CACEIS and PwC have jointly published a report examining the relationship between institutional investors and asset managers, suggesting the key areas the latter group must improve upon to ensure the relationship works well.
Launched today at the ICBI-hosted Fund Forum 2012 in Monaco, the companies over February and April surveyed European institutional investors with assets in excess of 4.5 trillion, including pension funds (27%), insurance companies (42%) and others (41%). 59% of the institutional investors surveyed were small institutional investors with AuM below 49 billion and 41% above 5 billion. 15 countries responded to the survey, notably with an over representation of UK institutional investors, and an underrepresentation of German institutional investors.
Institutional investors form the significant majority of assets in the investment industry and have increased their allocation in recent years in spite of the hardships of recent market crises, as such maintaining their trust is integral to the future success of asset managers, said CACEIS and PwC in a joint press release. Today, institutional investors hold 69% of the assets managed by the asset management industry, which, at in excess of 12 trillion, makes these insurance companies and pension funds a major force within the industry.
The results of the survey were used as the basis for a new report entitled Taking the Reins – A roadmap for navigating the institutional investors universe. The report highlights institutional investors awareness and the importance they place upon a number of additional Key Performance Indicators critical to their relationship with asset managers. The surveys responses fell into two categories: areas in which satisfaction is being met, such as expertise, quality of advice, operational strength and independent verification; and those in which expectations are falling short, including performance, fees, risk transparency and the quality of reporting. Commenting on the report Dariush Yazdani, Ppartner, PwC Luxembourg, Market Research Institute stated that, While the traditional expectations regarding performance and fees remain, institutional investors are also looking to other aspects of their relationship and change is demanded; those that are able to adapt first are those that will succeed in the future.
The analysis and conclusions taken from institutional investors’ responses gave rise to the PwC-CACEIS Assurance Model, which distils the responses from all the institutional investors into a framework which asset managers can use as a basis for enhancing their offering and ensuring continued success with institutional investors. It covers the four key action areas of risk-based performance over fees, operational strength, governance and transparency.
The report noted that asset managers need to understand the fundamentals and use them to their advantage:-Governance – A stronger governance framework including independent verification of controls and procedures.-Operational strength – The backbone of an asset manager and essential to the maintenance and improvement of their abilities.
-Risk-based performance over fees – A model that satisfies institutional investors demands for fees correlated to the performance of their investment.
-Transparency – Operations and reporting tailored toward a more transparent and explanatory framework.
According to the report, institutional investors select their asset managers using the following criteria (in order of importance):-product transparency – risk-performance
-expertise
Institutional investors place emphasis on the following KPIs during the life of the mandate (in order of importance):-operational strength-independent verification of figures-quality advice
What is interesting to note here is that the in the above two observations, the criteria is based less on financial elements and more on performance and transparency, says CACEIS CEO Franois Marion.
When it comes to the mandate renewals, says Marion, institutional investors criteria become more financial-based. Performance is most important, followed by high levels of fees and costs and then quality of reporting.
But it is not all about performance, says Marion. Importantly, this only appears twice in the study. Investors are looking for long-term advice.
Overall, the satisfaction measure of institutional investors with their asset managers is 6.9 out of 10, the survey found. However, says Marion, this is insufficient to draw conclusions. We want to measure the satisfaction gap – the difference between performance and satisfaction,” says Marion.
Overall satisfaction is good but what is important is not just being able to leverage operational strength. Institutional investors obviously want strong and robust operational strength but asset managers have to be aware what that is. In the future due diligence will be important.
The main issue is the asymmetry between fees and performance. Fees should be measured on a multi-year time span. Risk transparency, quality of reporting, and the independent verification of data is also important. The measure of performance should be in line with benchmark. Through the CACEIS PwC assurance model it is clear that governance, performance and fees and operational strength interact with each other.
(JDC)