The big issues facing asset managers in 2018 and beyond
The asset management industry has faced a number of challenges in the decade since the financial crisis, and there is plenty still to come which will give industry leaders pause for thought. But it’s not all doom and gloom, there are also some bright spots in the outlook for the sector.
February’s bout of equity market volatility served as a reminder to professional investors that they must stay on their toes. Market participants had shrugged off a number of macro events which might have been expected to move asset prices, with the VIX index staying at historic lows in the face of a nuclear threat, Donald Trump’s election, and even Brexit. But in the end it was fears about inflation and monetary policy tightening which finally caused a market wobble, triggered by the release of earnings numbers from the US.
There is little doubt now that the direction of interest rates globally is upwards, but an inflation shock could cause central banks to raise rates faster than expected, which could upset the market again. In an upbeat Spring Statement, the Chancellor forecast inflation in the UK to fall to 2% by the end of the year. But is it possible that that today’s benign global inflation outlook has been misjudged? Investors will need to watch closely to see what effect Trump’s tax cut plans have on economic growth, while keeping an eye on the rising oil price.
Costs and charges are at the top of the global regulatory agenda, with MiFID II making asset managers once again rethink their commission practices, especially the way they handle third party research. The wide-ranging MiFID II legislation brings higher costs and operational complexity to firms. It will see commercial relationships, remuneration practices and management charges come under scrutiny, KPMG has warned. This could lead to significant changes to cross-border fund distribution, which already has a question mark over it because of Brexit.
Losing the ability to ‘passport’ funds so they can be sold across European borders remains one of the main fears asset management firms have about the outcome of Brexit. There are also concerns about whether it will become harder for firms to delegate portfolio management to EU member states.
There are still plenty of other unknowns: whether offices will need to be relocated, whether it will be harder to attract and retain staff, and how much it will all cost. Recent research from management consultancy Oliver Wyman and law firm Clifford Chance found that UK financial services will take “by far the biggest hit” from Brexit, given London’s role as Europe’s financial centre. It estimated that financial services as a whole will incur about a third of the extra ‘red tape’ costs of leaving the EU.
But there are two sides to the coin when it comes to Brexit. In a more optimistic commentary issued in March, the EY Item Club said the likelihood of a transition period for Brexit, combined with a stronger economy, should offer support to the industry this year.
Even before asset managers had to shoulder the additional burden of research costs under MiFID II, they were already seeing margins squeezed. PwC notes that the push towards greater transparency kicked off by the Retail Distribution Review, and a shift to outcome-based investment solutions, has pushed down fees. Some active managers have struggled to deliver the outperformance needed to justify their higher fees, and passive providers have grabbed market shares while racing each other to the bottom on price.
The FCA’s push for asset managers to demonstrate ‘value for money’, as revealed in its Asset Management Market Study last summer, is designed to improve competition in the market for consumers, but will also add to the pressure on firms.
In spite of these headwinds, this year is expected to be a good one for asset gathering. The UK’s financial services industry as a whole will attract £1.5trn in assets under management by 2021, says the latest EY Item Club outlook, even with a potentially challenging 2018 in store. It notes AUM growth over the last two years has been helped by the post-referendum drop in sterling, but sterling’s recovery against the dollar will constrain growth this year.
Gill Lofts, UK head of wealth and asset management at EY, said last year was intensely challenging for asset managers, with the rise of ETFs, MiFID II, Brexit and robo-advice all causing consternation.
“While all of these issues are important, the UK asset management industry also stands at the cusp of some major global structural changes as, for the first time, economic power is shifting in favour of developing nations,” she said. “Those that can be fleet-of-foot in responding to this critical change stand to gain a serious edge on their competitors, so 2018 could be a year of reckoning in more ways than one.”