tools are developed, more analysis is required by fund managers. CHART 20 Number of Staff by Job Role Other Respondents 1-31 Insurance No Client Information Retail Bank 25% 226,731 Fund Manager 17% 118,890 Diversified Financial Services 13% 48,682 Fund Managers, Analysts Marketing, Sales, Client Services 4,034 4,894 Total Sample 21% 1,172,325 Compliance, Finance, Risk Management 1,915 Chart 19 looks at costs only, indicating the client mix of the group in question. It shows that many lower cost groups have a preponderance of insurance clients, reflecting the large scale of these funds and associated economies of scale. Above average costs tended to reflect groups with a broader mix of pension, retail and other business. Fund Administration, Operations, Human Resources, I.T. 12,447 9

12 Table 3 highlights proportions of fund administration outsourced to third party administrators. Over 40% of respondents, managing 461 billion, do not outsource any administration. At the other end of the scale, one quarter of respondents, managing 285 billion, outsource all fund administration. In total the 48 respondents manage 1.5 trillion. TABLE 3: Outsourcing of Fund Administration % Outsourced to Respondents bn third party administrators TABLE 4: Proportion of Total Commissions Paid Subject to Soft Commission Arrangements Percentage of commission value No. of Groups Managing 1.3 trillion as at June 2003, 37 respondents provided soft commission figures for June 2002 and June After stripping out the 18 groups that had no soft commission arrangements for both June 2002 and June 2003, the remaining 15 are on average using less soft commissions than the year to June SOFT COMMISSION ARRANGEMENTS Respondents were asked to provide the proportion of business subject to soft commission arrangements. Just under half do not enter into soft commission arrangements while some groups use soft commission arrangements on non-uk accounts. Only 11 of the 50 respondents managing 1.6 trillion, enter into such arrangements for more than 10% of all commissions paid. See Table 4. By weighting each respondent s percentage use of soft commissions with their assets under management, as a proportion of all respondents, we have a proxy for the value of business directed through soft commission arrangements. The average proportion of business subject to soft commission arrangements has fallen from 5.8% in June 2002 to 5.3% in June The respondents using soft commissions ranked, in order of importance, the value of goods and services received under soft commission arrangements; 1 being the most important and 4 the least. Chart 21 shows the top service received for three quarters of respondents was information feeds and hardware, and for the second year, access to research is the second most preferred service. 10

13 CHART 21 Soft Commission Services Ranked by Percentage of Respondents % TABLE 5: Proportion of Clients Requiring/Receiving Transaction Cost Analysis <25% 25%-50% 50%-75% >75% Number of Groups Expected to increase? Research Publications Info feeds & hardware Other Rank 1 Rank 2 Rank 3 Rank 4 TRANSACTION COSTS Two thirds of all respondents, 48 groups totalling 1.5 trillion, undertake transaction cost analysis as part of the firm s internal assessment of performance. Table 5 details the responses of 46 groups managing 1.2 trillion and shows the number of clients requesting transaction cost analysis and the expectation over the next year. For nearly 80% of respondents, less than one quarter of clients request feedback on transaction costs, however, two thirds of those are expecting an increase. Three groups provide transaction cost analysis to all clients. Please note, due to rounding, percentages displayed on charts may not add to 100% 11

14 4 CURRENT INDUSTRY TRENDS INTERVIEWS WITH CEOS We interviewed representatives at Chief Executive Officer level from ten firms covering 40% of the industry. Liability Benchmarking is going to become widespread... An issue that featured strongly in all interviews is the potential impact of future changes in the investment philosophy of pension funds. After the move from balanced to specialist mandates in the 1990s, pension funds are expected to shift focus again, towards liability-based benchmarking. The impetus is seen as coming from sponsor companies, who are increasingly concerned about the contingent liability represented by their pension schemes and their implicit guarantee of them, and are taking a much closer interest in their management. The result is both a continued decline in Defined Benefit (DB) schemes which are open to new entrants, and a shift in asset mix towards bonds and away from equities. Respondents reported that, while liability based mandates have been under discussion for some time with little sign of being introduced, that is starting to change. One noted a pick up in the last year of Request for Proposals along such lines, i. Create a fixed income product that provides a series of duration buckets to immunise projected cash flows. We then allocate clients across duration buckets depending on their own duration i.e. match product with client s liability spectrum. ii. For larger clients we can offer a fully segregated account. In parallel with this, in order to satisfy client demand for higher returns than a conventional bond portfolio, half of the respondents reported the development of a growing niche market for alternative fixed income products and instruments, and according to more than one group, property that exhibits debt like characteristics (e.g. long term government rental buildings), swaps and cash flow techniques. One respondent noted,..the focus on scheme liabilities coupled with the search for above average comparatively safe yields, has created a demand for high alpha fixed income products. Others commented; At the moment there is a relatively limited number of liability based mandates, but momentum is gathering; it will follow a typical product cycle. All those interviewed expected to see a substantial increase in liability based mandates over the next 3-5 years. Liability based investment mandates aim to model or predict the fund s future liabilities and invest in assets with matched characteristics. As one respondent put it,..we are already seeing greater use of bonds, to satisfy the increased demand for liability matching. We are seeing a shift away from equities toward bonds to service liability benchmarking.... but not everybody sees this as best value There are indications that some may not consider liability benchmarking and the subsequent shift from equities to bonds to be the best solution for pension fund liabilities, adding value above the liability rather than above the benchmark. Another group describe their product offering as,..it is not value driven, it is not a choice based on comparative asset class returns, instead it reflects regulation, accounting issues and the maturing profile of the DB market. There are two ways in which we can offer to meet liability-matching benchmarks: Liability matching benchmarks are growing this is not necessarily positive as a lot of spurious decisions surround the process of modelling the liability. 12

15 One concern raised is the emergence over the next five years of gearing on company balance sheets, As a result a few houses have developed global allocation funds to meet this demand. Ultimately the risk is simply moved about the system there will be more fixed interest finance, but it will be riskier because there will be thinner equity backing. Despite reservations, use of liability based mandates is growing and asset managers are building expertise to meet the demand, Fund managers must develop expertise in the asset allocation arena so that mandates such as invest in what you want but beat my liabilities plus 2%, can be met. Increased demand for Absolute Return investing The majority of respondents mentioned increased interest from private clients, a small proportion of pension funds and other institutional investors in absolute return mandates and high alpha type products. [The group] is selling five different approaches to absolute return mandates; tremendous upward momentum principally from private investors but increasingly institutions. Pension funds may take on the investment characteristics of life funds... Closed DB schemes are increasingly adopting asset allocation strategies very close to those employed by closed life funds, which are generally held to have reached the limit of their migration to fixed income. Over time asset allocation of pension funds should approach that of insurance funds. Insurance funds have gone as far as they are likely to go in terms of shifting focus to fixed income. Over the next three years the fixed income allocation in pension funds will increase. The skills required of a closed DB fund manager are tightly matched with that of a closed life fund manager. The skills involved in managing a closed DB scheme are not dissimilar to the skills required to run a closed life fund; however the regulatory environment that the life fund operates in is very different, and this will test the resilience of asset allocation strategy. Some believe interest in absolute return products is cyclical, others are more confident about a potential longer-term role in a portfolio, What is interesting is the segmentation of risk levels; clients are prepared to take risk in some areas if it is neutralised in other areas. Although pension funds may be able to afford only a small risk allocation to absolute return mandates and hedge funds, popularity for high alpha has been growing. Pension fund mandates are becoming more specialised and there is a definite shift toward absolute return strategies. Tactical asset allocation has also been identified as a technique with the potential to add value for clients. 10 There is little difference between DB and DC schemes in the short term. The issue arises when a DB scheme closes, as it must effectively enter a long-term liability management problem that doesn t exist with an open scheme, where new contributions fund liabilities. As an indicator of the orders of magnitude here, pension scheme assets are estimated to be around 600 billion, and a reduction in the proportion in equities from the present 56% to the 31% figure for insurance funds would involve a movement of some 150 billion in assets compared with June but demand for equities may grow elsewhere There are however likely to be countervailing factors. As closed schemes shift assets from equities to bonds, respondents are expecting open DB schemes, Defined Contribution (DC) schemes, and open life schemes to 10 The process of selecting a long term target asset allocation is commonly called strategic asset allocation, short term variations around that target is usually referred to as tactical asset allocation. 13

16 continue to generate demand for equities. Tempered with longer time horizons and cash flows from new contributions it was felt that, they [clients] will tolerate equity volatility in exchange for the necessary higher returns. If you are still taking in the people at the start of their working life you simply cannot afford to not be invested in equities. Despite the continuing need for equities, there are mixed short term views with one group not planning to take on new equity business. Another commented on a new trend, Demand for overseas equity mandates is rising, but awarded in place of UK equity mandates as clients adopt a broader approach to their portfolio. DC business not yet a replacement for DB Although there is expectation of increasing shifts from DB to DC schemes, the pool of assets in DC schemes is thought by all to be quite small and likely to remain so for some time, as most schemes have been set up in the last five years it is too early for sizeable pots of assets to have emerged. sure of continued commitment from the DC scheme, because of the potential future growth. There are problems with the DC market; the need to package administration is a cost that must be met. The market is still quite small; if it gets big [we] might attack. However some groups are more sceptical, DC schemes are not the best use of resources when you are in a position to go after the large mandates.the higher margin mandates that require more brainpower. this sort of business will be unattractive for some time to come. Retail investors likely to demand more equities The general view was that retail investors are likely to favour equities in the short to medium term, particularly global equities, but that bonds have established a long term role in portfolios, The retail market has undergone fundamental change; the big feature has been the rise and rise of bond funds now taking a permanent position in retail portfolios. In the short term however, equity funds will be popular. The prospect of taking on more DC business has been met with mixed reactions. Some identified DC business as a potential replacement for DB business, New business must be identified to replace DB. Although the cash flows from the DC market are attractive, scale is needed before high margins are available. However, it remains, alongside retail, one of the best places to look for expansion. Most measure the opportunity presented by the developing DC market in terms of potential clients rather than current assets. One respondent offered the following explanation for why retail investors are moving back to equities, Rather than looking at liabilities, retail investors look at returns when they make the investment decision. Again we are seeing a greater demand for equities than bonds, as opposed to last year when bond funds were the popular choice. Absolute return mandates are increasingly demanded by retail investors. To an extent this is a cyclical effect, but a certain amount of underlying demand for absolute return is here to stay. It is almost better to consider this business in terms of number of potential clients. A 10mn DC mandate is preferred to a 40mn DB mandate if one could be Most groups cited retail markets as important for expansion. Particularly once scale has been achieved in the UK, many saw continental Europe as a key growth 14

17 opportunity. Strategies varied from a single country focus of perhaps one or two products to a suite of distribution strategies across Europe. There are of course challenges which respondents identified. The following are some of the comments made. Business Issues The firms interviewed have a range of different strategies, reflecting their views of their individual strengths as houses capabilities in equity, bond, property, retail or international business were all mentioned as individual strengths that could be leveraged over the coming period. Distribution and efficiency are also high strategic priorities for most firms. One group identified four ways a business can gain competitive advantage: product or investment strength, superior distribution capabilities, customer intimacy and administrative efficiency. Another recommended more active product management in order to meet client needs, Low nominal returns add pressure to revenue as clients become increasingly conscious of deductions from funds. Generic products are easy to scale up, but as you shift toward liability management, you move to a more tailored, costly approach. Regulation, which is becoming more prescriptive, is also adding pressure to revenue. One view is that increasing costs due to tailoring and regulation will mean that the survivors will be more profitable because there will be less competition. Another less sanguine was that there are too many players in a fragmented industry that is difficult to consolidate. The industry must rationalise product in terms of business impact; people need to think about strategy, how you move from point A to point B, rather than explain after the event. Skills may need to be widened from the razor edge of specialist knowledge, returning to a reliance on generalist ability. More time must be spent asking existing clients about their future needs and identify the skills needed to deliver future solutions. Business can be grown from offering existing clients a greater range of products, and resources must be employed to ensure that clients are aware of in-house capabilities. Alongside the risk posed by consultants is the uncertainty of a shift in the balance of power at the client end. Indeed, changes in the way pension funds are run may impact the nature of the client relationship, It is not immediately clear who the actual client is. Is it the Finance Director, the trustee or the scheme members? This comes back to understanding the client. More pressure is expected for performance related fees. According to one respondent, The fee structure until now has not meant a direct relationship between performance and fees; the relationship has been between beta and fees. Clients are now demanding alpha; performance related fees ensure the relationship rests with alpha not beta. The industry should feel this shift over the next three years. One respondent, however, argued that a balance must be maintained between performance fee revenue and management charge revenue if one is to continue to be an asset manager rather than a hedge fund manager. This leads to a problem faced by more than one group; in order to keep talent, companies may feel pressure to compensate in line with the financial rewards potentially on offer from hedge funds. The opportunity to operate without regulatory and corporate constraints is also perceived as attractive. It is a challenge for large houses to keep strong talent as people break away and start up again. This is a persistent trend. The industry is continually regenerating. 15

18 5 APPENDIX 1: SURVEY PARTICIPANTS ASSETS MANAGED AS AT 30TH JUNE 2003, MN COMPANY PARENT PARENT MANAGED MANAGED GROUP TYPE IN THE UK GLOBALLY Legal & General Investment Legal & General Group Plc Insurance Co 122, ,583 Barclays Global Investors Barclays Plc Retail Bank 119, ,461 M&G Investment Management Prudential Plc Insurance Co 116, ,641 Morley Fund Management Aviva Ltd Insurance Co 103, ,000 Standard Life Investments Standard Life Assurance Group Insurance Co 77,751 89,307 Scottish Widows Investment Partnership Lloyds TSB Group Retail Bank 72,986 99,000 DWS Investments Deutsche Bank AG Investment Bank 70, ,657 Henderson Global Investors AMP Insurance Co 68,748 94,061 Insight Investment HBOS Group Retail Bank 67,652 67,652 Schroders Plc Schroders Fund Manager 66,730 90,382 J. P. Morgan Fleming Asset Management JPMorgan Chase Investment Bank 63, ,500 ISIS Asset Management Plc Friends Provident Insurance Co 60,800 60,800 State Street Global Advisors State Street Group Custodian 51, ,000 Hermes Pensions Management Ltd Pension Fund Manager 39,550 39,550 AEGON Asset Management AEGON UK Insurance Co 33, ,000 Abbey National Asset Managers Abbey Group Retail Bank 28, ,298 Capital International Ltd Capital Group Companies Fund Manager 27, ,750 Goldman Sachs Asset Management Goldman Sachs Group Inc Investment Bank 25, ,496 Baillie Gifford Fund Manager 22,034 22,034 F&C Management Eureko B.V. Insurance Co 20,756 62,487 Baring Asset Management ING* Insurance Co 18,178 19,734 Britannic Asset Management Britannic Group Plc Insurance Co 14,291 14,291 Aberdeen Unit Trust Managers Ltd Aberdeen Asset Management Plc Fund Manager 10,917 20,215 ABN AMRO Asset Management ABN AMRO Bank N.V. Investment Bank 9, ,397 Cazenove Fund Management Ltd Cazenove Group Plc Investment Bank 6,605 6,605 SG Asset Management Societe Generale SA Investment Bank 6, ,000 First State Investments (UK) Ltd Commonwealth Bank of Australia Retail Bank 5,440 36,935 Martin Currie Investment Management Ltd Fund Manager 5,232 5,232 CCLA Investment Management Ltd Fund Manager 5,077 5,077 Singer & Friedlander Investment Management Ltd Singer & Friedlander Group Plc Investment Bank 2,600 2,600 Chiswell Associates Nedcor Limited Investment Bank 1,768 19,000 Franklin Templeton Investment Management Ltd Franklin Templeton Investments Fund Manager 1, ,000 Aberforth Partners Fund Manager 1,147 1,147 Glasgow Investment Managers Ltd Fund Manager Odey Asset Management LLP Fund Manager Legg Mason Investments Legg Mason Inc Fund Manager ,305 Merrill Lynch Investment Managers Merrill Lynch & Co, Inc Investment Bank x 285,416 Invesco Perpetual AMVESCAP Fund Manager x 210,665 Aerion Fund Management Limited Lattice Group Pension Scheme Pension Fund Manager x x Alliance Dresdner Asset Management (UK) Ltd AXA Group* Insurance Co x x AXA Investment Managers UK Ltd AXA Group Insurance Co x x B & CE Unit Trust Management Co Ltd B & CE Benefit Schemes Pension Fund Manager x x BAE Pensions Fund Investment Management Ltd Pension Fund Manager x x Bank of Ireland Fund Managers Ltd Bank of Ireland Group Retail Bank x x BP Investment Management Pension Fund Manager x x British Airways Pension Investment Management Pension Fund Manager x x BWD Rensburg Unit Trust Managers Ltd BWD Securities Plc Fund Manager x x Canada Life Ltd Great West (Canada) Insurance Co x x Citigroup Asset Management Ltd. Citigroup Retail Bank x x Close Fund Management Close Brothers Investment Bank x x Consistent Unit Trust Managers Consistent Unit Trust Management Co Ltd Fund Manager x x Cooperative Insurance Society Co-Operative Group Insurance Co x x Credit Suisse Asset Management (UK) Holding Ltd Credit Suisse Group Investment Bank x x Direct Line Unit Trusts Ltd Direct Line Group Services Insurance Co x x Discretionary Unit Fund Managers Ltd Rights & Issues Investment Trust Plc Fund Manager x x Ecclesiastical Ecclesiastical Insurance Group Insurance Co x x Fidelity International Ltd Fund Manager x x Framlington Framlington Group Ltd Fund Manager x x 16

19 COMPANY PARENT PARENT MANAGED MANAGED GROUP TYPE IN THE UK GLOBALLY Gartmore Investment Management Plc Nationwide Mutual Insurance Co x x Genesis Investment Management Genesis Group Fund Manager x x Homeowners Investment Fund Managers Ltd Homeowners Friendly Society Insurance Co x x HSBC Asset Management Ltd HSBC Group Retail Bank x x Investec Asset Management Investec Investment Bank x x Jupiter Asset Management Ltd Commerzbank Investment Bank x x Kvaerner Pensions Investment Aker Kvaerner Group Pension Fund Manager x x Lazard Asset Management Lazard LLC Investment Bank x x Liontrust Asset Management Fund Manager x x Liverpool Victoria Asset Management Ltd Liverpool Victoria Friendly Society Ltd Insurance Co x x Lombard Odier Darier Hentsch Asset Management Ltd Lombard Odier Darier Hentsch & Cie Investment Bank** x x Lord Abbett Ltd Lord, Abbett & Co LLC Fund Manager x x Manek Investment Management Ltd Fund Manager x x Marks & Spencer Financial Services Diversified Financial Services x x Marlborough Fund Managers Ltd Fund Manager x x Mayflower Management Co Ltd Fund Manager x x MFS Fund Services MFS Investment Management Ltd Fund Manager x x MGM Unit Managers Ltd MGM Assurance Insurance Co x x MLC Trust Management National Australia Bank Ltd Retail Bank x x Morgan Stanley Investment Management Ltd Morgan Stanley Group Europe Investment Bank x x Nationwide Unit Trust Managers Ltd Nationwide Building Society Insurance Co x x Neptune Investment Management Ltd Fund Manager x x New Star Investment Funds New Star Asset Management Fund Manager x x Newton Investment Management Ltd Mellon Financial Corporation Custodian x x NFU Mutual Unit Managers Ltd NFU Mutual Insurance Co x x Old Mutual Asset Managers Old Mutual Plc Insurance Co x x Pall Mall Partners Fund Manager x x Pensions Services Ltd Pension Fund Manager x x Pictet Asset/International Management Pictet Investment Bank** x x Pilkington Pensions Services Ltd Pilkington Pensions Services Ltd Pension Fund Manager x x Police Mutual Investment Services Ltd Police Mutual Assurance Society Insurance Co x x Premier Portfolio Managers Ltd Premier Asset Management Plc Fund Manager x x Pyrford International Plc Fund Manager x x Reed Elsevier (UK) Ltd Reed Elsevier Pension Fund Manager x x Rio Tinto Pension Investments Ltd Rio Tinto Plc Pension Fund Manager x x Rothschild Private Management Rothschild Investment Bank x x Royal London Asset Management Royal London Mutual Insurance Society Insurance Co x x Sand Aire Ltd Fund Manager x x Sarasin Investment Funds Ltd Sarasin Investment Bank** x x Scottish Friendly Asset Managers Ltd Scottish Friendly Assurance Society Ltd Insurance Co x x Shell Pension Management Ltd Pension Fund Manager x x Smith & Williamson Unit Trust Managers Smith & Williamson Diversified Financial Services x x Solus Investment Funds Ltd KBL Investment Funds Ltd Fund Manager x x Sovereign Unit Trust Managers Fund Manager x x St James's Place Unit Trust Group Ltd St James's Place Group Ltd Fund Manager x x SVM Fund Manager x x T Rowe Price Global Investment Services Ltd T Rowe Price Group Inc Fund Manager x x Thornhill Fund Manager x x Threadneedle Asset Management Ltd American Express (effective October 2003) Diversified Financial Services x x Tilney Collective Management Ltd Tilney Group Fund Manager x x TRW Investment Management Co Ltd TRW Inc Pension Fund Manager x x TU Fund Managers Ltd Fund Manager x x UBS Global Asset Management UBS Investment Bank x x Universities Superannuation Sheme Ltd Pension Fund Manager x x Wesleyan Assurance Society Insurance Co x x x Non disclosure requested or no direct response * 'Managed Globally' figure does not represent global assets under management of the ultimate parent but of the subsidiary ** Please note that Private Banks have been included in the Investment Bank category Respondents provided Parent name and selected Parent Type from a given list. Parent and Parent Type of non respondents have been assigned by the IMA. 17

20 6 APPENDIX 2: AGGREGATE RESPONSES, MN UK CLIENTS Client Types Respondents AUM Client Mandates Respondents AUM UK basis 41 1,122,328.9 UK basis 38 1,042,252.5 Global basis ,400.4 Global basis 7 250,131.1 UK CLIENTS Absolute Passive Customised Peer Group Specialist TOTAL Return Benchmark Pension Funds UK basis , , , , ,019.2 Global basis , , , ,030.6 Central Banks/ UK basis , , ,093.5 Gov't Bodies Global basis , , ,315.3 Insurance UK basis , , , , ,589.9 Global basis , , ,599.1 Private Client UK basis , ,183.9 Global basis , ,848.2 Retail UK basis , , , , ,363.3 Global basis , , , ,059.7 Other UK basis , , , , ,079.1 Global basis , , ,547.5 TOTAL UK basis 49, , , , , ,122,328.9 Global basis 1.6 1, , , , ,400.4 ASSET ALLOCATION Client Types Respondents AUM UK basis 35 1,002,264.5 Global basis ,589.4 UK CLIENTS UK North American European Japanese Emerging Other Equities Equities Equities Equities Markets Equities Equities Pension Funds UK basis 63, , , , , ,295.6 Global basis 11, , , , , ,014.0 Central Banks/ UK basis 1, , ,554.0 Gov't Bodies Global basis 2, , , , ,647.7 Insurance UK basis 66, , , , , ,164.8 Global basis 8, , , ,827.1 Private Client UK basis 2, ,887.3 Global basis , Retail UK basis 42, , , , , ,390.3 Global basis 8, , , , , ,994.3 Other UK basis 4, , , ,823.1 Global basis 7, , , , ,621.0 TOTAL UK basis 276, , , , , ,288.1 Global basis 109, , , , , ,

21 NON UK CLIENTS Client Types Respondents AUM Client Mandates Respondents AUM UK basis ,547.0 UK basis ,249.0 Global basis 11 1,246,516.0 Global basis 5 408,550.2 NON UK CLIENTS Absolute Passive Customised Peer Group Specialist TOTAL Return Benchmark Pension Funds UK basis 0.0 7, , , ,735.9 Global basis , , , ,003.0 Central Banks/ UK basis , , ,498.3 Gov't Bodies Global basis , , ,877.4 Insurance UK basis 0.0 2, , , ,818.1 Global basis , ,458.1 Private Client UK basis , ,921.9 Global basis , ,079.3 Retail UK basis 1, , , , , ,776.2 Global basis , , , , ,410.9 Other UK basis , , , ,796.7 Global basis 1.0 1, , , ,687.2 TOTAL UK basis 1, , , , , ,547.0 Global basis , , , , ,246,516.0 Government Investment High Yield Cash/ Property Venture Other TOTAL Debt Grade Bonds Bonds Money Market Capital 40, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,002, , , , , , , , ,