State Street research reveals how Canadian asset managers are

competing to capitalize on the growing demand for outcome-

based investment solutions

Asset managers in Canada are adapting to a new world. The country

weathered the financial crisis well, but economic growth is now sluggish

and the investment environment is challenging. Investors are targeting

higher returns, but are also determined to manage their exposure to risk.

Asset managers must adapt to these pressures with new investment

solutions that meet their clients’ needs. That will mean investing in both

talent and technology. A new State Street survey of 300 asset managers

around the world, conducted by FT Remark, delivers insights into how

Canadian asset managers are responding to these challenges.

Meeting New Investor Demands

85% of Canadian asset managers say that few asset managers are currently equipped to thrive when it comes to offering multi-asset class investment solutions.

Frontline Revolution for Asset Managers

CANADA SNAPSHOT

A CHANGING REGULATORY MODEL

The Client Relationship Model (CRM2) reforms require Canadian

financial advisors to make much more detailed disclosures on

charges and commissions to their clients. The changes are being

phased in over a three-year period, which began in July 2013,

and have major implications for the industry.

“CRM2, and ultimately CRM3, have been spurring a huge

move towards the fee-based advisor model,” says Barry

Gordon, President and Chief Executive Officer of First Asset.

“Accompanying that, we’ve seen an increased use in exchange-

traded funds. Advisors are fearful of criticism from clients if they

buy just traditional passive beta, because they’re concerned

clients will ask ‘if you’re just buying me the index, why am I

paying for your advice?’”

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Frontline Revolution for Asset Managers Meeting New Investor Demands

SHIFTING INVESTMENT LANDSCAPE

Investors are increasingly looking for bespoke

investment solutions that deliver more predictable

absolute returns while reducing volatility. This shift to

outcome-based investment requires asset managers

to develop new products that harness a much broader

range of asset classes and investment techniques.

Canadian asset managers recognize the magnitude

of this shift in demand. In our survey, 81 percent

of Canadian asset managers say they expect multi-

asset solutions to be the investment strategy that

contributes most to their business growth over the

next three years — more than in any other country

or region in our survey.

However, fulfilling this potential will be challenging.

The vast majority (85 percent) of Canadian

respondents strongly agree that few asset managers

are currently equipped to thrive when it comes to

offering multi-asset class investment solutions.

“The reality is that more and more people are realizing

you can actually capture the various risk premia —

value, momentum, size, volatility, dividends and so

on — and that they (multi-asset solutions) have a very

solid home in portfolios,” says Barry Gordon of First

Asset. “But the technology has to be up to speed in

terms of replicating those mandates.”

Despite these challenges, however, Canadian asset

managers know they must adapt to survive: three-

quarters (76 percent) say changing client demands

are driving a fundamental shift in their business

strategy.

TRANSPARENCY PROVIDES COMPETITIVE ADVANTAGE

In a market environment where clients and their

advisors are placing asset managers under more

scrutiny than ever before, transparency can be an

important selling point. Canadian asset managers

recognize this demand: 62 percent strongly agree

that those managers who provide the greatest degree

of transparency to clients will have a competitive

advantage in attracting new assets.

It is not only the clients who are demanding greater

transparency — financial regulators are demanding

the same thing. The domestic Client Relationship

Model (CRM2) reforms have arrived at the same

time as a swathe of other international regulations,

including the new Foreign Account Tax Compliance

Act (FATCA) requirements. Asset managers are facing

new regulatory requirements in almost every global

market in which they operate.

Meeting those requirements involves serious

investment in technology and new tools. More than

one in three (38 percent) Canadian asset managers

plan to make a significant investment in risk analytics

over the next three years. The figures for data

integration and performance analytics are also high, at

29 percent and 24 percent respectively.

At Bridgehouse Asset Managers, CEO Oliver Murray

says the firm puts emphasis on implementing tools

that can help prove its credibility to clients. “We have

been investing in third-party tools to demonstrate

that we have a consistent approach that generates

consistent outcomes,” he says. “We say to clients,

here is the evidence that historically we’ve done what

we said we would do.”

Canada81%

Australia80%

Germany76%

Japan67%

US59%

53%

0% 10% 30% 50% 90%40%20%

UK

80%70%60%

Figure 1: Which one of these investment strategies do you think will contribute most to your business growth over the next three years? (Those selecting multi-asset solutions)

33

Frontline Revolution for Asset Managers Meeting New Investor Demands

Figure 2: Asset managers who provide the greatest degree of transparency to clients have a competitive advantage in attracting new assets (Percentage of respondents who strongly agree)

Canada62%

UK47%

US44%

Germany40%

Australia30%

23%

0% 10% 30% 50% 70%40%20%

Japan

60%

BUILDING SKILLS AND EXPERTISE

Alongside product innovation and greater transparency,

attracting the necessary talent and skills to support

the new investment strategies will be the third key

battleground for Canadian asset managers. Firms must

think hard about the personnel changes and technology

investment required to meet new investor demands, as

well as to satisfy increasingly zealous regulators.

They need the skills and expertise to support both new

investment solutions and new technologies, as they

increase spending on sophisticated analytical tools and

back-office systems.

Yet only 5 percent of Canadian asset managers say they

plan significant investment in new talent to address

capability gaps. A larger number (29 percent) intend

to invest heavily in talent to resource high volumes

of business and in training for existing staff, but this

remains low compared to the other countries in our

research.

Robert Baillie, President and CEO, State Street Trust

Company Canada, comments: “Canadian asset

managers must not underestimate the need for a whole

new set of skills to support multi-asset solutions. The

astute players will be proactive in hunting out new talent

to help them thrive in this new environment.”

FOCUS FOR THE FUTURE

Canadian asset managers will have three clear areas

of focus over the next three years:

• Transformation. Restructuring operations around the

changing needs of investors and regulators.

• Tools. Investing in state-of-the-art analytics to give

clients real-time insights across increasingly complex

investment portfolios.

• Talent. Shoring up capabilities to support new

investment strategies.

Figure 3: Levels of investment over the next three years in acquring new talent to resource higher volume of business (Canadian respondents only)

29%Significant

5%Moderate

38%Minimal

29%No Investment

www.statestreet.com

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Frontline Revolution for Asset Managers Meeting New Investor Demands

©STATE STREET CORPORATION 14-22416

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

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institutional investors including investment servicing,

investment management and investment research

and trading.

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

Robert Baillie +1 647 775 5144 rbaillie@statestreet.com

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. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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