The money management industry is changing fast. What will the new face of the industry look like?

The money management industry is undergoing a massive change. Just how different will managers look in the future? A report last year by McKinsey & Company called The Asset Management Industry in 2010 found that the money manager landscape will see the biggest players in the industry earning 30% of their revenue from products they don’t even offer today. That’s not hard to believe when one considers the changes that are shaping the money management business in Canada such as the elimination of the foreign property rule and the increase of alternative investments.

To better envision this new money manager, benefits canada asked some of this year’s Top 40 money managers what they think their business will look like in a few years. From increased alpha to the blurring lines between institutional and retail product development, many money managers will be shifting their focus in order to compete effectively in 2010. And that means adopting a whole new look.

SNAPSHOT 2006
Let’s start by looking at the numbers. Total assets under management among our Top 40 money managers rose 15% to $734.4 billion in 2006. While that’s a steep jump overall, big gains on the part of a few players really stood out on our list, with some new firms breaking into the top spots. AllianceBernstein broke into the top 10 for the first time, moving to eighth place from 11th in 2005. The leg up came from a whopping 55.3% gain in assets under management, up to $25.6 billion from $16.4 billion in 2005. That’s the firm’s second major gain in a row, following a 61.9% jump between 2004 and 2005. State Street Global Advisors moved up to fifth place from 10th in 2005, enjoying a 16.5% increase in assets under management, bringing the firm’s total to $32.2 billion. TD Asset Management Group inched up into third place from fourth with an impressive 19.7% gain, taking its total assets under management up to $37.3 billion.

All three of the fastest growing money managers managed to more than double their pension assets. JP Morgan Asset Management topped the list with a 59.5% jump to $12.8 billion, Fidelity Investments Canada held on to second place with a 57.2% jump to $8.1 billion, while AllianceBernstein was still third in terms of asset growth.

Managers say the new business is coming from demand for global investments. Plan sponsors are also seeking products that help them better manage their risk.that means fixed income, absolute return strategies, portable alpha and liability driven investing(LDI). For example, Fidelity, the second biggest gainer on the list, credits its growth to demand for global products and fixed income, which the firm says relates to LDI. According to Colin Ripsman, Fidelity’s vice-president, retirement services, in Toronto, “the growth in fixed income mandates reflects an increased interest by Canadian defined benefit(DB)plan sponsors in managing risks through LDI. As allocations to fixed income in many DB plans increase, plan sponsors are looking for higher value-added fixed income products.”

The story was similar at State Street Global Advisors, where new business came from products related to risk management and an appetite for global assets. “One of the changes we’ve seen is the greater amount of global assets people are putting into their allocations,” notes Carl Bang, the firm’s president in Montreal. “Investors are opening their scope.” New products and strategies such as 130-30(130 long, 30 short), absolute return and portable alpha are also in great demand as plan sponsors look for a more efficient return stream and better risk control. “When you think of liability driven investing,” explains Bang, “the whole investment framework is changing from just looking at asset allocation to tying it to a liability.”

WHAT SPONSORS WANT
Terri Troy, chief executive officer, HRM Pension Plan in Halifax, is looking for managers who offer strong risk-adjusted performance, net of fees. Troy says that the focus on risk-adjusted returns means that managers “are going to have to be strong risk managers as opposed to just asset managers.” Indeed, risk management is also top of mind for plan sponsor Gerry Wahl, assistant treasurer with Teck Cominco in Vancouver. “As we move toward better risk management and budgeting, the relationship with all our fund managers is changing,” says Wahl. Specifically, as liability matching becomes more important for plan sponsors seeking to control risk at the fund level, fixed income managers will take on a more critical role in managing overall portfolio risk. All this means a much closer working relationship between managers and plan sponsors, says Wahl.

Managers will also need to deliver customized solutions. Peter Clarke, managing director, UBS Global Asset Management (Canada)in Toronto(ranking: 18), says Canadian managers must shift to a consultative role with plan sponsors. “Asset managers can no longer just come in and present strong performance in one asset class as the only thing they offer,” he explains. “You’re going to see managers becoming more consultative with their clients, doing asset liability work and looking for solutions to meet clients’ specific needs.”

Partnerships and better products are the name of the game, as managers work to keep up with industry trends. Barbara Palk, senior vice-president with TD Asset Management Group in Toronto, agrees that plan sponsors want their managers to go beyond traditional portfolio asset management. “Money managers traditionally believed that if they had the best numbers and ranking that this would translate into the best business model,” she explains. In the future, that won’t be the case. “You have to have the right business model to attract people,” she says.

Joe DiMassimo senior vice-president, sales and service, with Addenda Capital in Toronto(ranking: 10)agrees that performance-driven management is giving way to something far more complex than outperforming a benchmark.the quest for alpha and the separation of alpha and beta within a pension fund. “In five years’ time, performance will be a given and the big driver will be alpha and beta separation,” he says.

New asset classes and approaches are also part of the new look plan sponsors are adopting going forward. From his perspective, Malcolm Leitch, chief operating officer with Bentall Capital in Vancouver(ranking: 23), says his firm is already eyeing global opportunities. As real estate moves into the mainstream, new growth to meet the increasing demand will likely come from abroad, says Leitch. “As additional pension funds look to put money into real estate, many will not be able to fill their mandates by staying in Canada, especially the big funds,” he explains. “Right now there are opportunities [outside Canada] to justify the risk. And they offer diversification benefits and higher potential returns than in Canada,” he says.

RETAIL MEETS INSTITUTIONAL
Managers will start looking at the retail and institutional sides of the asset management business. That is because the lines are blurring between these two traditionally separate areas of the business. While Gary Wing, global head of institutional account services, with AGF Fund, might not be with one of the top 40 firms, he is very aware of the sea change that is shaping his business. As many plan sponsors move away from the DB model toward more defined contribution(DC)offerings, product development is tipping into retail territory. “As the retail side and the pure institutional side of the business come together, it is changing the industry on a macro level,” says Wing. That means changes on the product development level: “I think product development is going to be a lot different,” Wing explains, noting that the merging of what he calls the “old-school institutional world” with the very different space of mutual fund sales will make for a key shift in the industry.

Keith Walter, senior vice-president, sales and marketing, with MFC Global Investment Management in Toronto(ranking: 39), calls this trend the “DB-ing of the DC world.” “We see more of the same investment intelligence that goes in the DB world going into the DC world, with subtle differences.” MFC, like other DC providers, is putting a focus on building DC options that take the form of target date lifecycle funds. products that automatically adjust in tandem with an individual’s life situation. Kind of like “mini DB plans,” Walter says these products are shaping the industry.

Despite the changes, plan sponsors are opting for a slow and steady approach to new products and innovations. “With the globalization of investment plans following the elimination of the foreign property rule, Canadian plan sponsors are starting to step into global markets two years on. But it’s going to take a little while to play out,” Walter believes.

Slow or fast, one thing is clear.Canada’s top 40 money managers say that the changes are already taking hold. As we approach 2010, the top 40 list will reflect their efforts to keep pace with the needs of their plan sponsor clients as they tackle the challenges that lie ahead.

Five Hot New Looks in Money Management

As plan sponsors ask for more, money managers are changing the way they do business, offering more products and facing their clients in a whole new way. What are the top trends for this year’s top 40 money managers?

1 Consultation

Plan sponsors are looking for more than just performance.they want tailored solutions focused on their liabilities and risks. Says Peter Clarke: “You’re going to see managers becoming more consultative with their clients, doing asset liability work and looking for solutions to meet clients’ specific needs. You can’t just sell them one thing.”

2 Alpha beta separation

Risk management is the new asset management. that means more and more separation of alpha and beta. Says Joe DiMassimmo: “The firms that are going to be at the top will be those that are manufacturing the products that are needed at the right areas in their client’s portfolio.”

3 New products

Hot new products and strategies such as 130-30 (130 long, 30 short), absolute return and portable alpha are in demand as plan sponsors look for a more efficient return stream and better risk control.

4 Global

The buzzword is international managers need to bring the world to their clients. Says Malcolm Leitch: “Right now there are opportunities [outside Canada] to justify the risk. And they offer diversification benefits and higher potential returns than in Canada.”

5 DC looking more DB

As the lines blur between DC and DB products, money managers will need to offer a little bit of both. Says Keith Walter: “We see more of the same investment intelligence that goes in the DB world going into the DC world.

 

 

Caroline Cakebread is the editor of CANADIAN INVESTMENT REVIEW. caroline.cakebread@rogers.com

For a PDF version of this article, click here.

© Copyright 2007 Rogers Publishing Ltd. This article first appeared in the April 2007 edition of BENEFITS CANADA magazine.

 

Copyright © 2019 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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