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SO far,
banks have been the focus of attention as bearing the
brunt of the credit-crisis impact. But what of the
fund-management sector? This report asks how fund
managers have been affected by the credit crisis—and
what strategies they are adopting in response.
“Beyond
the credit crisis: the impact and lessons learnt for
investment managers” was written in cooperation with the
Economist Intelligence Unit and is based on their survey
of 333 senior executives from across the global and
fund- and investment-management community in March and
April 2008. Respondents were based in fund- or
investment-management firms, institutional investors,
private equity funds, hedge funds and real- estate
funds.
References within the report to “mainstream
fund-management firms” or “fund managers” are based on a
filtered sample of respondents that excludes either
alternative investment funds (private-equity funds and
hedge funds) or fund managers’ key clients
(institutional investors). A range of organization sizes
were represented: 58 percent had assets under management
of at least $1billion; and nearly one in four (23
percent) had assets of at least $50 billion.
Geographically, about one-third (31 percent) were based
in North America, 29 percent in Western Europe, 23
percent in Asia-Pacific, with the balance from the rest
of the world. The respondents were very senior: 41
percent of participants were C-level executives, 35
percent were in SVP/VP or director positions, or were
heads of business units or departments, with the balance
from other management positions.
Some key
findings within the report:
•
Investors do not have the same enthusiasm for complex
instruments as fund managers.
Increasing complexity defines the fund-management
industry today. This survey of fund-management and
-investment professionals reveals that 57 percent of
mainstream fund-management firms use derivatives in
their portfolios. The figure is even higher within large
mainstream fund management firms: nearly one-third of
those with assets of at least $10 billion use
derivatives to a major extent. The survey also found
that half of mainstream fund-management firms manage
private-equity strategies, nearly half manage
asset-backed securities and more than one-third manage
collateralized debt obligations (CDOs). Fund managers
still believe that with the exception of CDOs, all the
above strategies and asset classes will rise over the
next two years. On the other hand, 70 percent of
investors who answered the survey say the credit crisis
has reduced their appetite for complex products.
• Trust
in fund managers has fallen as a result of the credit
crisis.
Fund-management firms have suffered a degree of fallout
from the credit crisis, although nothing nearly as
severe as the banking sector. Well over half of
mainstream fund managers say investment returns have
fallen and about the same proportion report falling
subscriptions. But the damage potentially goes further
than short-term losses in funds: six of 10 respondents
believe trust in fund managers has been eroded by the
effects of the credit crisis.
• Lack
of skills and experience is a key concern.
There is
evidence, in the light of the credit crisis, that some
aspects of fund management require urgent attention. One
in five fund managers that have invested in complex
financial instruments, such as derivatives, CDOs or
structured products, admit to having no in-house
specialists with relevant experience. Investors are at
greater risk still, with about one in three of the
institutions investing in such instruments saying they
have no in-house expertise of these. Rating agencies are
seen as providing little support: One-third of the
respondents agree that rating agencies provide an
accurate assessment of whether an instrument will
default, and just 1 percent of respondents think rating
agencies are very accurate in predicting defaults.
• Risk
management, valuation methods and governance structures
are all being shaken up.
There is
a widespread feeling that fund-management firms need to
re-evaluate what kind of business they are conducting
and the risks they are running. Four out of ten firms
surveyed for this report say they have already
formalized risk frameworks in the past two years as a
result of managing more complex strategies, with a
similar number planning to do so over the coming two
years. Valuation methods have come under intense
scrutiny during the credit crisis and a third of firms
have reviewed this activity, while a further third will
do so in the next two years. An even higher proportion,
38 percent of respondents, have reviewed governance
arrangements—particularly relevant in the cases of funds
that used risky instruments to enhance returns on
supposedly low-volatility funds—and a further quarter
will do so in the next two years.
• Making
fund management successful in the future requires a
renewed focus on the client proposition.
The
credit crisis will sharpen the minds of fund managers:
in a time of increasing uncertainty and investor
conservatism, they need to demonstrate their added value
proposition. The concern is that investors will reject
further innovation, particularly if it involves complex
strategies and instruments. The fund-management industry
will need to prove the doubters wrong by developing
products and services that perform well over the cycle
and in changing economic environments. All-weather
strategies, lifestyle funds, insightful asset-allocation
advice and sound risk-management and governance
practices are all likely to be at a premium in the
coming months and years.
(This
article is an excerpt from a thought-leadership document
entitled “Beyond the credit crisis: the impact and
lessons learnt for investment managers” (July 2008) by
KPMG International. The information here is of a general
nature and is not intended to address the circumstances
of any particular individual or entity. Although we
endeavor to provide accurate and timely information,
there can be no guarantee that such information is
accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act
on such information without appropriate professional
advice after a thorough examination of the particular
situation. KPMG and the KPMG logo are registered
trademarks of KPMG International, a Swiss cooperative. ) |
