Investment managers in Australia are encouraged by the growth

outlook for the next 12 months, yet they see a capability gap where

few are equipped to tap the opportunities ahead.

These are the findings of a new State Street survey of 300 asset managers

around the world conducted by FT Remark. Key factors that are causing

asset managers to fundamentally rethink their business strategy include:

• Investor demands for outcome-based investment solutions

• The emergence of superannuation funds that manage their own assets

• Opportunities to capture growth opportunities in overseas markets

“The Australian market is ripe for growth,” says Paul Khoury, Head of

Asset Manager Sector Solutions for Asia Pacific at State Street. “Asset

managers are taking that positive outlook into account when planning,

budgeting and developing new products. It’s definitely a positive and

buoyant market.”

Figure 1: Which one of these investment strategies do you think will contribute most to your business growth over the next three years? (Select one only)Australia-based respondents only

Focused on Evolving Investor Needs

84% of Australia-based managers say that changing client demands are causing a fundamental shift in their overall business strategy.

Frontline Revolution for Asset Managers

AUSTRALIA SNAPSHOT

20% 40% 60% 100%80%0%

7%

80%

Multi-asset solutions

Traditional actively managed equity

3%

3%

Traditional actively managed fixed income

Passive equity

7%

Other

2

Frontline Revolution for Asset Managers Focused on Evolving Investor Needs

CHANGING INVESTOR DEMANDS

The first step to success in this new environment

is to understand shifting patterns in investor demand.

More than four-fifths of Australia-based managers

(84 percent) say that changing client demands are

causing a fundamental shift in their overall business

strategy. One of the most striking examples of this

shift is in the types of investment strategy that will

drive growth.

Eighty percent say that multi-asset solutions will be

the investment strategy that will help them meet

clients’ objectives and drive most growth over the

next three years (a figure that is the highest of any

country in our survey) — yet 73 percent say that few

managers are equipped to offer them successfully.

A shift to multi-asset investment solutions requires

a major transformation of many aspects of an asset

manager’s operating model. Over the next three

years, more than two-thirds (70 percent) of Australia-

based asset managers expect to make significant or

moderate investment in skills training and 63 percent

plan to acquire new talent to address capability gaps.

Analytics tools around performance and risk are a

major focus for investment as they manage and

report across more complex portfolios.

“We are excited about the prospects for our asset

management business,” says Tim Barber, Chief

Operating Officer at Australian Unity. “Businesses that

can innovate based on client demands and needs will

be more successful than those that manufacture a

product and then go look for a market or a buyer.”

Like their global counterparts, Australia-based

asset managers are positive about the potential

to transform through M&A, whether to add new

investment capabilities, geographic presence or

scale. Seventy-seven percent of them see increased

opportunity for acquisition over the next 12 months.

Figure 2: Investing in Technology % Australian respondents that expect significant or moderate investments in the following over the next three years

TRANSFORMATION IN THE SUPER SPACE

Against the backdrop of increased member

contributions, super funds are undergoing a period

of transformation. They are searching for operational

efficiencies and also examining what investment

management capabilities they can develop within their

own organisations. In short, the asset owners are

becoming asset managers.

“As an investment manager, it means the

contestable pool is considerably less with the

internalisation programmes of a number of funds,”

says Mark Lazberger, Chief Executive Officer at

Colonial First State Global Asset Management.

The rise of the self-managed super fund (SMSF) is

another potentially disruptive factor in the industry.

While in some respects it represents a competitive

threat to asset managers, it also creates opportunities

for those that can provide innovative solutions to those

investors that manage their own retirement funds.

Asset managers must innovate and create an

investment strategy that meets the needs of the

super funds while ensuring growth.

20% 40% 60% 100%80%0%

93%

97%

Performance analytics

Risk analytics

90%

Data integration

33

Frontline Revolution for Asset Managers Focused on Evolving Investor Needs

CAPTURING NEW OPPORTUNITIES

While the deepening pool of super assets creates

strong local opportunities, asset managers are also

eager to diversify into overseas investments. Half of

the Australia-based managers say that they plan to

expand the business to new countries or regions

over the next three years.

“From an Australian vantage point, there’s a big

world out there and it’s another driver for us to look

at other markets,” says Colonial First State Global

Asset Management’s Lazberger, adding that the

target countries include the United States, Britain

and Europe.

However, they face some significant challenges:

• 63 percent of Australia-based managers agree that

distribution challenges deter them from investing

more in otherwise highly attractive markets

• Unclear business terms, the high cost of doing

business and exposure to regulatory risks are the

top three challenges Australia-based managers face

with third-party intermediaries for distribution

• Nearly two-thirds (60 percent) of Australia-based

managers say regulatory risk will strongly increase

over the next 12 months

“The regulations being introduced into the industry

pervade many aspects of an asset manager’s

business,” says State Street’s Khoury. “This

complexity brings uncertainty and costs, but

regulatory changes are also creating opportunities for

asset managers. They need to determine how they

can most efficiently support regulatory compliance —

whether by investing internally or through outsourced

relationships — to ensure they can stay focused on

their core investment competencies.”

Regulatory reforms, if implemented effectively, can

also help smooth the path to geographic expansion.

Three key initiatives currently being introduced

across Asia Pacific — the Hong Kong-China Mutual

Recognition, Asia Region Funds Passport and ASEAN

Collective Investment Scheme — should help facilitate

cross-border capital flows, give asset managers more

access to savings pools and help them achieve higher

economies of scale.

THE ROUTE TO SUCCESS

Ultimate success will require asset managers to:

• Make the shift from delivering traditional products

toward holistic solutions such as a multi-asset

portfolio as a mainstream investment strategy.

• Position themselves for longer-term expansion

through a mastery of local investor demands,

regulatory systems and distribution channels.

• Invest in new talent, adopt advanced technology,

and develop flexible operating models.

“If you’re innovating in a way that’s focused on serving

investors and their evolving needs, you’re going to

be more successful,” says Australian Unity’s Barber.

“This is where innovation should be focused.”

“As an investment manager, it means the

contestable pool is considerably less with

the internalisation of a number of funds.”

Mark Lazberger

Chief Executive Officer at Colonial

First State Global Asset Management

www.statestreet.com

4

Frontline Revolution for Asset Managers Focused on Evolving Investor Needs

©STATE STREET CORPORATION 14-22146-0614

ABOUT THE RESEARCH

The research presented in this report is based on a

global State Street survey of 300 senior executives at

asset management firms. The State Street 2014 Asset

Manager Survey was conducted by FT Remark in April

and May 2014. Respondents were equally distributed

across North America, Europe and Asia Pacific.

THIS IS STATE STREET

State Street Corporation (NYSE: STT) is one of the

world’s leading providers of financial services to

institutional investors including investment servicing,

investment management and investment research

and trading.

With US$27.5 trillion in assets under custody and

administration and US$2.4 trillion in assets under

management* at March 31, 2014, State Street operates

in more than 100 geographic markets worldwide,

including the US, Canada, Europe, the Middle East

and Asia.

* This AUM includes the assets of the SPDR® Gold ETF (approximately US$34 billion as of March 31, 2014), for which State Street Global Markets, LLC, an affiliate of SSGA, serves as the distribution agent.

If you would like to discuss the results with a State Street expert, please contact:

Paul Khoury +61 2 9323 6444 paulkhoury@statestreet.com

Andrew Willis +61 2 9323 6455 awillis@statestreet.com

Sinclair Scholfield +61 2 8249 1244 sscholfield@statestreet.com

This publication is issued in Australia by State Street Bank and Trust Company ABN 70 062 819 630 AFSL 239679 and is intended only for wholesale clients, as defined in the Corporations Act 2001. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.