Rebuilding confidence and enabling growth

Growing funds under management in the post-crisis environment poses a range of new challenges. Managers are responding to those challenges in different ways but it is clear that transparency and robust processes are likely to be key components in rebuilding confidence across the market. 

by Richard Willsher, financial journalist

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The world has changed for fund selectors and professional investors,” says Phil Barker, investment director and head of european business development at Standard Life Investments, the fund management arm of the London-listed Standard Life Group. “Their criteria now drive business perhaps to the larger groups. Perhaps to the groups that are able to employ strong, robust processes rather than boutique fund management groups who rely on the strengths of one individual with particular skills. The buying criteria have moved on.”

The firm is looking to build its business outside of the UK, promoting funds to the institutional market across europe. Barker says Standard Life sees opportunities to grow due to the ‘demise’ of other competitors and because clients are now seeking more transparent products.

Transparency and clarity

“The two key words are transparency and clarity of funds as compared with pre-crisis when investors were willing to buy more complex products. Now, for example, in the credit area whether it's investment grade, high yield or government credit, investors are looking to see what is happening within the fund. They want to be confident that their due diligence can be thorough enough to see what is in those products.”

“The same rigour also applies to understanding the investment process and within that, knowing that the systems that are used to select and monitor assets from a very large universe are robust. Altogether, robust and repeatable processes are key to attracting new business now, in a way that was not the case a year or eighteen months ago,” says Barker.

Although Standard Life’s offerings cover a broad waterfront of asset classes across equities, fixed income and property, a recent fitch ratings report that focuses on credit product managers echoed many of the same client concerns.

The rating firm’s February publication ‘Changing Trends in Credit Asset Management' sets out key metrics that will be used to evaluate credit asset managers. Among these it lists:

• portfolio transparency and valuation;
• fundamental credit analysis skills, experience and resources to ensure increased selectivity and anticipation;
• fundamental investment risk management, as a complement to quantitative risk management based on modelling.

In respect of the last of these, Fitch’ analysts explain, “Risk management processes are being revisited in a context of heightened tail risk and are likely to be less reliant on modelling, and build in greater use of ‘what if’ scenario analysis and stress testing outside the models.” The emphasis on trenchant analysis is clear and implicit in this is the requirement for sound information to work with.

What managers want

This is a theme that is taken up by Helen Webster who is head of products at Aegon Asset Management, where she looks after product development, management and support. “What managers want is to be able to have data which they can rely on. Some companies for example, not ourselves, have moved on to prime brokerage platforms for some of their more sophisticated funds because they weren't getting the information they needed.”

In terms of fund offerings, aegon's background has been in the wholesale end of the market. They have typically sold to fund of funds, discretionary managers, and private banks and therefore, Webster says, the company has had a long-held policy of the fund being clearly defined. Their customers expect their funds to be what they say they are, rather than fudged in their focus. This ‘clean building blocks’ approach to their funds now, she believes, sets the company in good stead for addressing the needs of the current marketplace.

“In terms of transparency and openness, I don't think we have the same issues to address as some of our competitors in the market where there is a definite theme of ‘back to basics’.”At the same time she points out a paradoxical trend in the market regarding derivatives.

On the one hand, post-Lehmans, the drive to transparency has led to widespread distrust of derivatives, concern about counterparty risk and ‘knowing where you stand’. On the other hand risk management has become a major preoccupation and derivatives provide useful tools for controlling risks within funds which investors are keen to see applied to their assets under management.

Transparency and alternatives

This paradox looks set to remain the case, at least for a while. Yet if transparency is a key client concern when dealing with mainstream managers and mainstream asset classes it is an even greater concern when dealing with alternative investment providers.

A march 2009 article published by Adrian Keller and Dimitri Senik of PricewaterhouseCoopers Switzerland noted, “Investors consider strong risk management, compliance and transparency to be as important as a good performance track record. While most alternative providers report on the investment performance and risk results, only a minority volunteer to inform on further key metrics, such as operational risks and the internal control system around the investment process and back office.”

This seems to further corroborate the views of both Standard Life’s Phil Barker and Aegon's Helen Webster that transparency, clarity and robust processes are now the predominant games in town. This, however, is hardly surprising considering the substantial sums that have been wiped off of the value of investors' funds in the last 12 months. The overall thrust that emerges from the views of fund managers, their advisors and consultants is that the investment management industry is in a phase of reconstructing confidence among its clients. Confidence to invest and to seek optimal returns. At the same time the pressure to invest is ever present while real returns on cash are now in many cases in negative territory. Sooner or later investors have to come out to play but they will only choose partners whose products and processes they can analyse, assess and understand. This will be the key to building funds under management post crisis.

Richard Willsher is a London-based financial journalist and former investment banker.