IN PRINT ARCHIVE CIR Fall 1999
|A Special Exchange|
|This issue of Exchange features highlights from the 1999 Forum on The Future of the Investment Management Industry III, hosted in Toronto by the Toronto Society of Financial Analysts.|
1. The institutional business is becoming increasingly competitive. There is significant pressure coming from plan sponsors--they are consolidating managers and pushing for lower fees. Sales and client service are more important than ever before.
2. Growth in the mutual fund industry. Mutual funds have enjoyed 32% compounded average growth per year since 1981. This is coming primarily from domestic equity funds. The forecast for 1998 to 2000 is weaker however: 12%.
3. The importance of the RRSP. RRSPs represent the fastest growing, most stable segment of the business. The period 1991 to 1996 produced compounded average year-over-year growth of 12%.
4. Global diversification is crucial. This is a must in order to optimize risk-return trade-off, and to take advantage of the world's most attractive investment opportunities.
5. Increased focus on retail distribution. Canada's network of bank branches has been harnessed as a venue for brand name mutual fund sales. Investment performance is paramount of course, but branding is increasingly important.
6. The search for scale. The industry is focused on increasing assets under management, product breadth, a diversity of distribution channels and client-base and strength of brand. There is also a noticeable shift to e-commerce channels of delivery.
Pension Funds on the World Stage
The Manager Panel
Tom Gunn: Six issues
2. Efficient markets. Markets remain years from achieving true efficiency. As a result, superior securities selection and active management still deliver significant value.
3. Information. Technology continues to improve access to information. This means, for example, a first quartile Canadian equities market could work out of Hong Kong. That said, while an information edge can create "alpha," the key is to understand the data once it is collected.
4. Organization. Asset growth raises the need for better corporate management practices. That means actively managing the investment management firm or the pension funds.
5. Risk management. More and more, risk-managed goals are taking the place of simple return targets. We're seeing the development of risk management systems.
6. Focus. Defining core competencies is a significant key for the future. Institutional funds need to determine which skills are essential to keep in-house, and they need to have access to world-scale skills. But that is not to say funds need to own the skills exclusively. Strategic alliances and satellite organizations are becoming more prevelant.
Lloyd Atkinson: Three issues
2. Consolidation. More consolidation is inevitable. The Canadian asset management industry still has more than its share of fragmentation and excess manufacturing capacity. Eventually the business will be dominated by a few large players that offer multiple products and multiple management styles. A few niche players will also play a role.
3. Defined contribution. Growth in the defined benefit pension business is slowing. The defined contribution business will enjoy considerable growth moving forward. Brand recognition is important here. Among the challenges are increased distribution and marketing costs.
Doug Mahaffy: Eight issues
2. Capacity. Too many top managers are closed for Canadian equities mandates. However, there are no capacity constraints in bonds and global equities. Managers shouldn't price a scarce resource cheaply, and they ought to learn how to say no.
3. Size. Large firms are well suited for the defined contribution/RSP market. Large multiproduct international players and a few small niche players will enjoy the strongest growth. Firms should plan ahead, and build research and servicing capacity.
4. Foreign content. The foreign property ceiling will be raised from its current level of 20%. This will prompt the entrance of foreign firms in a more significant way. It is essential to broaden stock research and build international affiliations.
5. Private clients. This is a high growth segment. Accounts are smaller, and a higher level of service is demanded. But fees are higher and the loyalty issue is considerable.
6. Research. Do as much on your own as possible. Mentors should be designated to train analysts. Keep written reports short.
7. Pricing. Fees need to be more closely matched to the value added. Capacity constraint should be kept in mind. There is often no need to discount.
8. Organizational culture. There is no one right way. Firms should develop a culture and stick to it. Organizational culture should be kept as flat as possible, communication should be open and there should be a blending of young and old talent.
Implementation shortfall can be caused by several factors, including a poor manager selection process, an unsatisfactory manager structure, too much manager turnover or inadequate rebalancing.
Marmer makes five recommendations to reduce implementation shortfall.
2. Evaluate managers on qualitative factors, and outsource the manager selection/monitoring process. The process must be more rigorous and disciplined.
3. Diversification among different management styles is critical.
4. Analyze commission costs, market impact costs and so forth more carefully during the transition management process.
5. Establish a formal procedure for rebalancing.