Investment fund insights:

post-crisis hindrances to growth pose key industry sector challenge

Thought leaders representing the investment management industry convened with renowned academics at the SimCorp StrategyLab Copenhagen Summit 2011 to discuss key investment management industry challenges in the post financial crisis environment. They articulated their findings in three thought-provoking white papers now published and which are summarised in the following article.

by Martin J. Gruber (Ph.D.)

Share|

The biggest challenge facing the investment funds sector today is the challenge to growth as triggered by the financial crisis of 2008-09. The crisis resulted in money flowing out of funds (although it has started to flow back in), and people switching funds both within and between fund complexes, reacting rapidly to short-run moves in the market. The crisis has also increased the threat of new regulation as to how investment funds can or should function. All of this has increased the uncertainty for investment fund management.

One way investment funds can start to meet this challenge is to work on their public relations. The investment fund industry has a really good track record, and if the last three financial crises are examined, we find that while the industry suffered temporary losses as a result of each crisis, when the crisis was a year past the industry bounced back to previous levels.

While there is a threat of increased regulation, the point also has to be made that regulation is a cost but also one of the biggest advantages for the industry, because regulation in combination with the industry’s self-determination has led to a tremendous transparency in the investment fund business; more transparency than is offered by any other financial intermediary. This is one of the major advantages of investment funds that has to be promoted.

The biggest opportunity facing the industry today comes out of a very large social challenge. If we look around the world today, the demographics in every country mean that we have fewer working people supporting more retired people. This means that we have to have better and better schemes for retirement planning.

In the USA, 70% of the people owning investment funds, when asked why they own such funds, the principal reason they gave was retirement. The private retirement system has to grow all over the world, but particularly in Europe. Investment funds are a natural product for the retirement industry and can also be crafted into a platform that will actually help people plan for retirement. We see this as representing a tremendous opportunity for the development of products and systems and one that the industry finds advantageous.

The four main conclusions in the Investment funds white paper are:

  • Business issues related to risk, cost and growth factors are interconnected and impact investment funds in varying degrees of significance.
  • Increased market volatility, financial instability and regulatory change have become permanent features of the global industry landscape, creating challenges as well as opportunities for industry players. Although the outlook for the investment funds industry remains broadly optimistic, the ability to manage risk, cost and growth respectively will separate the winners from the losers.
  • Changing demographics (i.e. ageing population) will alter investment funding patterns, creating new cost challenges but also growth opportunities for the investment management industry as a whole.
  • Scale, internationalisation and the right choice of investment management system are key determinants in controlling risk of both a market and a regulatory nature, curbing costs whether in the IT or operational sphere and spurring growth in terms of both business and product.

 

Martin J. Gruber (Ph.D.) is Professor Emeritus of Finance and Scholar in Residence at the Leonard N. Stern School of Business, New York University. He is a director and member of the executive committee and the investment committee of the National Bureau of Economic Research. He is a Past President of the American Finance Association and a Fellow of the American Finance Association, Financial Management Association and Institute for Quantitative Research in Finance. Marty Gruber is a director of the Daiwa Closed End Funds and has been a Director of DWS Investment Funds, SGCowen Investment Funds, TIAA-CREF. He has published six books and over 100 articles on investment analysis and portfolio management. Marty Gruber holds an S.B. degree and Chemical Engineering from MIT and a Ph.D. in Finance and Economics from Columbia University. He was also awarded the degree of Docteur ‘honoris causa’ by the University of Liege, Belgium.