New SimCorp StrategyLab volume on growth and value creation in asset management

A new SimCorp StrategyLab volume addresses key issues as to why and in what way investment managers must reassess their strategies to ensure value creation and growth in the new financial environment emerging in the global asset management industry after the financial crisis.

by Professor Paul Verdin and Mette Trier

How can investment managers win in the ‘new normal’ of the financial industry? Will it be back to business as usual, or should new approaches be developed after the major ‘re-set’ wit­nessed in financial markets and asset management in particular? Will the winners of tomorrow be the same as those of yesterday or today? What does it take to implement successful growth strategies going forward in the invest­ment management industry? How do investment managers create value in a durable, sustainable way that addresses the needs of clients, intermediaries, regulators, managers and shareholders? What are the future implications of operational challenges and IT architecture?

These questions are some of the key is­sues addressed in the latest volume on the global asset management industry published by SimCorp’s independent research arm SimCorp StrategyLab. In ‘Growth and value creation in asset management’, the third and final vol­ume in a series on risk, cost and growth, professionals and experts from the investment management industry and research centres share their views and insights.

The book has been written for the man­agement of the global asset manage­ment industry. However, the issues raised and the findings reached will also be highly relevant for anyone with an interest in this industry, whether they are researchers or students. The insights presented can without doubt serve as a basis for future research and develop­ment as well as to stimulate new theo­retical or empirical studies.

DIVERSITY AND RICHNESS

The volume’s aim is not to close the gap or fill the apparent void between growth ambition and specific growth strategies or frameworks, even less to provide a comprehensive coverage of all the stra­tegic issues facing the asset manage­ment industry worldwide.

It is, however, the ambition to offer some relevant, possibly new approaches, in­sights and conclusions from recent and ongoing research and developments in the industry from a variety of vantage points, as these are emerging from the recent work of academics, think-tanks, consultants and industry experts.

While each of the contributions has been selected for its originality and thought-provoking qualities, we believe the col­lection represents a diversity and rich­ness of perspectives which are intended more as pointers to engage in further analysis and strategic reflection rather than as ready-made answers to the various strategic questions and opport unities that are arising out of the current environment.

True to the nature of any strategic prob­ing and strategy-making, we believe that ready-made answers and general prescriptions can never be offered in general discussions or publications any­how, whatever their nature or objective. Those answers can only be achieved in the specific context of any particular business and organisation and can only be successfully implemented by their own managers and executives.

STRUCTURE, REGULATION AND BUSINESS MODELS

The volume is divided into an introduc­tion, three parts, and a conclusion, making up 11 chapters in all. Following the introduction, which provides the context and overview of the volume, Part 1 opens with a discussion in Chap­ter 2 of the industrial organisation and institutional development of the global asset management industry by Ingo Walter of the Stern School of Business at NYU and Director of SimCorp StrategyLab.

Professor Walter argues that the asset management industry is likely to be one of the largest and most dynamic parts of the global financial services sector and explains why it is likely to resume its long-term growth after the impact of the recent crisis. At the same time, the chapter provides an overview of the ma­jor players on the buy side of the busi­ness (from pension, insurance and mu­tual funds and UCITS to private equity and hedge funds), and the main factors affecting them as a basis for the com­petitive dynamics observed in the in­dustry and as a basis for future strategy development.

Massimo Massa, who is the Rothschild Chair Professor of Banking and Fi­nance at INSEAD, takes us in Chapter 3 further into the inner sanctuaries of how the mutual fund industry is really functioning or dysfunctioning, separat­ing fact from fiction, and distinguish­ing between hope (what he calls ‘mar­keting’) and reality (read: ‘performance’). These insights are based primarily on his own path-breaking academic re­search and that of his colleagues.

Given the growing importance of the European UCITS regime, not only on the European market, the largest re­gional asset management market so far, but increasingly also on the global scene, Karel Lannoo, chief executive of the Centre for European Policy Studies (CEPS), elaborates in Chapter 4 on pressures and opportunities coming from the regulatory side, particularly in view of the new UCITS IV European Directive and the continuing trends to­wards more or different regulations in the field, such as the controversial plans for new hedge fund regulation.

OPPORTUNITIES AND STRATEGIES

The second part of the volume looks at the opportunities and strategies for growth in the new financial environment. Asset management is no longer the prodigal son allowing for the easy business-as-usual practice that is at least in part re­sponsible for the inconsistencies, the oddities or the lack of sustainable strategies, which Massa so aptly points out. Profits will not easily return and it will become harder to make a living.

Yet there is plenty of hope if one takes a look at the ‘new normal’ that Johannes Elsner, Martin Huber and Philipp Koch of McKinsey believe we have ar­rived at.

In Chapter 5 of the volume, the three authors argue that what they describe as ‘fake’ alpha will not do anymore – only true alpha entrepreneurs will re­main, but as ‘boutique players’ along­side a few really large-scale beta factories. Key to survival, revival, and continued success, however, is to regain the trust from clients and investors, and to take the current crisis as an op­portunity for strategic (re-) evaluation and reorientation.

Adam Schneider, Principal at Deloitte Consulting, elaborates in Chapter 6 on the innovation challenge by translating it into concrete trajectories, each of which can be seen as a strategic re­sponse to major trends he identifies in the investment management business today. In passing, these trends are gen­erally in line with our claim of increas­ing competition in the business allow­ing fewer and fewer opportunities for easy money-making.

The responses he proposes illustrate how creating more value for clients can be achieved by (1) delivering better, more transparent, more reliable and better-performing products; (2) focus­ing on profitable segments and client satisfaction (i.e. by better delivering them the value proposition they are willing to pay for and thus also fine-tuning the offer and the pricing); and (3) by streamlining organisation and processes (e.g. eliminating some of the unproductive waste or side-effects of behavioural and organisational dynam­ics identified in the Massa chapter).

Massa’s contribution is quite comple­mentary to the one in Chapter 7 written by Alistair Byrne, Principal at Investit Consultancy, which looks not at what players in the industry say, but what in fact they do, and how this is affected by the organisational dynamics and ‘or­ganisational behaviour’ within asset management businesses.

This is a new kind of ‘behavioural fi­nance’, which we could call ‘organisa­tional behaviour finance’ – to comple­ment and join the growing ranks of the more traditional ‘behavioural finance’ contenders. Byrne, who has published more comprehensive reviews of ‘tradi­tional’ behavioural finance findings elsewhere, exposes readers in his chapter to a more novel and path-breaking study of customer behaviour and its implications for product design and development.

STRATEGICALLY DRIVEN IT PLATFORM

A strategically and business-driven IT architecture and platform that is fo­cussed, flexible and cost-effective will obviously be critical in this informa­tion-driven business.

This point is aptly and strategically dis­cussed in Chapter 8 by Pascal Wanner, Account Manager at SimCorp A/S, who highlights how strategic IT can and should be about securing and sup­porting growth going forward.

Effective and efficient IT investment has to be part of the overall business strategy. In today’s asset management environment, this requires regaining trust by delivering real value to clients. The resulting approach necessitates a paradigm change in the qualification and quantification of IT investments in general. Focussing exclusively on cost will limit the potential, as clients also expect more and different sources of value added.

Jacob Elsborg, Head of Investment at ATP Investment, takes this further in Chapter 9, outlining the crucial role of defining and implementing an appro­priate operational platform strategy – as distinct from an IT strategy, as it is gen­erally known or referred to. When properly managed and conceived, the operational platform can even be con­sidered a strategic asset, and should be managed as such.

Depending on the nature of the business activity, the relevant business model and the market in which players oper­ate, this could indeed become a crucial element in differentiating oneself from the next competitor and in particular could act as a platform for growth.

A STRATEGIC PROSPECTIVE

In the third part of the volume, Mathias Schmit and Lin-Sya Chao of the Solvay Brussels School of Economics and Management elaborate on this point in Chapter 10. On the basis of literature and empirical findings, they propose a pragmatic framework to better manage this ‘growth risk’ eminently present in any (growth) strategy. If we make big moves, if we chase growth for its own sake, even if we follow the proper path down the value curves and value seg­ments, we should be aware of the risks we are taking. Sustainable growth and value creation can only be based on a sound control of costs and risks.

The basic premise in the concluding chapter 11 is that growth will not re­turn by default if it is to be sustainable and profitable. In fact, growth in and of itself is not really a strategy – it is the result of a good strategy: a strategy that refocuses on sustained value delivery to clients and appropriate ways to share that value fairly and sustainably with the client for the benefit of manage­ment, employees and shareholders.

The link between growth and value creation therefore seems essential. As argued in the concluding chapter, there is no going back to the old ‘business-as-usual’ practice. Rather it means that one will need more and true innovation in terms of delivering value to the client if one is to win in this new and challeng­ing environment.

The editor, Paul Verdin (Ph.D., Harvard), holds the Chair of Strategy and Organisa­tion at Solvay Business School (ULB, Brussels) and is Professor of Strategy and International Management at KULeuven in Belgium. He is a former Distinguished Visiting Professor at INSEAD, where he has been on the faculty for over 15 years, and other international business schools, and has taught and consulted widely on strategic issues and processes in the financial sector (banking, insurance, asset management).