Asset managers need to focus on individual investors

Asset managers need to revamp their operating model as individual investors become an increasingly important client constituency, according to a paper by Casey Quirk, a consultancy.

Many individual investors have withdrawn accumulated savings from institutional investors. As such, asset managers will need to tailor their businesses accordingly. The Casey Quirk paper highlighted that most active asset managers will utilize an index as a mechanism by which to benchmark outperformance.

Individual investors would much prefer “strategies that align against their desired outcome rather than an arbitrary market index,” read the paper. As such, the paper said multi-asset strategies that combine a variety of index-linked or quantitative factor exposures, active bets and dynamic asset allocations in pursuit of their end objective ought to be beneficiaries of this changing investor behaviour.

The paper also highlighted the increase in individual investors would make asset management more inefficient. This is because there is more intermediation and multiple providers in between asset managers and individual investors as opposed to institutions. This will lead to segmentation. It also said individual investors tend to change managers more frequently than institutions who usually possess a more long-term view of managers.

The cost of managing retail money is obviously higher given the huge volumes of regulatory protections that are afforded to these investors. As such, managers will need to comply with legislation such as the UK Retail Distribution Review (RDR), proposed fiduciary obligations being considered by the US Department of Labor, the EU’s Markets in Financial Instruments Directive II (MiFID II) and Australia’s Future of Financial Advice rules. This will all add to managers’ operating costs at a time when regulatory overheads are already significant.

Asset managers should also embrace technology when reviewing distribution methods, added the paper. A number of reports have speculated whether technology giants will make a leap into asset management. Google, for example, commissioned research into the viability of entering asset management in 2014. While the Casey Quirk study speculates the regulation associated with providing investment advice will be off-putting to these technology firms, it advises asset managers to invest in technology in order to bolster their distribution channels.

Meanwhile, a number of institutional investors, particularly sovereign wealth funds (SWFs), are likely to invest into asset managers at lower levels, according to the paper. “The post-crisis capital shifts that created sovereign funds in emerging managers have stabilized and the falling price of oil has shrunk the petrodollar driven state investment pools,” read the Casey Quirk paper. This comes as the Saudi Arabian sovereign funds withdrew from several high-profile asset managers amid the slumping oil price.

Furthermore, the paper highlighted capital-rich asset owners were developing their own internal asset management functions. The Abu Dhabi Investment Authority has also grown its in-house teams and curtailed external investments. A study by Invesco Asset Management of 59 SWFs found 41% now had internal real estate investment teams in 2015 versus 31% in 2013. The number of SWFs utilizing in-house private equity teams also increased slightly from 26% in 2013 to 28% in 2015. Nonetheless, the number of internal infrastructure teams fell dramatically from 26% in 2013 to 16% in 2015, added the Invesco study.

The decision to move certain investment strategies in-house has also been driven by fee concerns in some circumstances, and it is possible that other institutional investors may increasingly in-source including large pension funds if there are cost savings opportunities to be realized.