Australian asset managers must 'adapt or fail' as they face intense competition in investment management and increasing demand for customised solutions, writes State Street's Paul Khoury.
The pressure is on: Australia’s asset managers and their counterparts across Asia Pacific (APAC) are revamping investment strategies, upgrading capabilities, targeting new markets and hunting for acquisitions that could extend their capabilities or their reach to compete in a fast-changing industry.
State Street Global Services' 2015 Asset Manager Survey shows that growing client demand for bespoke solutions requires many asset managers in Australia to adjust their business models.
This shift is particularly urgent as superannuation funds move more asset management in-house and require a more customised service from their external managers.
This includes a more personalised approach to risk across more complex portfolios, as super funds increasingly look to diversify their portfolios away from traditional public markets into alternative investments.
Meanwhile, the competitive environment continues to intensify: in our survey, 82 per cent of APAC-based asset managers expect to face competition from new, non-traditional market entrants such as technology or non-financial services firms.
Non-traditional market entrants could mount a serious challenge to asset managers in the region and globally. Increasingly, the ability to purchase online money market funds with just the click of a mouse button is only the start of the possibilities for disruption.
Even so, asset managers are optimistic overall: more than four-fifths (84 per cent) of APAC-based respondents forecast increased opportunities for profitable growth over the next year.
Adapting to grow
Successful asset managers are responding to these challenges through product innovation and catching the next wave of growth by offering better services, solutions and value to their clients.
They are reshaping their products to meet client demand for multi-asset, outcome-oriented solutions while continuing to boost returns in a low-yield environment.
Asset managers are investing in a broader spectrum of assets, increasingly adding alternatives to their portfolios.
In our survey, 42 per cent of APAC-based respondents say they will grow their multi-asset solutions capabilities in the next three years and 24 per cent will launch such a product for the first time.
They are also looking at new strategies such as liquid alternatives, where 34 per cent say they will increase their existing presence and 26 per cent will launch liquid alternatives for the first time.
Liquid alternatives offer investors some of the characteristics of hedge funds but within a mutual fund vehicle. They follow the reporting and compliance standards of 40 Act funds and UCITS, and may offer greater transparency and liquidity for investors.
These products may carry lower investment minimums and fees and can be attractive to retail investors as well as institutions and funds of hedge funds.
Advising their clients on risk
Managing risk is a major concern for institutions around the world, with 72 per cent of APAC-based asset managers in the survey saying their conversations with clients have evolved to focus more heavily on understanding risk and implementing strategies to manage it.
Nearly seven out of 10 APAC respondents (69 per cent) say their clients are demanding a more personalised approach to help them understand their risks.
Nearly four-fifths of respondents in APAC (78 per cent) say they have increased the level of transparency they offer to clients on their sources of risk and return.
The most enterprising asset managers are responding by bringing more to the table in their client relationships. Delivering greater value doesn’t just mean achieving consistently high returns.
It means forging closer partnerships with investors based on a transparent dialogue around risk and performance.
Australia’s asset managers are also improving their operational capabilities that will enable them to adapt to a more personal approach in client servicing.
For asset managers, costs are always under scrutiny where 98 per cent of APAC-based respondents say they are under pressure to reduce costs.
For example, they are driving operational efficiencies by investing in technologies that give them a competitive advantage in client servicing and enable them to offer better investment insights at a competitive price point.
Harvesting the rewards
Australia’s asset managers know that institutional investors are now being offered much more choice. Their clients will shop around and managers must establish a new value-driven relationship with investors. Increasingly, it’s becoming a choice of adapt or fail.
Managers must address a changing set of client needs through building portfolios from the investor’s point of view, finding out their clients’ expectations and desired outcomes, and shaping products to meet those needs.
They must understand that investors are looking for better product depth and need to think about the opportunities and bolster their capabilities accordingly.
Successful managers are investing in their business where it matters, by focusing on tools to improve their core expertise. By delivering value to investors in new ways, the most forward-thinking asset managers will translate today’s optimism into long-term success.
Paul Khoury is a senior vice president and head of State Street Global Services for Australia and New Zealand.