Watson Wyatt Worldwide, a consultancy, has launched a research publication entitledDefining moments, in which it describes a radically changing investment landscape that presents both problems and opportunities for investors. The goal of the research was to probe the forces at work in the industry and present a plausible picture of its future shape.
“There is one word that captures the flavour of the next few years in the financial industry complexity,” says Naomi Denning, head of investment consulting for Asia Pacific. “This will support increasingly sophisticated investment products and solutions, but will also weigh down decision-taking. In particular, funds will have to face three big problems: an increasingly crisis-prone financial system, high investment costs and too much short-termism. While we take the view that these problems are deep-rooted, our positive thought is that this is a world of opportunity for those fit enough to adapt.”
The research identifies four defining moments or events that will be seen with the benefit of hindsight to have had a significant impact on the shape and structure of the industry. The first three have already occurred and the final one is still to come:
* A shift in preferences towards absolute returns – created by the last major bear market which ended in 2003
* Fresh thinking on the governance and management of institutional assets with increased focus on the way that funds structure themselves in order to make and implement investment decisions. New framing of risk – where the sub-prime crisis in 2007 is precipitating major changes in the assessment and management of risk New regulation – a future phase of significant regulation which will impact the financial industry on a scale similar to the Sarbanes-Oxley effect on US corporations.
“These defining moments are major forces for change in the institutional investment industry,” says Naomi Denning. “By understanding how the investment landscape is likely to evolve over the next decade or so, institutional investors can adapt to cope with new challenges or take advantage of changes”.
According to the research these events will be felt over different time horizons and will vary in their likely impact. The longer-term macro trends that are likely to be well established by the year 2020 include:
* Institutional funds evolving to a different ‘food chain’ in which expense on various activities adds up to a better value proposition than exists today The emergence of new investment content offering higher efficiency, in which focus on alpha and beta as separable items will allow funds to have the precise combination that suits their requirements Continuing crisis contagion – in which dysfunction in the credit area and excess competition, complexity and compensation will continue to hamper the financial industry A better long-term investment framework – the better governed institutional funds of the future will reconcile the tension between shorter-term monitoring and decision making and longer-term journey planning The DC pension model will advance through improvements in the way institutions and members combine to determine the optimal strategy and Organisational change – while all organisations must inevitably weather change, adaptability will be the most prized attribute for thriving on change.
“The tide is clearly turning and the affairs of the investment industry are being reordered,” says Naomi. “This is creating a new landscape that will reward funds that prioritise streamlined governance and forward thinking.” The Defining moments publication incorporates the findings of the 2020 Vision expert opinion survey conducted by Watson Wyatt in association with the Financial Times.