The opinions expressed are those of the individual speakers and do not necessarily reflect the views of State Street Corporation.

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2 This Is State Street With $27.5 trillion in assets under custody and administration, and $2.4 trillion in assets under management* at March 31, 2014, State Street is a leading financial services provider serving some of the world s most sophisticated institutions. We offer a flexible suite of solutions that spans the investment spectrum, including investment management, research and trading, and investment servicing. With operations in 29 countries serving clients in more than 100 geographic markets, our global reach, expertise, and unique combination of consistency and innovation help clients manage uncertainty, act on growth opportunities and enhance the value of their services. State Street Corporation State Street Financial Center One Lincoln Street Boston, Massachusetts NYSE ticker symbol: STT The opinions expressed are those of the individual speakers and do not necessarily reflect the views of State Street Corporation. For questions or comments about our Vision series, us at vision@statestreet.com. *This AUM includes the assets of the SPDR Gold Trust (approx. $34 billion as of March 31, 2014), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors, serves as the distribution agent STATE STREET CORPORATION i VISION 2014

3 Contents iii ABOUT THE RESEARCH iv CONTRIBUTORS v EXECUTIVE SUMMARY 1 THE INNOVATION DRIVE 4 Clients want outcome-based investment solutions 8 New solutions demand new capabilities 10 Key insights 11 TARGETING TOMORROW S CUSTOMERS 16 Overcoming regulatory challenges 18 Distribution drive 19 Key insights 21 INVESTING IN THE FUTURE 24 Transformation: Future-proofing the business 26 Tools: Unlocking the power of data and analytics 28 Talent: Expanding the skill base 31 Key insights 33 CONCLUSION: LEADING THE FRONTLINE REVOLUTION ii FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

4 About the Research This report explores how asset managers are adapting to the challenges of a new investment environment. The research presented in this report is based on a global State Street survey of 300 senior executives at asset management firms. The State Street 2014 Asset Manager Survey was conducted by FT Remark in April and May Respondents were equally distributed across North America, Europe and Asia Pacific. iii VISION 2014

5 Contributors In addition to the survey, Longitude Research conducted a series of interviews with senior executives in asset management firms around the world. We thank all those who participated for their time and insights: Tim Barber, COO, Australian Unity Australia Ken Fisher, CEO, Fisher Investments US Christian Franzen, Global Head of Performance and Portfolio Risk, Allianz Global Investors Germany Alan Gadd, Head of Product & Distribution Development, Artemis UK Barry Gordon, President & CEO, First Asset Canada Ferdinand Haas, Co-Head of Active Investments, Deutsche Asset Management Germany Mark Lazberger, CEO, Colonial First State Global Asset Management Australia Sandy McIntyre, Co-Chief Executive Officer, Sentry Investments Canada Brad McMillan, Chief Investment Officer, Commonwealth US Euan Munro, CEO, Aviva Investors UK Oliver Murray, CEO, Bridgehouse Asset Managers Canada Gerry Ng, Chief Executive Officer, Baring Asset Management - Asia Ex Japan Anne Richards, Chief Investment Officer, Aberdeen Asset Management UK Nick Ring, Head of Distribution, Threadneedle Investments UK Takashi Saruta, Senior Investment Officer, Nomura Asset Management Japan Laurent Seyer, Global Head of Client Group, AXA Investment Managers Takumi Shibata, President & CEO, Nikko Asset Management Co., Ltd. Japan Maarten Slendebroek, CEO, Jupiter Asset Management UK Alex Takayama, General Manager, Head of Global Business Development, Tokio Marine Asset Management Co., Ltd. Japan Shen Tan, Managing Director and Head of Relationship Management, Income Partners Asset Management Hong Kong Rob Vanderhooft, CEO, Greystone Managed Investments Inc. Canada Phil Wagstaff, Global Head of Distribution, Henderson Global Investors Eleanor Wan, Chief Executive Officer, BEA Union Investment Hong Kong Robert White, CEO, Eaton Vance Management International (Asia) Pte. Ltd Singapore iv FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

6 Executive Summary Asset managers are rethinking their business models to capitalize on new growth opportunities, according to a State Street survey of 300 senior executives at asset management firms, conducted by FT Remark. Almost four-fifths of asset managers (79 percent) rate highly their prospects for growth over the next 12 months. Three-quarters of respondents (76 percent) say changing client demands are causing a fundamental shift in their overall business strategy. Demand for new types of investment solutions, combined with intense competition for the most profitable customer segments and markets, is reshaping the industry. DEMAND FOR NEW TYPES OF INVESTMENT SOLUTIONS, COMBINED WITH INTENSE COMPETITION FOR THE MOST PROFITABLE CUSTOMER SEGMENTS AND MARKETS, IS RESHAPING THE INDUSTRY v VISION 2014

7 Our survey findings indicate that asset managers will compete to dominate the emerging investment landscape in three areas: 1. Product innovation will unlock a new wave of growth: More than half (56 percent) of asset managers believe that product innovation is key to growth. There will be a huge focus on multi- asset solutions, which two-thirds of asset managers (67 percent) see as most likely to drive growth in the next three years compared with only 17 percent who cite traditional actively-managed equity. 2. Growth strategies will target underserved markets and segments: Asset managers must find ways to both target new markets and identify underserved investor groups in markets where they already operate. While in the short term they are focused on opportunities in existing markets, some 47 percent of asset managers expect to expand into new countries or regions over the next three years. Forty-two percent are focused on new investor segments. 3. Leading asset managers will transform their capabilities to thrive in a multi-asset world: Managers are considering how to transform their operations to deliver new efficiencies and greater agility. Technology has a major role to play: more than 80 percent of asset managers plan to make moderate or significant investments in risk analytics, performance analytics and data integration over the next three years. Human capital will be crucial too: 54 percent of asset managers plan moderate or significant investments in new talent to address capability gaps. Asset managers face exciting opportunities. They also see major hurdles standing in their way. Many feel ill-equipped to deliver the new multi-asset solutions, with 74 percent of respondents agreeing that few managers currently have the capabilities to thrive in multi-asset investment. Regulation remains a major challenge, with 76 percent of respondents expecting regulatory risk to rise strongly over the next 12 months. Distribution issues are also high on the list of concerns: 55 percent of asset managers say distribution difficulties are preventing them from investing more in otherwise attractive markets. Those that rise to the challenge can position themselves for a new era of growth. This report examines how leading asset managers around the world are transforming themselves to grasp the opportunities of a fast-changing competitive landscape. vi FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

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9 The Innovation Drive FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS viii

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11 The Innovation Drive There is no shortage of growth opportunities, but only for asset managers that are able to adapt to the new investor demands now reshaping the competitive landscape. A strengthening global economy, combined with better prospects for most developed countries, has improved the growth outlook for the industry. Worldwide assets under management are forecast to rise to $101.7 trillion by 2020, up from $63.9 trillion in 2014, according to a recent report from PwC 1. Executives in State Street s survey are overwhelmingly positive about their prospects, with 79 percent of respondents seeing significant opportunities for profitable growth. Capitalizing on these opportunities requires asset managers to target their business strategies in the right areas. Product innovation will be key: almost half of respondents (48 percent) in the survey view this as their greatest opportunity. An additional 24 percent believe that increasing market share for existing products in their established markets is their most likely route to growth. Only one quarter (28 percent) of asset managers cite new markets as their main opportunity for the next 12 months. Geographic expansion remains a strategic goal, but new market investments typically take time to become profitable. Continued pressure on costs and fees make it hard for asset managers to take uncertain bets on less familiar markets. For many, targeting clients in existing markets with new products is likely to yield better rewards in the near term. 1 Asset Management 2020: A Brave New World, PwC, FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

12 Figure 1: Where will growth come from? What s the greatest opportunity for your business over the next three years? 24% EXISTING COUNTRY MARKETS 72% 3-YEAR GROWTH 28% 8% NEW COUNTRY MARKETS 48% 20% 48% Developing new products for existing markets 24% Growing market share of existing products in existing markets 72% Existing Country Markets 28% New Country Markets 20% Bringing existing products to new markets 8% Developing new products for new markets Clients want outcome-based investment solutions Clients increasingly want investment products that are tailored to their individual investment goals. In particular, there s an increased focus on investment strategies that deliver more stable returns or pre-defined cash flows, and on finding better ways to manage risk and volatility. For institutional investors, there s also the need to match assets against their long-term liabilities. Nick Ring, Head of Distribution at Threadneedle Investments in London, explains how investment trends evolved as a result of the financial crisis. The old paradigm was for clients to build diversified portfolios based on traditional asset allocation models. But what happened in 2008 proved that didn t always work, he says. Now clients are no longer saying, I want exposure to US equities or Japanese bonds ; they re saying I d like a total return of 4 percent a year with very little volatility. The focus on investment outcomes explains the growing importance of multi-asset solutions as a key engine of growth for the asset management industry. In our survey, more than two-thirds of asset managers (67 percent) cite multi-asset solutions as the type of investment strategy most likely to drive growth. By comparison, only 17 percent of respondents cite traditional actively managed equity. Traditional actively managed fixed income (7 percent) is even less likely to be a priority. 4 VISION 2014

13 In the past months, we have seen a spike in the number of information requests and interest as far as multi-asset investing is concerned. One of the factors in that is the volatility in the marketplace. Gerry Ng, Chief Executive Officer, Baring Asset Management The term multi-asset solution covers a range of different approaches, but they share a number of characteristics (see Table 1). Typically these solutions integrate a broad range of asset classes to create portfolios that are highly customized around the investor s specific goals. Alongside a wide choice of traditional asset classes, many managers are including within these solutions alternative asset classes such as real estate, commodities, credit, hedge funds, private equity, infrastructure and derivative instruments. Absolute return is a key feature of the multi-asset approach in many cases. Asset managers set out to deliver a specific targeted outcome for clients, rather than outperformance relative to a benchmark, which might still be negative. This outcome-oriented approach to management focuses on using the right blend of assets to deliver on the client s objectives, rather than simply offering exposure to a particular asset class. Advisors are highly conscious and in some respects almost fearful of client criticism if they buy traditional passive beta, because they re concerned that the clients will say: Well, if you re just buying me the index, why am I paying you for advice? Barry Gordon, President & CEO, First Asset The blurring of the lines between active and passive investment is another piece of the multiasset jigsaw. Smart beta products, for example, offer to replicate the performance of custom-made benchmarks tailored to give exposure to specific factors. Actively managed exchange-traded funds (ETFs) are also growing in popularity as part of the mix. Together, these trends redefine the relationship between asset managers and their clients. It is easier for asset managers to benchmark their performance against an index than to demonstrate they can deliver against a client s overall investment objectives. Asset managers that can rise to that challenge will have a considerable advantage in the years ahead. 5 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

14 Table 1: Eight characteristics of the multi-asset solution Investor trend Focus on investment goals Improve diversification Reduce volatility Create transparency Upgrade service Manage dynamically Blend passive and active Drive cash flow Industry impact Migrate from products to outcome-based solutions Find better ways to analyze risk and performance holistically across multi-asset portfolios Ensure consistent risk-weighted performance over the long run Achieve real-time ability to deliver granular insights into all aspects of performance and risk Differentiate by offering proactive account management to clients Adjust asset allocation models to suit the prevailing market conditions Fuse both styles of management, as well as using hybrid vehicles such as smart beta and active ETFs Deliver more predictable cash flow Figure 2: Which one of these investment strategies do you think will contribute most to your business growth over the next three years? (Select one only) Multi-asset solutions 67% Traditional actively managed equity 17% Traditional actively managed fixed income 7% Passive equity 4% Alternative mutual funds 4% Passive fixed income 0.3% Other strategy 2% 0% 10% 20% 30% 40% 50% 60% 70% 6 VISION 2014

15 INVESTORS THAT WERE ONCE DETERRED FROM ALTERNATIVES BY THEIR COMPLEXITY, PERCEIVED ILLIQUID STRUCTURES OR HIGH FEES, ARE NOW SEEING THEM AS KEY TO MANAGING RISK, REDUCING VOLATILITY AND IMPROVING LONG-TERM RETURNS Jane Mancini Head of Asset Manager Solutions, North America STATE STREET VIEWPOINT: ALTERNATIVES IN THE MIX ASSET MANAGERS RISE TO THE CHALLENGE Alternative investments are no longer the sole domain of institutional and high-net-worth investors They are becoming part of the mainstream investment management landscape, particularly in North America. Where once investors might have been deterred from alternatives by their complexity, perceived illiquid structures or high fees, prevailing market conditions have boosted their appeal. Investors now see alternatives potential benefits in an environment of low interest rates, limited growth and poor returns. Those benefits include the ability to de-correlate risks and to reduce volatility. Seen in this light, adding alternatives to a diversified portfolio can be a way to produce better, more stable returns. A big trend in recent years has been the rise of liquid alternatives. Many asset managers are turning to alternatives within the traditional structure of a mutual fund. The mutual fund structure brings some restrictions asset managers must be able to provide daily liquidity, for instance. Nevertheless, the demand for these novel products creates a huge opportunity. Going into the traditional mutual fund structure gives asset managers access to new markets and to bigger markets, such as the broker-dealer distributed market. The focus going forward should be on ensuring that the right talent and tools are in place to tackle this emerging trend. Asset managers must be able to give investors insight around the risk-reward trade-off, how alternatives fit into their portfolios, and the time horizon associated with a given return. While it is said that alternatives will always bring liquidity constraints and risks, the bigger risk is to ignore this burgeoning trend. 7 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

16 New solutions demand new capabilities The shift from traditional products to multi-asset solutions represents a major inflection point for the industry. Many asset managers are struggling to adapt. Almost three-quarters (74 percent) of respondents agree that few asset managers are currently equipped to thrive when it comes to offering multi-asset class investment solutions. The survey also shows that the biggest challenge when launching new products in existing markets is the need to build internal expertise (cited by 63 percent of survey respondents). Asset managers need to be able to cater to the broader needs of the market by diversifying beyond the core asset classes. There are two major trends here low-cost tracking and alternatives. Regardless of the path a firm pursues, having the right combination of expertise, scale and the appropriate infrastructure will be important considerations. Robert Baillie, President and CEO, State Street Trust Company Canada Multi-asset solutions stretch asset managers capabilities on a number of fronts. They need to assemble teams with the right expertise across a broader range of asset classes. It s not an easy transition for asset managers whose front-office talent has previously been focused on supporting a more traditional product set. With investors increasingly focused on performance across the portfolio, asset managers will also need tools to analyze risk and performance across asset classes that have widely varying characteristics. Multi-asset solutions put pressure on the technology and data infrastructures that asset managers increasingly rely on to optimize today s diversified portfolios (see Section III of this report for more on this topic). Building the team to support multi-asset solutions is a major challenge. You can t necessarily just redeploy your existing staff into this role. It s likely also to require a whole new set of skills and experiences. Andy Wilson, Head of UK Asset Manager Solutions, State Street 8 VISION 2014

17 Figure 3: What are the biggest challenges for your firm when launching new products in your existing markets? (Please select up to 3) Building the necessary internal expertise 63% Selecting the right distribution platform(s) 57% Determining the optimal fund structure/domicile 55% Creating the necessary operational and technology infrastructure 50% Overcoming regulatory barriers 40% Gaining internal consensus on strategy 33% 0% 10% 20% 30% 40% 50% 60% 70% Plug-in product or one-stop shop? One other crucial question for asset managers is whether they want to provide a one-stop solution for clients. The alternative is to offer plug-in products that clients and their advisors can use as building blocks alongside products from other asset managers. Ferdinand Haas, Co-Head of Active Investments at Deutsche Asset Management, believes that the onestop approach won t work for everyone. Sometimes the asset manager will deliver a full solution, at other times they will plug into a solution developed by an intermediary. We have to be a supplier of building blocks to those who build solutions for their clients, Haas argues. Those intermediaries will focus on pulling together best-in-class building blocks to build their solutions so that is where the battle will be fought. Oliver Murray, CEO of Bridgehouse Asset Managers in Canada, says the building block approach makes it even more crucial to establish a reputation for reliability and consistency. If they pick your solution can they rest assured that, say, a value building block will behave as a value building block for the next five years? he asks. In a world of solutions, if you have style drift in your building block, it is going to be hard to be selected. 9 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

18 Key insights: Multi-asset solutions will force asset managers to develop internal expertise in new asset classes, product construction, risk management and reporting or acquire this talent. As investment portfolios become more complex, investors will choose to work with asset managers who can provide more transparency and control over how their money is being managed. Asset managers will need to decide whether to operate as a one-stop shop, or to offer focused products that can act as the building blocks for providers of more holistic solutions. 10 VISION 2014

19 Targeting Tomorrow s Customers FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS 9

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21 Targeting Tomorrow s Customers Asset managers need strategies to target under-penetrated customer segments, as well as the high-growth markets of the future. New products represent one route to growth, but asset managers are also keen to exploit other opportunities. Many asset managers are planning international expansion. Almost half (47 percent) expect to enter new countries or regions over the next three years. Asia is a priority: 60 percent of survey respondents cite it as the region that will drive the most growth over the next three years (excluding their home region). You simply cannot avoid being in Asia, says Laurent Seyer, Global Head of Client Group at AXA Investment Managers. But success in the region requires asset managers to tailor their approach to local needs. You ve got to understand the specifics of this market and the needs of its different client segments, he says. This is a complex undertaking in Asia s fragmented markets, each of which have different customer requirements, as well as widely varied regulatory and distribution environments (see next section). 13 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

22 In the near term, targeting new customer groups at home may be a faster route to profitable growth. This includes developing relationships with under-penetrated demographic groups such as Generation X and looking to the future Millennials. These investors have different investment requirements from the baby boomer generation, and managers need to tailor products accordingly. They also have different expectations of how to access services, and are more likely to consume services through online channels. Businesses that can innovate based on client demand and needs will be more successful than businesses that manufacture a product and then go looking for the buyer. Tim Barber, COO, Australian Unity With almost twice as many asset managers in the survey targeting growth from new investor segments as existing segments (42 percent versus 23 percent), navigating this shift in investor requirements requires careful planning. It is a challenge that will force asset managers to rethink many aspects of their product offerings, distribution channels and brand image. Our goal is to gain market share, not to go to every new market in the world or to be everywhere in the world all the time. Too many firms think about expanding into new markets before they have share in the markets they re already in, says Ken Fisher, CEO, Fisher Investments. 14 VISION 2014

23 TECHNOLOGY AND SOCIAL MEDIA FIRMS HAVE THE TECHNOLOGICAL WHEREWITHAL TO PROVIDE A COMPELLING ALTERNATIVE TO THE TRADITIONAL ASSET MANAGEMENT APPROACH Jörg Ambrosius Head of Asset Manager Solutions, EMEA STATE STREET VIEWPOINT: THE BATTLE FOR THE NEXT GENERATION Distribution channels are where one of the wars for the next generation of investors may be won or lost. The possibility of technology and social media firms such as Google and Facebook entering the financial services industry should truly concern asset managers. These firms have access to individual data that can build a truly comprehensive picture of investor needs. They have spent years building a personal relationship with younger demographics. There are already early examples, with more expected to follow. In China, e-commerce business Alibaba started distributing a money market fund in 2013, managing to raise $65 billion within its first 12 months. And Tencent began distributing a fund managed by China AMC in January 2014, reportedly raising $8 billion within 40 days of launch. 2 The potential dangers posed to the asset management industry by disruptive new entrants is best illustrated by the speculation around Google s move into the insurance market. By already acting as an insurance aggregator, they have begun to position themselves in an industry where 75 percent of all purchases are forecast to be online by The insight these technology and social media firms have on retail investors where they live, what they do for a living, what kind of sports they take part in and what kind of holidays they have means they can potentially value risk more precisely than a traditional insurance company. Asset managers may face a similar kind of challenge from these new entrants. So while asset managers have plenty of other concerns to occupy them, it is imperative that they keep a close eye on tech and social media businesses. It is true that these firms would have to adapt to operating in a highly regulated, low-margin business, but they have the technological wherewithal to provide compelling choices to investors. Alternatively, these new entrants may look to partner with asset manager firms who have already mastered the complex landscape. Successful asset managers will exploit digital channels and tools to consult with their clients toward an individual outcome-driven investment strategy and provide more transparency and control over their investment portfolios. They will also search for efficiencies to compete with the lower prices offered by technology and social media firms. Most importantly, asset managers must target the new generation now, because soon they will account for the lion s share of the market. 2 Fund managers fret as Facebook pushes into financial services, Financial Times, April Insurance@Digital-20X by 2020, Boston Consulting Group and Google, FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

24 Overcoming regulatory challenges Asset managers are sanguine about the opportunities created by new market and client segments, yet challenges loom on the horizon. Foremost among these are concerns over regulation. More than three-quarters of respondents in the survey (76 percent) feel that regulatory risk will rise strongly for their business over the next 12 months. A wave of high-profile regulations such as Dodd-Frank and the Foreign Account Tax Compliance Act (FATCA) are already imposing a heavy compliance burden on the industry. And regulatory requirements are becoming more stringent in markets all around the world. For Japanese managers, or for any asset managers in any country for that matter, increased regulatory oversight will heighten the cost of business and raise the bar for entry, says Takumi Shibata, President and CEO of Nikko Asset Management. The regulatory challenge becomes even more onerous as asset managers seek to expand into less familiar markets. Asia s emerging markets provide a good example. Each country has its own unique regulatory requirements; to gain entry, asset managers need to invest heavily in local expertise. This further suppresses profits at a time when asset managers are already under considerable cost pressures. For many, these regulatory issues make international expansion far less attractive. Over four-fifths of asset managers (85 percent) see regulatory barriers as a key challenge when expanding into new markets. For asset managers that harbor global ambitions, the key to success is having the right capabilities and infrastructure to navigate regulatory complexity across multiple jurisdictions. In particular, they need to develop more flexible regulatory reporting systems, while building regulatory expertise across a broader set of markets. 16 VISION 2014

25 MARKET FORCES WILL DRIVE THESE REGIONAL PASSPORTS TO MERGE THE REGION IS CALLING OUT FOR A PROPERLY CONTROLLED AND COORDINATED PASSPORT Paul Khoury Head of Asset Manager Solutions, Asia Pacific STATE STREET VIEWPOINT: REGULATORY CHALLENGES IN APAC Regulatory complexity is a huge issue for any asset manager that seeks to operate internationally in Asia Pacific (APAC). The region s regulators tightly scrutinize what securities can be traded and how funds can be marketed in certain markets. Asset managers must be transparent and rigorous in their reporting to both the underlying investor and regulators. Complying with this plethora of regulatory standards brings complexity, uncertainty and cost. It also requires asset managers to be nimble enough to respond to the next wave of regulatory changes. Today, the big regulatory trend is around passporting. A number of economies within the Asia-Pacific Economic Corporation (APEC), including Australia, Korea and Singapore, are planning to implement the Asia Region Funds Passport in Similar to the UCITS initiative in Europe, the scheme will allow a managed fund based in one jurisdiction to be offered more easily to investors in other signatory nations. In another example, the three most developed capital markets in the Association of Southeast Asian Nations (ASEAN) block Singapore, Malaysia and Thailand are implementing a Collective Investment Scheme. Finally, mutual recognition between China and Hong Kong will provide broader opportunities for asset managers seeking to gain exposure to the Chinese market. But these schemes can have their limitations. One requirement over time of the Asia Region Funds Passport is that asset managers have a presence in the market where they deliver the product. Late entrants may find themselves competing against companies that have already mastered the local regulatory environment and established partnerships with local distributors. The current environment means that asset managers are selling products under several umbrellas to comply with different regulations. As the region contends with the complexity of multiple passporting schemes, market forces may drive these passports to merge to become a tax neutral environment, with Hong Kong and Singapore looking like possible regional hubs. In the short term, how do asset managers navigate their way through this shifting landscape? Typically the key is for managers to develop a local presence, helping them to build relationships with local regulators. Managers will also have to absorb the costs of complying with the various regulatory schemes. The ultimate rewards can outweigh the costs. Players with a local presence can move more quickly to cope with cultural nuances and are in a better position to attract talent. 17 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

26 55 PERCENT OF RESPONDENTS AGREE THAT DISTRIBUTION CHALLENGES PREVENT ASSET MANAGERS FROM INVESTING MORE IN OTHERWISE HIGHLY ATTRACTIVE MARKETS Distribution drive Regulatory complexity is echoed by challenges in global distribution. Companies that move into new markets are racing to develop local distribution networks. In our survey, approximately one-third of asset managers plan to expand the number of distribution channels they use a figure that rises to almost half (47 percent) in Asia Pacific. Finding the right distribution solution for each market is far from easy. More than half (55 percent) of respondents agree that distribution challenges are preventing asset managers from investing more in otherwise highly attractive markets. Selecting the right distribution platform is seen as the biggest hurdle for Asian fund managers (31 percent) when launching new products in existing markets. The shift toward multi-asset solutions is forcing asset managers to seek specialist distribution partners across their global footprint to support more complex investment solutions. Even in their home markets, it is getting harder for asset managers to attract sales advisors with the required range of expertise. The need for local expertise and partnerships becomes critical. A lot of the time we are not directly servicing the end client; we are servicing them via the distributor. This means that we need to provide much deeper information, because the distributor must understand everything that is translated to the end client. Eleanor Wan, Chief Executive Officer, BEA Union Investment It works to manufacture centrally, says Maarten Slendebroek, Chief Executive Officer of Jupiter Asset Management, but when it comes to distribution, our experience is that clients and intermediaries want to see boots on the ground locally, with sales teams that speak their language and understand the intricacies of their markets. Most domestic asset management companies aren t geared up for international business, so it takes time to develop the right distribution network. Robert White, CEO of Eaton Vance Management International in Hong Kong 18 VISION 2014

27 Power to the intermediary The role of the intermediary is evolving rapidly. Today s asset managers do business through an expanding array of channels, including global banks, small-scale financial advisors and brokers, as well as online platforms. We are getting more business from large global banks such as UBS, Credit Suisse and HSBC on a global basis, says Phil Wagstaff, Global Head of Distribution at Henderson Global Investors. If we get a product approved by them in one market then it s suitable for distribution in others, because distributors are becoming more joined up. This is a positive development, in that it allows for single points of product manufacture. The rise of the intermediary can also pose a challenge, however. For example, leading pension fund consultants are now pushing for a greater role in asset allocation and portfolio design decisions. Some consultants are now providing asset management services at an asset allocation level, says Anne Richards, Chief Investment Officer at Aberdeen Asset Management. This creates a risk that the relationship between the actual fund manager and the client can become too distant. The asset manager s relationship with the various intermediaries is therefore complex. Many asset managers will take a dual approach, both partnering with intermediaries while also building more direct connections with the end-investor. The challenge is to work with the intermediaries in the market but also to get closer to the customer, concludes Euan Munro, CEO of Aviva Investors. Key insights: Asset managers must engage both Millennials and older generations with the right distribution channels and investment products. Navigating regulatory regimes across multiple jurisdictions will become a core competency for asset managers with global ambitions. Selecting the right distribution channel will be crucial to expanding into new and existing markets, with asset managers often looking to local partners to provide specialist expertise in the local environment. 19 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

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29 Investing in the Future FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS 19

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31 Investing in the Future Leading asset managers are rebuilding their businesses to become smarter, more agile and more capable of satisfying evolving investor demands. The opportunities opening up for asset managers in both new and existing marketplaces are enticing. To grasp them, asset managers must rethink the way they operate, reconsider the technologies they have at their disposal, and invest in new talent. Figure 4: Few asset managers are currently equipped to thrive when it comes to offering multi-asset class investment solutions 20% Strongly agree 54% Somewhat agree 18% Neutral 8% Somewhat disagree 23 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

32 Transformation: Future-proofing the business The new investment landscape requires a major transformation of many aspects of an asset manager s operating model. Indeed, more than half (54 percent) see major opportunities to improve their operational efficiency. Asset managers need to transform their operations so they can roll out and support new products rapidly. They must provide the talent, technology and processes required to deliver world-class investment performance and service. They need to implement the flexible reporting systems and data management strategies required to support regulatory requirements in multiple jurisdictions. They must also develop the right distribution strategies to access a more diverse range of customer segments and markets. Many asset managers will invest in building these capabilities organically. They may also eye opportunities to improve their market reach and capabilities through strategic acquisitions. Almost three-quarters (72 percent) of asset managers in the survey see opportunities for acquisitions in the next 12 months. As they overhaul their product offerings, asset managers will also need to redefine their core competencies. Many will seek to acquire cutting-edge capabilities to support the fastest-growing investment strategies. At the same time they will look for help on support roles for example, outsourcing administrative functions and regulatory reporting to specialist providers. 24 VISION 2014

33 New alliances in a changing world The need for asset managers to augment their expertise and capabilities across a wide range of markets and product areas is increasing the appetite for partnerships among some asset managers. While acquisition and partnership activity has already begun to pick up following the lows seen immediately following the financial crisis, the relationships of the future are set to be of a more targeted nature. Recent research from Fitch Ratings indicates that M&A activity is set to become more selective, particularly in Europe. 4 Partnerships will be forged as asset managers work out how to innovate desirable new products and move into new markets. Any activity we see will have a focus on adding competencies, products, clients and distribution channels. The Fitch research cites Aberdeen Asset Management s acquisition of Scottish Widows Investment Partnership, and the sale of Robeco to Japan s Orix, as examples of this new breed of discerning deal making. Alex Takayama, General Manager, Head of Global Business Development at Tokio Marine, says: If a client wants an asset class that we are not good at managing internally, then we are open to teaming up with a third-party investment manager. A similar position is taken by Oliver Murray, CEO of Bridgehouse Asset Managers in Canada, who adds: That notion of asset management firms collaborating together to deliver broader solutions to investors is a trend that I expect to see happen more. 4 EU Asset Managers to Rationalise but M&A Spree Unlikely, Fitch Ratings, February FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

34 MORE THAN 9 OUT OF 10 OF ASSET MANAGERS AGREE THAT PROVIDING A HIGH DEGREE OF TRANSPARENCY TO CLIENTS GIVES THEM A COMPETITIVE ADVANTAGE WHEN ATTRACTING NEW ASSETS Tools: Unlocking the power of data and analytics The shift to investment solutions requires asset managers to analyze risk and performance more holistically across investment portfolios and to report back to clients in far greater detail than ever before. More than 9 out of 10 of asset managers surveyed (91 percent) agree that providing a high degree of transparency to clients gives them a competitive advantage when attracting new assets. Nick Ring of Threadneedle Investments says that the drive toward greater transparency is an important step for the investment industry: The combination of investors having greater clarity as to what they need, and a regulatory environment which is encouraging openness and transparency, means that we re all in a better place. Client servicing and reporting to clients has historically been too generic. The industry could be a lot more transparent. Shen Tan, Managing Director and Head of Relationship Management, Income Partners Asset Management The challenge today is to deliver this transparency at a time when investment portfolios are becoming increasingly complex. This is particularly the case with multi-asset solutions that often comprise a range of assets and strategies, each with their own unique characteristics. Outdated technology systems compound the problem. Often asset managers are using incompatible tools for different asset classes, a situation that makes it hard to provide a more holistic picture of performance. 26 VISION 2014

35 Leading asset managers will rise to this challenge, creating more integrated reporting platforms to deliver comprehensive and timely insights to their customers. In particular, they will invest in tools that can integrate risk and performance analysis across the portfolio. Indeed, risk and performance analytics emerge as a top priority for investment in the survey, with over four out of five asset managers planning to make moderate or significant investments in these areas. There is also the need to harness data for better investment insights a challenge that explains why data infrastructures are also a priority for investment for 81 percent of survey respondents. Together, these tools and technologies are vital to ensure that asset managers can manage, optimize and report on highly complex multi-asset portfolios. We have years of experience in offering multi-asset products in Japan, but we ve just started to distribute these to international clients. The vast number of alternatives raises some tough challenges around analyzing models and performance attribution. Takashi Saruta, Senior Investment Officer, Nomura Asset Management Figure 5: Investing in Technology % respondents that expect significant or moderate investments in the following over the next three years Performance analytics 85% Risk analytics 81% Data integration 86% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 27 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

36 The investment required is sizable, says Sandy McIntyre, Co-Chief Executive Officer at Sentry Investments. One of the first things we did was to start investing in better data, because the one thing that we own is our data. Our data spend over the past five years has risen significantly. Spent wisely, this money will pay dividends. Active managers need to understand what they are really doing in greater detail and be able to explain themselves to clients, says Christian Franzen, Global Head of Performance and Portfolio Risk at Allianz Global Investors. To do that, you need powerful analytics tools and to manage the whole information flow more effectively. We consider technology to be a critical competitive advantage. It s a key differentiator we re able to provide higher quality service, better technology and ultimately better information. Technology helps you do a better job for your clients, which translates to more business. It really does touch the bottom line. Brad McMillan, Chief Investment Officer, Commonwealth Talent: Expanding the skill base The survey shows significant investments are now being made to acquire talent and upgrade capabilities (see Figure 6). Almost two-thirds of respondents (65 percent) say they will make moderate or significant investments in training over the next three years. In addition, 54 percent will make moderate or significant investments in new talent to address capability gaps. 28 VISION 2014

37 Figure 6: Investing in talent % respondents that expect significant or moderate investments in the following over the next three years New talent to resource higher volumes 59% New talent to address capability gaps 54% Skills training 65% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Asset managers warn of talent shortages in at least three different areas. They are struggling to recruit enough people into compliance. They are finding it even harder to source pure fund management talent. An increased focus on risk means that there s strong competition for talent in this area too. For all of these reasons, talent acquisition will be a major driver of asset managers success in the years ahead. As Mark Lazberger, CEO at Colonial First State Global Asset Management, comments: The quality of the people and the value of the investment proposition are the key ingredients to determine whether an investment management firm is going to be successful or not. 29 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

38 Alternatives tend to be higher touch in terms of service. Supporting the new investment strategies isn t just about investment expertise you also need relationship managers with excellent consultative skills. Rob Vanderhooft CEO, Greystone Managed Investments Inc. Ultimately investor satisfaction rests on a combination of consistent investment performance matched with a state-of-art servicing model. The current investment environment, with the investor and regulatory emphasis on transparency, only reinforces this focus. I think what clients are looking for is greater bench strength, says Alan Gadd, Head of Product & Distribution Development at Artemis. And they want to see that the business has a robust infrastructure that the people managing the money are properly supported, whether that s through internal resources or externally. 30 VISION 2014

39 Key insights: Core competencies will be redefined as asset managers decide where their in-house talent should be deployed to add the greatest value. Technology infrastructure must be optimized to support transparent reporting, enabling asset managers to provide the timely insights that investors and regulators increasingly demand. Multi-asset portfolios demand sophisticated performance and risk analytics. Human capital pressures will force asset managers to seek out those with the right compliance, fund management and risk management skills. 31 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

40 32 VISION 2014

41 Conclusion: Leading the Frontline Revolution FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS 31

42 32 34 VISION 2014

43 Conclusion: Leading the Frontline Revolution Six years after the financial crisis, asset managers confidence about the outlook for the future has improved dramatically. The ability to capitalize on this new era of growth rests on asset managers ability to respond to three major shifts: Multi-asset portfolios: To triumph in today s multi-asset investment world, asset managers must deliver an outcome-oriented approach to fund management and innovate with comprehensive solutions that consistently meet clients long-term objectives. Expansion strategies: The victors of the battle for the most profitable investor segments and markets will be those who can master local demands, identify and deliver well-targeted products, and swiftly adapt to new regulatory demands and distribution channels. Capabilities: To conquer the capabilities challenge, asset managers must transform their operating models. To do so, they must invest in technology to manage, optimize and report data on risk, performance and all client-relevant portfolio information. And underpinning this will be their ability to bring in new expertise fast either through internal talent development, talent acquisition, or by partnering with specialist providers. The competitive landscape has shifted. The asset managers that recognize how profoundly the environment has changed and act decisively today will emerge as stronger, more flexible businesses with the ability to capitalize on a new world of opportunity. 35 FRONTLINE REVOLUTION: THE NEW BATTLEGROUND FOR ASSET MANAGERS

44 Notes

45 Notes

46 Notes

47 FT Remark produces bespoke research reports, surveying the thoughts and opinions of key audience segments and then using these to form the basis of multi-platform thought leadership campaigns. FT Remark research is carried out by Remark, part of the Mergermarket Group, and is distributed to the Financial Times audience via FT.com and FT Live events.

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