With less institutional flows forecast in the next few years, asset managers will need to implement a convincing “fiduciary overlay” to win business from large investors.
Asset managers say they will need to run a fiduciary overlay to attract flows from the most promising sources of new capital -sovereign wealth funds, national pension funds, central bank reserve funds and defined contribution vehicles – in the next three years, finds Professor Amin Rajan, of CREATE Research, in a global survey of asset managers overseeing $29.1 trillion, Exploiting uncertainty in investment markets.
“The fund pie will be noted for its subdued growth,” Rajan writes. “Dog fights will be inevitable.”
To win capital, managers will need to prove they are more than “distant vendors” of products, and are not only financially aligned with clients: in addition to demonstrating their ability to deliver consistent returns, maintain a deep and incentivised talent pool, offer a value-for-money fee structure and superior service, they will need to prove deep non-financial alignment with institutional clients.
They need to prove their risk-management capabilities, which includes the mitigation of operational risk through carefully made outsourcing arrangements. Managers should also view clients as a source of ideas as new investment products are built to provide a tailored solution.
This need to add a fiduciary dimension was identified in the survey after one manager told Rajan: “We were as remote from our clients as the man on the moon.”
Rajan finds that the financial crisis “profoundly” changed clients’ needs. Now, investors want checks against the behavioural biases that have influenced managers in the past, and for managers to stop selling products that are not “fit for purpose”.
Investors also want meritocratic incentives in which “gains and pains” are shared equally between themselves and managers, and in which common investment beliefs and time horizons for performance are set, Rajan writes.
The fiduciary overlay binds the interests of asset managers, their clients, and investment staff within asset managers, he reckons. It demands that managers fully disclose risks, costs, and strive for product integrity. It also wants proximity to managers, so they know clients’ goals and fears and can design suitable solutions.
Managers identified the next phase of asset growth to be one-third organic, two-thirds displacement: new flows will come from sovereign wealth funds, national pension funds, central bank reserve funds and defined contribution (DC) funds in Asia, Europe and North America, but the largest allocations will come from DC funds emerging from defined-benefit structures, wholesale managers selling products through advisory channels, and insurance funds outsourcing asset management to external managers.