The UK asset management market has seen the greatest number of outflows since the recession in January this year, with investors growing increasingly frustrated with volatile markets. The impending referendum with debating on a potential Brexit has only added to potential woes. Global Stocks dropped significantly with fears of China’s slowing economy & currency depreciations. Seemingly, with ‘banker bashing’ becoming a subject of a bygone era, focus has turned towards the asset management industry, with the FCA continuing front to back reviews of firms not least looking at justification for management fees. The continuing struggles of asset managers can be highlighted by the UK firm Aberdeen Asset Management falling from the FTSE 100 into the 250 and assets under management (AUM) dropping by 38bn from last year. So with this in mind, what should the asset management market be expecting over the next year and is it as bleak as it first appears?
The mere thought of a potential Brexit is leaving the markets flat, with the fixed income and equity market’s both underperforming nearly half way through the year. Despite this, several high profile supporters of Brexit have emerged with Alexander Darwall (Jupiter) and Peter Hargreaves (Hargreaves Lansdown) both committing personal funding to the No campaign. Strangely enough, they are not the only two within the fund management world to be in support of a Brexit, with fund managers the largest contributors to the No camp. However, as it is well documented, should a Brexit happen, the distribution of UCITS Funds as European vehicles will have to be re-packaged along with other significant EU Funds. David Harding of Winton and Manny Roman of Man Group see this to be one of the many factors to keep a united Europe and committed significantly to the Yes camp. Conversely, Moody’s have commented that a UK exit “would pose little threat to asset managers’ creditworthiness and have minimal impact on the management of institutional assets.” However, in a time where AUM on the whole is on the decline, a shift in the status quo would surely create more uncertainty in the already volatile markets. Simmons & Simmons noted, in their seminar on the topic, that there are counties (Switzerland / Norway) who hold particular relationships with the EU which allows them to trade as “third-country firms” that may allow for a similar arrangement in the UK. However, no relationship of the sort is promised for Britain and for a No vote on 23rd June would not put the UK at the top of the list to be given any favours by the remaining EU member states. In the same seminar, they also highlighted the capacity of other regulators within the EU, showing how no one nation within the EU could cope with a sudden influx of new registrations, from the sheer volume of financial institutions HQ in the UK.
The regulatory landscape that surrounds many of these issues stands fairly similar to that of last year; AIFMD, UCITS V, MAR, EMIR and MiFID II/ MiFIR is still ever prevalent in everyone’s minds, but for the vast majority there is still uncertainty of what MiFID II will look like. A senior regulatory professional from a global fund when asked on the topic, commented “the biggest change for buy-side firms will be that they have to think like the sell-side” a trait that is not always forthcoming within asset managers in particular. A recent survey by Funds Europe found that of 50 AM firms, only 18% had begun implementation of MiFID II, regardless of the delay. The same survey also highlighted that the two biggest concerns for asset managers surrounding MiFID II was change to the Distribution Inducement Ban, and wider market infrastructure, both of which drastically change the way business is conducted. Product Governance is also key, however the FINMA has implemented a product governance rule which could be used as a template in an almost blueprint-like capacity. With all regulatory pressures, it can be easy to chastise regulators and condemn them for the over exposure, one global CCO commented recently however that “there will never be a COO or CEO who does not think that there is not enough regulation”.
Like with most challenging markets, there are also opportunities and there has been an increase in M&A activity across the asset management market. Roger Altman of Evercore predicted, whilst speaking to Bloomberg, that there would be more action across M&A market within funds: “It really depends on the type of asset management, because right now you’re seeing big outflows of assets from a lot of big, long-only-centered managers and into passive hands, into index-fund-type hands” Altman said. “But I don’t think it’s surprising to see asset-management transactions. There have been really quite a few of them.” He went on to mention that due to the relative stability there is more openness to change and develop. For example, GAM are currently looking to on-board THS (boutique Fund Manager) and add a potentially exciting other string to their bow. Whilst Old Mutual are looking to sell off their US Asset Management business and set out an IPO for the UK Wealth Management arm.
With performance a major issue for concern, and firms such as Henderson GI, who made the most of good markets in previous years, are now starting to struggle into 2016 – it could be said that they were not looking at contingency plans after squeezing profits in China. Firms, such as Jupiter and Schroders have capitalised on others shortfalls and rallied coming into the start of this year. The impact on hiring has taken an effect across the market, a number of senior redundancies across Legal & Compliance, leaving it fairly flat and new headcount especially across Legal & Compliance being left thin. This is perhaps to be expected with the last couple of years, bringing high levels of hiring within the space, and asset managers in particular looking to hold on to talented individuals and upskill internally.
With the UK asset management industry accounting for a little over 4 trillion in AUM, as well as being the second biggest to the US (30 trillion), it would be difficult to see a complete shift of focus to another European centre should a Brexit ensue. However, there could be a shift from many European and global firms perhaps to hubs like Ireland, Luxembourg or even the Netherlands, whilst also slowing the UK economy at a time when the markets are already proving to be a challenge. Regulation in particular will continue in a similar pattern, with a watchful eye on MiFID II and the impending implementation stage, many commentators also expect closer focus on surveillance as MAR (Market Abuse Regulation) comes into effect. Asset managers remain concerned with spend across legal and compliance departments which has resulted in minimal movement in senior positions, but we anticipate after the annual summer hiring hibernation, markets to rally with more movement at the senior end. Of course if a vote for Yes is the result after 23rd June.
For any further insight or questions on this paper please contact Max at Fides Search, malfano@fidessearch.com :+44 (0) 20 3011 0698