NEW YORK Retirement plans will be a dwindling and less profitable source of new business for money managers over the next five years, with rich investors the likeliest group to fill the gap, a report from Putnam Lovell predicts.
Researchers at Putnam Lovell, the New York-based investment banking division of Jefferies & Co. Inc., said investors at home and abroad with portfolios of $1 million or more should be at the forefront of demand for the sophisticated, higher-fee alternative strategies that are poised to boost their share of global industry revenue to 51% by 2012, from 31% in 2006.
The report also predicts: the final stage in asset managements transition to a wholesale industry, dominated by best-of-breed managers and the professional buyers who mix and match them in structured investment products; the growing importance of independent money managers; and Asias emergence as the source of the bulk of new money management business.
The slowing momentum of retirement-related earnings growth might be the most fundamental shift with which money managers have to grapple. An industry where most of the growth in the past five to 10 years has come from the interaction between defined contribution and mutual funds now will have to look to other pockets, Benjamin F. Phillips, managing director of strategic analysis and an author of the report, said in an interview.
Thats partly a demographic question, with the baby boom generation giving way to a smaller Generation Y, whose savings activity is earmarked to a greater extent for nearer-term goals, such as education. That transition should result in larger numbers of smaller accounts, a less profitable proposition, the report said.
In addition, the retirement plans being hammered out in fast-growing overseas markets such as Latin America and Asia arent promising the kind of nirvana that the 401(k) experience has been for the industry, Mr. Phillips said.
In contrast to the United States participant-directed, mutual fund-based system, these state-administered overseas programs offer marquee mandates, but at razor-thin pricing that has left some fund managers avoiding the business altogether, according to the report.
More than tripling
The combined assets of sovereign funds government reserve funds built through foreign exchange receipts could more than triple to almost $10 trillion by 2012. But they arent likely to be a panacea for money managers looking for a new source of asset growth, either, the report said. Thats because for the most part the infrastructure, business and finance investments those funds focus on will be managed internally, the report said.
Instead, the rich and, to a lesser extent, the mass affluent, with portfolios exceeding U.S. $100,000 are the groups that hold out hope for further expansion of the fund management industry. The number of dollar millionaires in emerging economies is rising even faster than in the developed markets, and with those wealthy individuals more open to sophisticated, higher-fee products, they should exert a greater influence on fund management revenues during the next five years, the report said.
The reported predicts the separation of manufacturing and distribution in the investment management industry will continue to pick up speed, heralding the final act in asset managements transition to a fully wholesale industry.
The share of industry assets managed by independent and publicly traded money management firms will jump to 33% by 2012 from 24% in 2006, while bank-affiliated managers will see their share drop to 36% from 42%, and insurance-company affiliated managers, to 24% from 26%, the report said.
That trend will be accompanied by the continued rise in importance of professional buyers the gatekeepers at investment banks, insurance companies and private wealth managers who assemble and package the manufacturing capabilities of an array of money managers to provide complex financialstrategies for clients.
More dispersion possible
While professional buyers, depending on their size, can wield pricing power in relation to money managers, its unclear if that will cause the healthy margins of 30% to 40% now enjoyed by the money management industry to trend lower. Instead, there could be more dispersion in margins among managers, with stronger, more consistent firms able to auction off capacity in their products at higher fees to buyers desperate to deliver strong performance, said Mr. Phillips.
Increasingly, the industry will see firms with big mutual fund platforms having to choose between focusing on manufacturing or becoming professional buyers themselves by distributing portfolios subadvised by best-of-breed managers.
Another trend will be the growing importance of overseas markets for U.S. managers, with Putnam Lovell predicting Asia and Australia will account for the majority of annual net new business in the fund management industry by 2012. The share of global assets under management in those markets should rise to 30% by 2012 from around 23% today, the report said.
Putnam Lovell predicts that by 2012, foreign client assets will account for 40% of overall assets for U.S. domiciled money managers, up from 27% in 2006.