The finance industry is currently operating in a climate of unprecedented market and economic volatility, and the asset management sector is no exception. Institutional investors are finding it an ever-harder challenge to meet their investment needs. Pension funds and insurance companies are worried about funding their liabilities, which are increasing due to factors such as ageing populations and changing weather patterns. Many sovereign wealth funds are struggling to preserve the value of their investments.
However, the asset management sector has fared better than other parts of the finance world. In general, it's always had the prudent, long-term attitude and client-orientated approach that are both now being held up as gold standards for firms across the finance world. Asset management firms concentrate on managing their clients money on a fiduciary basis for the medium to long term. Their business models are fundamentally different to those of investment banks which conduct their own business as well working on behalf of clients and, because of their transactions and markets focus, tend to operate in a way that's orientated towards the short term. Both of these factors put investment banks at greater risk than asset management firms at times of market volatility.
And asset management firms are well-placed not only to ride out market volatility, but also to seize the significant opportunities it presents. Firms like BlackRock are seeing the current climate as a chance to develop new technology and investment products, and to reshape the industry so that it's well set up for the coming years by working closely with regulators. Furthermore, a retreat from some areas of work by investment banks means asset management firms are getting more closely involved than ever before in the analysis and structuring of investment opportunities.
So while there are potentially great opportunities ahead for graduates in investment banking, asset management is currently an exceptionally exciting sector to go into for those interested in focusing on clients' investment needs and thinking about the future.
Here are what we think are six particularly interesting current prospects for the asset management industry.
Stephen Crocombe, Head of Product Development at BlackRock, is upbeat about the UK's economic prospects. He first argues that the UK's corporate sector, an important source of clients and thus fee revenue for asset management firms operating in the UK, is doing somewhat better than the media tends to report, and certainly better than those of the struggling southern European economies. And he points to the fact that some industries in the UK requiring asset management services, for example, manufacturing, are growing steadily after a period of decline.
Stephen goes on to add that current economic trends mean that the sector's future prospects are good. According to the Investment Management Association (IMA)'s 2010/11 report, assets under management by the industry in the UK are at a record 3.9 trillion and this massive amount looks set to grow even more in the future. Why? The fact that people in the UK are living longer than ever before means that the provision of adequate pensions for those of retirement age, a huge element of what asset management firms do, has become a very pressing concern. "There's now a massive gap between what we are saving for our retirements, and what we need to save. So there's lots of legislation coming in that will force people to save more. And when people have to save more, that money gets invested by asset management firms. Therefore the asset management business is likely to grow in the future."
The growth of rising economies in Africa, Asia, eastern Europe and South America has been one of the key trends in the business world over the past decade. What does it mean for asset management firms? "First", says Stephen, they're now catering extensively for European and North American clients who want to invest in these regions: You now see the same level of resourcing put into investment in emerging markets as into investing in American or European markets. Second, the rise of emerging market economies means that governments, businesses and individuals in these countries are increasingly using the services of firms such as BlackRock themselves. "They're big clients of ours," says Stephen, "and we're setting up more services local to them we've now got offices in places like Guangdong, Taiwan, Mexico City and So Paulo."
London has historically been renowned as one of the world's key centres for asset management but there's been some talk in the industry that shifts in the balance of global economic power might lead to London losing this crown. What does Stephen think? "There's never been just one centre for the industry and I think London will always be an important business hub with a wide range of fantastic financial services. We do, however, need to carry on building on our language and time zone advantages and growing our knowledge."
Shares or debt?
Asset management firms have traditionally invested significantly in shares, usually in large publicly listed companies. However, the years since the financial crisis have seen increased investment in debt products such as bonds, publicly traded slices of corporate or government debt. These products (also known as fixed income products) offer set returns in the form of interest payments, in contrast to the more uncertain rewards of equity investment. Says Stephen: "Our clients are understandably nervous in the current economic climate, so tend to want us to invest their money in debt products, preferably in their local market."
However, this increased demand in the market for debt products has led to a pronounced lowering in the returns they offer. "Many fixed income assets, like US government bonds," says Stephen,"are even giving negative returns, once you take inflation into account. So that means you're effectively paying, say, the US government to lend to it. The fact that there's still demand for these assets shows how much uncertainty there is out there." Stephen adds that this shift out of equities and into fixed income means that "you can now buy shares in really good quality European companies very cheaply because people are so worried about equity risk and volatility. For example, BMW is currently paying twice or three times as much return to investors as German government debt products." However, Stephen thinks that investors are starting to realise there are equity bargains on offer and that a swing back into equities may be beginning.
Like other parts of the finance world, the asset management sector has seen increased regulation in recent years. Much of the new funds regulation comes from Brussels and getting to grips with it or in some cases, helping to formulate it takes up a significant amount of Stephen's time he goes to Brussels every couple of months. One of the most significant new pieces of European legislation of recent years affecting asset management firms is the EU Markets in Financial Instruments Directive (MiFID), implemented in 2007 and designed to increase transparency and competition in the European equity markets.
The way in which asset management firms function as businesses is regulated by the Financial Services Authority (FSA), currently in the process of being reformed into several new organisations following significant criticism of it in the wake of the financial crisis. This criticism has led to it adopting a more hands-on approach, which means asset management firms are getting used to much closer scrutiny of their activities. However, Stephen feels that BlackRock at least has been able to take this shift in its stride: "The FSA regularly grills me on what we do in a very robust way. But it's appropriate for them to do so and, as we run a good business of which I'm proud, I enjoy the process."
Asset management firms traditionally work by carefully researching and analysing potential investments and then deciding on the basis of this information where to put their clients money. This process is still at the heart of the business, but technological innovations have had a big impact in recent years. "Fund managers," says Stephen, "are still relying on balance sheet analysis, their experience from perhaps 20 years of investing, and their gut feelings about potential investments, but they're also now using technology to process information and are taking technologically-generated signals into consideration when making investment decisions."
Some investment products offered by asset management firms are now significantly automated, for example, computerised index-tracking funds, which aim to produce a small but steady profit for investors by investing according to a set market-linked formula. These index-tracking funds and related "passively-managed" products have long been a big part of BlackRock's business, and are an exciting growth area for the firm, as well as the asset management industry in general.
Technology has also allowed asset management firms to monitor and manage their clients exposure to risk more effectively. Says Stephen: "With the press of a button, we can now see what their exposure is, for instance, to Goldman Sachs, or the Spanish government the system sucks in all the available information about their various investments and allows you to manage risk for an investor from a central vantage point."