When selecting an asset management firm, institutional investors no longer make investment performance the primary factor. In fact, they rank it equally highly with expertise and risk transparency. So if asset managers are to forge long-lasting relationships with their institutional clients, they might need to refine their objectives to give a greater weighting to factors beyond performance.
In a survey of European institutional investors and their trade associations, accounting for close to 40% of Europe’s €4.5 trillion in institutional assets, PwC and CACEIS Investor Services discovered that regulatory changes and market uncertainty are leading to a shift in investor priorities. Entitled 'Taking the reins – a roadmap for navigating the institutional investors’ universe,' the June 2012 survey showed that while institutions are broadly satisfied with the services they receive, asset managers aren’t fulfilling their expectations in some specific areas, including the increasingly critical area of risk transparency. With institutional investors accounting for a growing share of European assets under management, this revelation should generate considerable debate among asset managers.
While in 2007 institutions such as pension funds and insurance companies contributed 65% of total assets under management, this proportion has since risen to 69%.¹ Areas of satisfaction and frustration The survey reviewed investors’ satisfaction levels in eight key areas of performance. It found that asset managers were meeting expectations in the areas of: expertise, quality of advice, operational strength and independent verification. But respondents reported room for improvement in the remaining four fields: fees, quality of reporting, performance and risk transparency. Bearing in mind that institutional investors are increasingly critical to asset managers’ prosperity, we believe that managers must both reinforce their areas of strength and address their areas of weakness.
We consider it possible to condense the eight survey areas of focus into four action areas, backed by key performance indicators (KPIs), which should help asset managers to give satisfaction. They are: governance, operational strength, risk-based performance over fees and transparency. Governance Strong governance frameworks, including independent verification of controls and procedures, make the asset manager’s operations clearer to the investor. This improves trust because investors can be sure that governance requirements are being met. Operational strength While institutional investors reported satisfaction with levels of expertise and quality of advice - which we see as relating to people and processes - operational strength is still a fundamental area of focus. Looming changes in regulations will require changes in asset managers’ operations and those of their institutional investor clients.
Both will have to be ready. Performance-related fees Investors are becoming increasingly sensitive to the correlation between fees and performance: those surveyed felt they were paying over the odds for asset management and received no compensation when performance was poor. Tying risk-adjusted performance to fees would be fairer to investors, would incentivise managers and, potentially, attract new clients. Transparency Transparency is a recurring theme in Taking the reins. Risk transparency is one of the KPIs that institutional investors value most of all; yet it’s also one of those where they’re least satisfied. Institutions want higher quality reporting, including clear explanations for good and bad performance. It’s not all about performance Evidently, investors are closely examining asset managers’ operational capabilities, as well as the value-added services they’re willing to give in order to promote greater understanding and transparency.
Investors are also looking into how asset managers can adapt to new regulatory requirements and governance procedures. Finding the resources to fulfil these obligations is a challenge for the industry. But we believe future success depends on embracing the four areas that we highlight. What’s more, those managers that adapt quickly and comprehensively, while also dedicating resources to explanatory and advice-led services, will make themselves more competitive. At this moment in time, winning new assets is hard. Given institutional investors’ growing dominance of the industry, adapting to their evolving needs must be any asset manager’s over-riding concern – which means having goals beyond investment performance and, in particular, improving risk transparency.