A new Putnam Lovell
report cleverly titled After the Belle Époque, the Future of Fund Management
paints a grim picture of the future of the fund industry. Some predictions from the report include: Traditional active management, long-only stock and bond portfolios charging asset-based fees, will contribute less than half of total industry revenue by 2012, down from about 69 percent in 2006; ETFs and other less-expensive products will increasingly endanger active managers offering closet index performance at higher fees; firms primarily reliant on long-only mutual funds will be under the most severe pressure to reinvent themselves or face dwindling prospects; and sub-advisors will capture increasing share, in particular in the US mutual fund segment where they will control 20 percent of the market by 2012.
Independent and quoted money management firms, both traditional and alternative, will capture 33% of all assets under management by 2012, up from 24% today, and will be beneficiaries of an historic shift from the retirement mainstay upon which the global fund industry was built, according to Putnam Lovell, the division of Jefferies & Company, Inc. focused on the asset management and financial technology industries.
Commercial banks, insurance companies and investment banks controlled the global money management business in its infancy. Increasingly, they will find it more lucrative to assemble unaffiliated products and play the role of professional buyers rather than fight a losing battle for market share with independent managers. Captive fund management operations of banks and insurers will agitate for more autonomy and spinoffs will become more common, particularly in Europe and Japan, according to the Jefferies Putnam Lovell report, After the Belle Époque, the Future of Fund Management.
Traditional active management, long-only stock and bond portfolios charging asset-based fees, will contribute less than half of total industry revenue by 2012, down from about 69% in 2006. More than 50% of revenue will come from performance fees, alternative investments rapidly becoming mainstream, and proliferating long-short extension strategies.
"The days of relying on tax advantages and government subsidies to spur retirement savings and growth in the fund industry are over," said Ben Phillips, managing director and head of strategic analysis at Jefferies Putnam Lovell, and author of the new report. "Individual investors, Asia, and sovereign wealth funds will be major sources of new business in the next five years. Yield rather than asset accumulation will increasingly be the focus of investors, boosting demand for a new generation of products."
More than ever in fund management, performance, not capital or brand, will separate the winners and losers. But investor inertia is fading and the price for adjusting slowly to this new environment will rise dramatically, according to the Jefferies Putnam Lovell report.
Forecasts in the Jefferies Putnam Lovell report include:
* ETFs and other less-expensive products will increasingly endanger active managers offering closet index performance at higher fees.
* Hedge funds, now in more challenging markets, will be more easily distinguishable. Institutional-grade firms generating strong performance in all market conditions will gain further market share at the expense of lesser competitors. Roughly 20% of the current total, approximately 2,000 funds, will disappear in the next five years.
* Firms primarily reliant on long-only mutual funds will be under the most severe pressure to reinvent themselves or face dwindling prospects.
* Sub-advisors will capture increasing share, in particular in the US mutual fund segment where they will control 20% of the market by 2012.
* Demand for performance fees and customized benchmarks are on the rise, from both institutional and individual investors willing only to pay for outperformance.
"Fund firms that anticipate and adjust to these new challenges will enjoy a bright future, growing their businesses at the expense of those unable to let go of a rich epoch that’s rapidly fading," Phillips said.
About Jefferies Putnam Lovell
Putnam Lovell, the division of Jefferies & Company, Inc. focused on the financial services industry, offers a wide range of corporate advisory services, including mergers and acquisitions advice and capital raising. Putnam Lovell’s global client base is comprised of diversified financial services firms, institutional and mutual fund managers, alternative investment managers, banks, broker-dealers, insurers, and financial technology firms. Putnam Lovell was founded in 1987 and operates from offices in New York, San Francisco, Boston, and London. Since July 2007, Putnam Lovell has been a division of Jefferies & Company, Inc., the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF). For more information please visit www.putnamlovell.com.
Jefferies, a global investment bank and institutional securities firm, has served growing and mid-sized companies and their investors for 45 years. Headquartered in New York, with more than 25 offices around the world, Jefferies provides clients with capital markets and financial advisory services, institutional brokerage, securities research and asset management. The firm is a leading provider of trade execution in equity, high yield, convertible and international securities for institutional investors and high net worth individuals. Jefferies & Company, Inc. is the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF; www.jefferies.com)
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