LONDON -- Are money managers wearing rose-tinted glasses?
A new survey by Arthur Andersen Global Financial Services discovered "an almost unbridled optimism among asset managers." Managers believe that a combination of factors -- the privatization of state pensions, older and wealthier individuals investing more of their assets, advancing information technology and removal of regulatory barriers -- will foster asset growth and speed cross-border investments.
Red flags raised
Yet Andersen consultants warn that managers might be taking an overly sunny view. Among the red flags they raise in the report:
* Managers expect assets under management to grow by "a surprisingly low 44%" over the next five years, although one-fifth project assets doubling during that period.
* Managers expect the Internet to play a key role in distribution, but most are ill-prepared to take advantage of it. Instead, most are relying heavily on existing distribution channels despite their growing cost structures.
* Many baby boomers are having children later in life, plus they need to support aging parents, diverting resources that otherwise might be available for investment.
* Privatization of state pensions will spur increased regulation, including government intervention in local securities markets, investment performance standards, capital adequacy requirements and other factors affecting product design and profitability.
* Distribution will become more critical, while barriers to entry into the business will fall, making it easier for non-financial firms to grab market share.
* European money managers in particular are vulnerable to U.S. competitors who offer superior customer service and technology.
* Global consolidation within the industry will knock out many weaker players.
"It's not all roses," said Clive Bouch, head of Andersen's London-based asset management practice.
In the fight for supremacy, Europe will be the major battleground, the study of 319 money managers and corporate executives around the world found. When asked which three markets would drive industry growth into the next century, 85% cited at least one European country. Not surprisingly, 95% of European respondents cited at least one European market. More threatening to the Europeans is that 84% of U.S.-based firms also cited a European state.
Germany high priority
Top on the European agenda --and second overall -- was Germany, cited by more than 50% of participants, because of its high level of pension underfunding. Other important European markets were the United Kingdom, France, Italy and Spain. The United States ranked as the most important market in the world, while Japan ranked third.
Only 3% of respondents mentioned a Latin American country, despite recent pension reforms there. That response might have been skewed by the Brazilian economic crisis earlier this year, when most of the interviews were conducted. The study also warned that European managers are ignoring Asian markets, and might lose out to U.S.-based firms.
Little Internet distribution
Also surprising was the extent to which money managers are ignoring e-commerce. While managers estimate, on average, that in five years' time 21% of their revenues will come from Internet-based distribution channels, most have ranked investment in such technologies well down their lists of priorities, according to the survey.
"From a strategic standpoint, the prevailing concern appears to be very much about getting the most out of existing distribution channels, rather than working to develop alternative means of reaching customers," the study said.
"Is this just short-term thinking on the part of existing players and does it provide clear points to areas where new entrants, unburdened by corporate history, will prove most successful?"
The study observed that managers might be missing the chance to create "a genuine competitive edge."
Also important to a manager's survival will be its ability to deliver high-quality service, whether in the institutional or retail market. "Whichever sector you're in, service will increase as a priority," Mr. Bouch said.
While global consolidation is expected to continue, U.S. money managers are expected to dominate the list of survivors. One-third believe Fidelity Investments will be a viable competitor in 20 years' time, followed by Merrill Lynch & Co. Inc., Deutsche Bank AG, Goldman Sachs & Co., Vanguard Group Inc. and Morgan Stanley Dean Witter. Aside from Deutsche Bank, other European players expected to make the top 10 are UBS AG and AXA-UAP S.A.