Navigating the storm: Implications of the crisis on the ......Navigating the storm: Implications of...

Navigating the storm:

Implications of the crisis on the

asset management industry

Toronto

November 19, 2008

MON-ZXT101-20081106-Presentation ICAC v1-JT

1

Overview of the asset management industry’s performance1

Today’s discussion

Implications of the current market environment on the industry2

Key success factors for asset managers3

2

The asset management industry was surprisingly profitable in 2007, with margins at their highest point in the last 7 years…

Pre-tax profit margin for all firms in the survey, 2001-07

Percent

Profit margin for same firms in 2006 and 2007 surveys

3331

2006 2007

333131

282625

27

2001 02 03 04 05 06 2007

Source: 2008 McKinsey/USI AM benchmarking survey

3

… driven by brisk growth, albeit at a lower pace for assets and more dramatically, revenues

AUM growth, 2001-07 Revenue growth, 2005-07

1417

1110

23

-9

-1

2001 02 03 04 05 06 2007

13

2119

2005 2006 2007


Percent

4

Higheralpha strategies

Traditional active/core

“Cheap beta”

Private equity/hedge funds

Balanced

Fixed income

Money market

QA/enhancedIndex

Pure index

Structured

AUM growth2004-05

AUM growth2005-06

Real estate

International equity

Asset growth remained strongest in higher alpha strategies, but market turmoil cut the growth of real estate, domestic equity, and quant active

AUM growth2006-07

% AUM2007


3

2

7

14

11

3

5

8

27

16

0

32

18

10

-7

1

18

23

38

24

9

39

16

11

16

10

25

27

15

32

7

12

27

13

19

5

21

13

33

22

Domestic equity

5

4

27

2

Q12007

Q2 Q3

-1

Q4 Total2007

-4

Q1 2008

0

Q2

However, growth slowed considerably in the 2nd half of 2007, andturned negative in Q4 continuing through to today

* Includes mutual funds held in variable annuity policiesSource: Investment Company Institute

Overall AUM growth rates over 2007 and first half 2008Percent

L-T Mutual fund AUM growth*

4 7 2 -2 11 -7 1

6

Institutional net flows are holding up, but assets have eroded due to market impact

Sources of Institutional* AUM growth rates Q1 2007 to Q2 2008Percent

Q2 ’08

1.1

-1.1

1H ’08 Growth

Q1 ’07

01.0

Q2 ’07

2.7

1.9

Q3 ’07

-0.8

3.0

Q4 ’07

-3.9

5.0

2007 Growth

2.5

Q1 ’08

-8.1

1.9-2.4

Net flows

Market impact

* Excludes endowment and foundation assets, includes all insurance assets, private and public pension plansSource: U.S. Federal Reserve, Flow of Funds Accounts of the United States

US INSTITUTIONAL

7

In addition, although long-term net flows for the year are strong, they masked increased churn across the industry

Long-term sales and outflowsPercent of BoY AUM

Institutional SubadvisoryOverall industry

24

-20

26

Outflows

Sales

-22

22

-21-17

26

-28

27

-19

26

Net flows +5 +5+4 +4 +7 -1

2006 2007


2006 2007 2006 2007

8

• Structured products

• Real estate equity

International equity

Large cap

Taxable fixed income

Money market

Quant active

Pure index 10

35

11

18

41

43

93

37

122Alternatives

• Hedge funds

* Not all products listed, total does not add to 100%Source: 2008 McKinsey/USI AM benchmarking survey

Traditional active/core

“Cheap beta”

Higher alpha strategies

2007 AUM*Percent2005 2006

7

32

12

18

41

53

38

213

102

2005-07, Bps

1

3

11

9

23

6

4

8

10

2007

7

32

13

18

40

48

91

35

174

Trend

~

~

~

~

~

Moreover, institutional net revenues also remained stable across the core, but declined in all higher alpha strategies

INSTITUTIONAL SEGMENT

9





10

100

150

200

250

300

350

400

450

500

550

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Bloomberg

S&P 500 Index: financial sector

510 on 2/20/07

>60%

184 on 10/9/08Financial services

index is currently at the same level as in 1997

The crisis has resulted in a remarkable weakening in the US financial sector overall…

11

* As of October 17, 2008; Returns Include only Share Price appreciation/depreciation

** Peer Index includes all companies

*** Q3 AUM not available

Source: SNL; McKinsey Corporate Performance Center analysis

Cumulative TRS in USD*

Index, 0=June 16, 2007

…and the asset management industry followed a similar trajectory with a particularly difficult period in October

Publicly Traded Asset Manager Pure Plays

Peer Index**

S&P Financials

AUM(Q2 vs. Q3 2008)$ Billions

Market cap (Q2 vs. Q3 2008) $ Millions

11

-16

-169

0***

-127

-73

-51

-21

-35

-31

-8,084

-4,204

-3,190

-8,922

-5,983

-6,398

-1,145

-2,066

-2,845

-1,834

-60

-55

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

11/16/2007 02/29/2008 05/30/2008 11/17/200808/29/2008

12

Asset management firms are now fully experiencing the impact of the crisis

INSTITUTIONAL SEGMENT - US

Source: Pension and Investments, October 13, 2008

Number of new mandates

Number of searches launched

Additional allocation to existing mandates

2008 Q3

382

259

2008 Q2

-32%

95

132

-28%

15

24

-38%

13

* Sep 30, 2008** Oct 31, 2008

Source: Strategic Insight, IFIC

19893

-39-85

167

660

109139

-24

883

12

-0-5-0

2

7

-1

101

35

2008 YTD*USD Billions

2007

2008 YTD**CAD Billions

2007

Total MF fund net flows U.S. equity Global equity Bond funds

Money market funds

Total MF fund net flows U.S. equity Global equity Bond funds

Money market funds

Market turmoil has led to dramatically lower net flows in 2008RETAIL SEGMENT

14

Mutual funds give us a more current view of the impact

1.2

11.41.1

1.2

1.51.8

Q4 ’07

-0.5

6.0

Q1 ’07 Q2 ’07

0.4

Q3 ’07 2007 Growth

0.3

Q1 ’08

-0.1

Q2 ’08

1.6 -0.9

-7.5

-9.5

-3.4

YTD Growth

Q3 ’08

Net flows

Market impact

* Includes variable annuities, excludes ETFs and closed end fundsSource: Investment Company Instittute

MUTUAL FUNDS ONLY

Sources of of Mutual Fund* AUM growth rates Q1 2007 to Q3 2008Percent

15

Profit margins in the AM industry are likely to fall significantly in 2008; equities firms could see profitability drop by more than half

Source: 2008 McKinsey; U.S. AM benchmarking survey

Operating profit marginPercent

Net revenues/AUMBps

Costs/AUMBps

23

53

39

22

5036

Survey average

Equities firms

FI/MM firms

2007

2008

16

3526

15

43

27

Equities firms

FI/MM firmsSurvey average

AUMgrowthPercent

-10 -21 -2

30

3533 31

11

24

Equities firmsSurvey average

FI/MM firms

ESTIMATES

16

In the last downturn, equities players were hardest hit but industry profitability was stable due to aggressive cost cutting

13

Key findings

• Overall profit margins fell only slightly in the last downturn due to lower cost reductions in line with AUM(and $ revenue) declines

• Equities players were hit hardest during 2001-02 downturn, but recovered most when asset growth returned

• FI/mm players improved their profitability during the downturn

Operating profit margins by type of firmPercent

Source: 2008 McKinsey; U.S. AM benchmarking survey

26 37 4

14

23

27

2019

25 24

2926

2003

2002

2001

FI/MM firmsSurvey average

Equities firms

AUMgrowthPercent

-1 -9-9 23 -13

17

We therefore expect to see many firms with low, or even negative performance in 2008

Source: 2008 McKinsey./USI AM benchmarking survey

43 3243 38 41Gap between top and bottom tier

38 28

Profit margin2001-07, Percent

Top third

Middle third

Bottom third

0

5

10

15

20

25

30

35

40

45

50

55

2001 02 03 04 05 06 2007

Under current forecasts, we expect

• 15-20% of firms will have negative margins in 08

• Only 20-25% of firms will have margins above 30% in 08

18

Current environment will lead to important changes in client demand and behaviours

• Limited shift in strategic asset allocation expected, however, more limited use of tactical asset allocation

• Review of strategies used to implement LDI approach

• Systematic review of portfolio of external managers

• Increased pressure on fees (e.g., HF)

• Greater demand for transparency on risk exposure and performance attribution

Institutional clients

Retail clients

• Short-term uncertainty is paralyzing investors, therefore limiting inflows to

actively managed products

• Mindset shift from capital appreciation to capital preservation, translating

into increased demand for products offering downside protection

• Increased awareness/sensitivity around fee structures and levels

• Greater demand for advice (e.g., financial planning tools and risk assessment)

19

Current environment will also have other major implications on the industry and individual firms

• Potential M&A/consolidation play

(e.g., from hard-hit alternative players

or banks in need of liquidity)

• Unprecedented pool of talent available (portfolio management, quants, sales, etc.) with

opportunities to “buy” specialized teams

• Shift in the type of new products launched (less capital intensive, more solution oriented, etc.)

• Increased focus on “relationship management”, specially with erosion of AUM impacting

profitability

• Increased focus on significant innovation/redesign, with focus on liquidity

• Increased disclosure regarding strategies employed because of investor demand for

transparency

Target

+

Changes in industry structure

Changes at firm level

• Acceleration of the “barbell” structure in the hedge fund industry (many players disappearing),

further diversification and institutionalization of processes

• Expected increased regulation, with integration of regulatory bodies

Acquiror

• New players such as PE firms

taking opportunity of low valuations

to enter industry

20





21

Further invest in understanding fundamental clients’investment objectives, needs and preferences

1

Adjust the product offering across the full spectrum of investment solutions

2

Keep enriching exiting value proposition with distinctive ancillary services

3

Source: McKinsey & Company

4 Make adjustment to the distribution and coverage model

5 Focus management’s attention key on drivers of profitability

To succeed in the retail market, asset managers will need to review their current practices in 5 areas

22

Asset managers will need to enrich their product offerings across the full spectrum of investment solutions

Imperatives for asset managers Implications

22

Segment the product offering by better separating passively managed products, alpha/actively managed products, and absolute return products (i.e., further segregating the portfolio in alpha vs. beta building blocks)

• May require a significant review of– Structure of portfolios– Allocation/utilization of alpha generation capabilities – Assembling and packaging of solutions/products

Make developing or strengthening true and sustainable alpha generation capabilities a top management priority

• May require further investments to – Attract PM/traders with different skills, styles,

capabilities, etc.– Upgrade systems/IT, risk management

capabilities, and portfolio analytics– Improve research capabilities

• Need to look for partnerships/JVs to complement internal alpha generation capabilities

Develop partnerships with other financial institutions to enrich/complement the product suite

• May require considering new types of partnerships, including cross-distributing products, co-investing in product development

Review the existing operational model to offer customized investment solutions in an industrial manner

• May require fundamentally reviewing existing platforms and structures for separate accounts as well as corresponding pricing


23

… to a more clearly segmented market

CAbsolute return

managers

B Active managers

A Index managers

From unclear positioning…

Absolute return managers

Active managers

Index managersA

B

C

Index managers with high tracking errors

Active managers with low tracking errors, but charging active management fees

Absolute return managers that are strongly correlated with market, but are charging hedge fund fees

Rationale• Translation of the ‘core satellite’ approach to organizational structure and risk budgeting• Less willingness to pay fees not aligned with appropriate management style• Need to understand risk exposure and level of correlation in their integrated portfolio

Source: McKinsey analysis

Managers will need to adopt a more specific market positioning based on their management approach

22

24

Value-add relationship can cover different dimensions

Example

Privileged access to internal expertise

• Privileged access to industry experts and niche resources

• Access to geographical specialists (international network)

Privileged access to proprietary research

• Immediate access to databases and research

• Personalized implications on cutting-edge research

• Development of deep and quick knowledge across critical themes

Best practice sharing

• Sharing best practices in trading and back-office management

• Potential for exchange of people

‘When I need access to research on a certain sector, I am calling my managers, not my capacity-constrained research group.”

“The ultimate goal of Yale’s asset manager selection process is to find those managers with whom we can have value-add relationships, not just asset management services.”

“One of our criteria for investment is whether we will be a significant investor for the asset manager and if we will get the accompanying benefits.”

Thought partnership on investment strategies

• Greater opportunity to thought partner and co-develop investment strategies

• Regular discussions of investment trends, themes, and emerging strategies

Source: McKinsey analysis, interviews, lit search

33

25

Firms will need to enhance their Sales & Distribution function

Source: 2008 McKinsey/USI AM benchmarking Sales & Distribution survey and interviews

Client segmentation

• Systematically segment clients and coverage based on buying behavior and revenue potential

• Forge deep strategic relationships (key accounts) with top 10% of clients

1

44

• Upgrade sophistication of sales force with deep knowledge of clients and products • Tailor products and services sold based on deep understanding of clients’ needs• Increase use of regional generalists supported by dedicated product experts for priority clients due

to increasing channel convergence

Sales force skills and structure

2

• Increase size and more closely integrated CR function with sales and service, e.g.,– Systematically identify consultants needed to access key sponsors – Tier consultant coverage (frequency and quality) based on importance

Consultant relations

3

• Establish more strategic “relationship management” role for priority clients– Separate sales and client service to increase focus and better align skill sets– Assign junior reps for routine servicing and servicing tier 2-3 clients

Client service

4

• Strong emphasis on deep product knowledge driving– Increased hiring/use of MBAs, CFAs– Increased spending on product specific training and pushing product knowledge out to sales force

• Adopt more subjective incentives

Talent/ incentives

5

26

Approach adopted

Tiering clientele helps firms to better allocate servicing resources

Source: McKinsey Asset Management Practice

DISGUISED CLIENT EXAMPLE

Total clientsNumber

46

14Tier 1

Tier 2

117Tier 3 15

20

65

15

10

75

Total revenues%

Total AuM%

Available within limits to meet client needs

Available through exceptions process

�

�

• Standard monthly statements• Quarterly product overview• Custom reporting and analysis• Specific risk report• Custom commentary

Reporting and analyses

Client apprecia-tion

Client meetings and interac-tions

• “Trinkets and trash”• Dinners• Entertainment• Sponsorships/charity

• Single client service rep• Quarterly investment review• Remote access to product

specialist• In-person access to product

specialist• Access to portfolio manager• Standard meeting materials• Custom meeting materials• Invite to Client Conference

Tier 3

��

��

Tier 1

��

��

��

�

��

Tier 2

��

��

��

�

��

��

�

��

Clientele segmentations

Activities

Client proactively decided to allocate more than two-thirds of “servicing resources”to Tier 1 clients

44

27

Clear opportunity to differentiate sales and service fordistinct client segmentsPercentage of firms responding yes

Question: Does your firm segment clients?

100

66

Best practicefirms

All firms

Question: Does your firm tier service levels?

Best practice firms

All firms

75

57

Clear opportunity remains for all firms to develop differentiated service levels

Best practice firms segment clients to better tailor sale approaches

Source: 2008 McKinsey/USI AM benchmarking Sales & Distribution survey and interviews

44

28

Asset managers will need to focus on the 3 key drivers of profitability

Asset manager profitability

Client retention

Discipline in fee

discounting

Context Increased competition in the industry, with a significant number of players focusing on specific niches to offer distinctive value-add services

ContextMore than 90% of institutions have only one mandate with each external manager

ImperativesMake additional efforts to cross-sell opportunities, given minimal cost for serving a client on additional assets

Cross-selling opportunities

ContextApplication of significant fee discounts on actively managed products in last years to secure mandates

ImperativesRecognize that limiting practices like pricing is not a key decision factor for most institutional investors

ImperativesReview existing resource allocation between business development and relationship management

Review incentives mechanisms across the organization

55


29

To succeed in the retail market, asset managers will need to review their current practices in 5 areas

Further leverage existing distribution platforms or explore opportunities in new channels

1

Strengthen investment management capabilities as performance is critical to receiving flows

2

3 Avoid pricing wars and unprofitable discounting

4 Strictly limit the number of new products launched

5


Align sales force around core products with a proven track record

30Source: IFIC Canada; CI Financial

Recent market conditions are accelerating the consolidation process in the Canadian Mutual Fund market

Total mutual fund AUMCAD $ Billions, Percent

• The top 5 players have 56% of the market share-14% more than they had in 2002

• In the past 8 months alone, the top 5 have increased market share by 4%

42.052.0 56.0

30.0

26.024.0

28.022.0 20.0

391.3

2002

697.2

2007

633.6

2008 YTD

Remainder

Next 5

Top 5

100% =

-4

6

Top 10 Canadian asset managers# of firms

• All firms with dedicated distribution have been gaining market shares to the detriment of independent players

With dedicated distribution

Without dedicated distribution

Winning market shares2007-2008

Loosing market shares2007-2008

Average change in market shares +3.2% - 2.0%

31

To succeed in the retail market, asset managers will need to review their current practices in five areas

Further leverage existing distribution platforms or explore opportunities in new channels

1

Strengthen investment management capabilities as performance is critical to receiving flows

2

3 Avoid pricing wars and unprofitable discounting

4 Strictly limit the number of new products launched

5


Align sales force around core products with a proven track record

32

Conclusion

Industry is entering in a new era where• Margins are expected to drop significantly compared to

historical levels• The difference between players of top and bottom quartiles will

be further accentuated

1

Winners will be those who will rapidly respond to the fast-changing needs and preferences of investors

2

Firms’ performance in 2008-09 will be largely impacted by the management’s capacity to focus on drivers of profitability and manage cost rigorously

3

Navigating the storm: Implications of the crisis on the ......Navigating the storm: Implications of...

Documents

Transcript of Navigating the storm: Implications of the crisis on the ......Navigating the storm: Implications of...