Cautious optimism returns as managers target institutions

The fund management industry has been under pressure since the crash of 2008, shedding an estimated 15 per cent of jobs and slashing its expenditure in technology and marketing.

But there is evidence the mood is starting to change, with companies gearing up for growth and focusing on the institutional market to find it. When fund service provider SEI polled its global client base of investment managers at a US conference in April, it found positive thinking was rife; 88 per cent were optimistic about their group’s business prospects over the next three years and 84 per cent were making significant investments in staff or technology.

When asked where they saw the greatest opportunity for client and asset growth the most popular response by far, chosen by nearly half (46 per cent), was the institutional market. David Morrissey, head of new business development for Europe and the Middle East at SEI’s investment manager services division, believes it is a common story on both sides of the Atlantic. “We have seen a strong start this year with new business coming on board and existing clients launching new products,” he says. “A lot of our clients are targeting institutional business, particularly on the alternative side.”

Much of SEI’s new business is being driven by investment managers upgrading client reporting and risk management systems in order to keep up with the increasingly sophisticated demands of institutional clients. But with defined benefit pension funds, one of the main components of the institutional market, in long-term decline in Europe, will this strategy stand the test of time?

In the UK, for instance, the National Association of Pension Funds reported in March that 17 per cent of UK DB schemes were no longing accruing benefits, and only a fifth were still open to new members.

However, their size means they are still magnets for fund managers. “They may be in decline, but they still hold the legacy assets,” says Amin Rajan, chief executive of Create Research. “It is hard to think the DB pie will decline substantially over the next 10 years.”

The UK occupational pension market is worth an estimated £1,400bn of assets; worldwide Towers Watson puts that figure at $23,430bn, of which $14,800bn is DB and $11,600bn is defined contribution (DC). The balance is set to shift as DB schemes gradually wind down and DC schemes bulk up, but the total prize remains as attractive as ever.

“The main reason for the current interest in the institutional market is that retail assets are not as sticky as they used to be,” says Mr Rajan. “At the first sign of gunfire, retail clients run for cover. In 2008 asset managers heavily dependent on retail clients nearly got killed.”

But there are other attractions too. Institutional clients are demanding complex strategies, such as absolute return and liability driven investment, which can be more lucrative and attract talented individuals to investment teams. The evolution of DC in Europe is also a significant lure; Mr Rajan expects to see more money flowing in larger chunks to asset managers thanks to the natural growth of occupational DC funds and new large scale innovations such as Nest, the UK government’s catch-all scheme, which is projected to be worth as much as £300bn by 2050.

Boutique asset managers are reporting shrinking margins in the retail arena, with the distribution fees demanded by intermediaries and fund supermarkets rising. Fees are being squeezed further by a growing desire for passive or low cost active funds.

Institutional investors are also taking advantage of the opportunity to demand lower fees from alternative investment managers, but demonstrate an appetite for the relatively high margin, high performance strategies run by boutiques as well as established brands. The market is also opening up as pension funds become less reliant on traditional consultants, showing a willingness to embrace new strategies and unfamiliar brands, as well as adopting multi-management approaches such as fiduciary management that offer an indirect route to market for asset managers. Other forms of institutional business are also growing as insurance, sovereign wealth funds and state social security funds enter the global market for fund management for the first time.

It is no wonder that leading retail brands are looking to follow Standard Life Investments, ING, Fidelity and Aberdeen, which have all made successful inroads into the institutional market. Jupiter is one retail manager that has recently expanded into institutional, reporting inflows of £383m into segregated mandates in 2010. But it is not an easy path, as Artemis discovered. Institutional now makes up 22 per cent of assets after the boutique fell into the market almost by accident in 2002, but after a strong start the equity manager found itself “on hold” with consultants in 2008 due to uncertainty over its ownership structure that was only resolved in 2010.

Other groups have been unable to get past the consultant gatekeepers in the first place or establish reputations. Some large institutions have failed to focus on core expertise, attempting to be all things to all clients and struggling to make headway as a result. Yet despite the setbacks, institutional remains a firm element of the Artemis business plan and Elaine Gordon, head of institutional business for Artemis, believes other retail managers will find the expanding DC market plays to their strengths. “If you think about DC, where a lot of growth in institutional will come from, you are providing products for the end consumer – for them it is not that different to investing in an Isa.”

With retail business becoming tougher for some and new routes into the institutional market in the form of bulk DC business opening up, investment managers in Europe are just as focused on this market as their counterparts in the US. There is little evidence of a tidal wave of optimism outside of the US, with leading headhunters reporting that caution remains the watchword on recruitment and IT investment. But with the 2008-09 crash still painfully etched in the memory for those who heavily relied on capricious retail investors, stickier large scale business is proving an attractive lure.

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