BOSTON -- Go west, young money manager, or for that matter, east, if you're interested in grabbing a bigger chunk of the global asset management business.
According to a new report from Cerulli Associates Inc., money managers would do well to look outside of the United States for new business.
While Cerulli Associates believes the United States will remain the largest, most profitable market for money managers for years to come, the firm expects more than half of the world's asset management revenue will come from outside of the United States before 2002.
Greater growth capacity
That revenue will be about $160 billion by the end of 2002, with about 49% coming from the United States, 25% from Asia and 26% from Europe. That contrasts with estimated year-end 1998 asset revenue of $103 billion, with 62% from the United States, 15% from Asia and 23% from Europe.
The reason is that while investible asset pools in foreign countries (total personal financial assets plus total pension assets) aren't necessarily growing any faster than those in the United States, there is much greater capacity for growth of professional asset management.
For example, of the estimated $65 trillion in investible assets in 1998 in the G7 countries plus Spain, about 47% ($30.6 trillion) was in non-U.S. markets. Of that, only 18% was professionally managed, compared with 30% of the U.S. total of $34.5 trillion of investible assets.
Cerulli consultants identified several global trends that will push those unmanaged non-U.S. assets into professional asset management and also will change the way the assets now professionally managed are allocated:
* a general move by consumers to an investing culture from a savings one;
* relaxed investment restrictions in many countries;
* big retirement funding gaps that will require higher investment in both foreign and domestic equities; and
* demographic shifts that will lead individual investors to seek higher-margin investment products.
Apply to pensions
With regard to pensions worldwide, aggregate pension fund exposure to equities (excluding the United States and the United Kingdom) was only 34% at the end of 1997, the most recent date for which reliable data are available. By contrast, U.S. pension plans had an aggregate 51% equity exposure; and U.K. pension plans, 75%.
Non-U.S. pension plan assets also will grow faster than in the United States, Cerulli consultants project, with non-U.S. defined benefit plans growing about 9% per year until 2002, compared with 5% per year for U.S. defined benefit plans. Non-U.S. defined contribution plan assets will zoom ahead, with 16% growth per year until 2002. Cerulli predicts defined contribution plan assets will account for 17% of non-U.S. pension assets by 2002, compared with about 14% at year-end 1998, as more pension reform sweeps through various countries.
Cerulli Associates does predict that more countries worldwide will move to a defined contribution plan model to close retirement funding gaps and improve pension portability. But, the report emphasizes, other countries are unlikely to follow the U.S. evolution to a 401(k) plan model.
One reason for a different growth path is a likely demand from foreign pension sponsors for more institutional-style investment management, rather than mutual funds.
In general, Cerulli consultants predict, "firms with institutional-format products -- separate accounts, by and large -- confront a different environment than the one faced by firms seeking to sell their retail-format products, such as mutual funds. The rise of global gatekeepers, primarily in the form of pension consulting firms, has created a more homogeneous competitive environment in the institutional segment, somewhat leveling the playing field for U.S. money managers. The gatekeepers create greater relative channel efficiency; the correlation between the costs of gathering U.S. institutional assets and overseas institutional assets is becoming slimmer."
Playing field narrows
The authors of the Cerulli report found investment consultants oversee manager selection at "virtually every U.S. institutional investor holding more than $100 million in assets" and the "majority of manager searches conducted by large non-U.S. institutions as well."
But managers hoping to use their relationships with pension consulting firms to gain access to global asset management face a narrowing field of opportunity.
Cerulli consultants predict that just three global investment consulting firms will dominate the field in manager selection within the next five years. These are: the combination of William M. Mercer and Sedgwick Noble Lowndes (which Cerulli predicts will be merged by their parent company, Marsh & McLennan Cos.); Towers Perrin; and Watson Wyatt Worldwide. A fourth company, Frank Russell Co., has been powerful in serving institutional investors in the United Kingdom and Japan, but Cerulli consultants think Russell's new parent company, Northwestern Mutual Life Co., might spin off the consulting arm, complicating its future as a global consultant.
Overseas markets present a huge potential for U.S.-domiciled money managers, which now manage about 14% of the total of non-U.S. retirement plan assets and just 50% of non-U.S. mutual fund assets, said Cerulli consultants. Only about 15% of U.S. managers' assets come from foreign clients. By contrast, about 25% of non-U.S. money managers' assets are from foreign clients.
Among the many market penetration strategies the Cerulli report suggests, joint ventures, unless very well thought-out, might not be the best route to global asset management success.
Most joint ventures fail
There were a record number of cross-border joint ventures in 1998 -- 29. About 50% of all cross-border joint ventures were launched in just the past three years.
But their futures might be bleak. Cerulli consultants found 28% of cross-border joint ventures formed since 1979 are now defunct. Of those joint ventures struck before 1996, 52% failed. In fact, the majority of joint ventures announced each year up until 1994 no longer are operational.
Most instigators of cross-border joint ventures were U.S.- and U.K.-based firms. Reasons for failure, according to the report, are as diverse as poor asset growth; contentious partnerships; poor marriages of corporate cultures and cultural expectations; mergers and changes of management or ownership; the U.S. or U.K. partner quickly developing in-house global asset management capabilities; and the institutional market being distrustful of joint venture partnerships.