Review of BCG’s Asset Management Survey

We had a chance to take a look at the Boston Consulting Group’s annual asset management survey which landed on our desks last week. Each summer the consultancy takes a fairly deep dive into the industry’s overall state of health and reviews its overall performance, as well as discusses emerging products and competitive trends. A few things we found particularly interesting:

  • For the first year since the 2008 financial crisis, revenue earned by asset management firms fell globally in 2016 along with profits. The biggest squeeze in margins come from those ‘in the middle’ i.e. from asset managers without large scale or a niche focus.
  • Global assets under management increased by 7 percent to $69 trillion, however most of that growth came from rising markets rather than new inflows which held steady throughout the year.

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  • One area of growth area that particularly stands out is China, where the asset management industry is still relatively underdeveloped. The country’s assets under management increased 21 percent in 2016, mostly driven by net new inflows. Rising levels of household wealth, along with the development of insurance companies and pension funds, offer the potential for further gains in the coming years. Foreign companies, for whom the barriers to entry to the Chinese market are gradually disappearing, could stand to benefit from this trend.
  • Passive strategies were the largest driver of net fund flows in the US, where the industry is dominated by a few large players (the top 10 firms captured almost all of the inflows). This ‘winner takes all’ trend was less pronounced on the active side of things, where the 10 top firms captured 58% of net inflows.
  • Despite the faster growth of AuM in passive products, passives’ contribution to managers’ revenue pools “remains small.” Revenues from passive mandates grew from about $6 billion in 2008 to $14 billion in 2016, which only represents 6% of the industry’s global revenues. Even though various forecasts suggest passive investments could overtake active by 2021 (in terms of AuM), revenues will likely only reach around 7% of total revenues during the same period.
  • The asset class that has proved to be the most stable during the last few years is alternatives. Even though alternatives only accounted for 15% of AuM in 2016, they made up 42% of total revenues. The next two strongest contributors were active specialties as well as solutions and multi assets.

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The survey concludes that growth in the industry is still possible, however only through a combination of M&A, cost management, and crucially, technology innovation.

2016 Global Trends in IR

BNY Mellon Depositary Receipts group has very recently published their annual report on global trends in investor relations. With 550 companies surveyed from 54 countries, it is probably the most comprehensive barometer of the current themes in our industry. The report provides large amount of comparative information on how listed companies are adapting to the changing marketing condition, touching on topics such as budgets, allocation of management’s time for buy side meetings, reporting lines, use of sell-side, measuring team effectiveness as well as insights into evolving areas such outreach to ESG investors and the use of technology.

Firstly as a qualifier, lets consider the demand side dynamics for global issuers. Despite the inevitable short and medium term swings in investor appetite for a given asset class, market or industry evidence that investors all around the world are diversifying and are increasingly adding a global component to their portfolios. Our own analysis point to over 4,000 institutional investors who hold emerging market securities, versus only 400 in early 20oo’s. BNY Mellon’s own estimates point to number of investors that hold DRs (or, roughly translated as those with global mandates) has increased from from 3,261 in 2Q10 to 4,533 in 2Q15. This figure will, we believe,  continue to grow, and present opportunities in areas where a- investors previously held most domestic bias and b- have considerable assets under management in active management and c- see diversification opportunities globally.

With this backdrop, a couple of things to note from the survey:

  • IR teams are working harder to address the growing global investment opportunity.  This is evidenced by 1- investor meetings taken by C-suite executives and IROs inside and outside their home markets have increased by 12.6% compared to 2013 (from 250.6 meetings in 2013 to 282.3 meetings in 2015). 2- companies almost doubling their IR budget allocation to travel, from 12.8% in 2013 to 24.3% in 2015, which in turn is interesting to contrast with the slight decrease in companies holding analyst/investor days (63% to 59%).
  • Top 10 sources of new investor demand in five years time, according to surveyed companies, will split evenly between emerging and frontier market. US, UK, China, Germany and Singapore lead the pact.
  • Technology tools, such as  conference call/webinar and video conference calls has been increasingly used in toolkit of a global IR officer (72% in 2015 vs. 63% in 2013 and 41% in 2015 vs. 34% in 2013). With the management and IR team time relatively fixed, and the buyside universe expanding – there is no element of a doubt that tools that help reach new investors can increase reach and efficiency, at a fraction of a price. We are strong advocates of using new tools to tell a company story . Can any one see how virtual reality or 360 videos can be applicable to the world of investor relations?
  • Despite the wave of regulations on how investors will pay for research and cooperate access, brokers continue to dominate the company non-deal roadshows arena, however with some signs of this changing. 10% of companies have organised NDRs themselves, up from 5% the previous year. Interestingly, companies rely a lot less on brokers nowadays to provide them with post meeting feedback, and rate quality targeting and introductions at upmost importance.
  • Growing ESG focus – The survey notes that there has been a strong increase (from 37% to 46%) in companies who have strategies in place to communicate with key investors on corporate governance issues on a regular basis, with top issues addressed being Board composition (76%), Transparency and disclosure (71%) and Remuneration (60%). Despite that the actual number of investors who reach out to ESG focused investors is still low (30%), however likely to rise. There is evidence to suggest that institutional investors are increasingly committing to ESG-focused principles in their strategies — whether that be through a more active engagement as shareholders or divestment strategies. 

Source: BNY Mellon Depositary Receipts Market Review 2015, BNY Mellon Global Trends in Investor Relations 2015

Developments in Sovereign Wealth

Invesco Asset Management recently surveyed 59 sovereign wealth funds (SWFs) worldwide and published a report outlining some of the key themes. A few points which we found particularly interesting:

  • Studying the investment preferences of SWFs, there is continued growth in emerging market allocations for new assets, however developed markets remain a preferred choice. Two headline corrections visible are: relationship between emerging market investment and infrastructure and relationship between developed markets and real estate. As discussed earlier, a number of funds are also beginning to targer frontier markets.
  • SWFs cite a number of factors which restrict their investment in emerging markets, such as political instability, corruption, regulation change and a lack of legal protection. These risks are of particular concern to SWFs because they cannot be quantified and many emerging market investments are prohibited by risk management guidelines irrespective of potential returns.
  • The biggest challenge for SWFs is sourcing new deals. Respondents explained that sourcing deals is toughest in infrastructure and is driving greater collaboration between SWFs, especially those across emerging markets. Good example of this is last week’s announcement of Saudi SWFs $10bn into Russia via its RDIF fund.
  • As we have noted earlier with some of largest pension funds, SWFs are relying more on in-house expertise to manage their funds in an effort to bring down costs and improve performance in the low-yield environment. The report points out that the percentage of global equities managed in-house rose to 34 percent from 26 percent at the end of 2013 (see chart below). Historically the vast majority of the fund’s equity investments were outsourced to external fund managers. It is a trend worth watching, and it continues it will mean that SWFs will continue to grow in relevance to Investor Relations Teams teams. Many of the largest funds are already frequently engaging management teams.

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Perceived attractiveness of top 10 economies based on economic performance, private sector investment opportunities and investment opportunities for sovereign investors

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SWFs assets in perspective

Total Mutual Fund AUM: $74.3 tr

Global Pension Fund AUM: $37.3 tr

Sovereign Wealth AUM: $7.3 tr

Exchange Traded Funds AUM: $ 3.0 tr

Hedge Fund AUM: $2.8 tr

Additional reading

 
 

Source: Invesco Global Sovereign Asset Management Study 2015

Are investors ready for a Digital Future?

This is a guest blog post Thomas Toomse-Smith from the Financial Reporting Council. The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.


 

The internet and technology has revolutionised many aspects of communications; however, communications between companies and investors does not appear to have taken full advantage of this revolution.

In order to understand why this might be, and how reporting might evolve in the future the UK Financial Reporting Council’s Financial Reporting Lab (Lab) launched a project to look at digital reporting by companies. The Lab has issued its first report from this project. The report called Digital Present is based on analysis conducted by the Lab from in depth interviews with companies and investors. The interviews were supplemented with the results of an online survey of retail investors.

The report provides practical guidance to companies and highlights some areas where improvements could be made to what currently exists.

The importance of annual accounts

Annual reports remain of paramount importance to investors. However, investors prefer PDF for digital annual reports. They consider PDF not as a substitute for a hard copy, but as a progression from it. PDF provides the best mix of attributes of paper and digital annual report, but companies still could improve the PDF by thinking more about how to deliver the best experience with it on-screen.

Making sense of multi-channel

Alongside the annual report, companies use a range of other channels to communicate information Investors need to consume information on multiple companies in an efficient manner. However, company-produced tools, by their very nature, focus only on the individual company, and the multitude of channels leads to a significant proportion of them too failing to gain traction with investors.

Investors have specific feedback for companies on the most significant channels and tools:

  • Delivery of annual results presentations – Investors want multiple channels to be available (e.g. phone and webcast) preferably with supporting slides. Transcripts of the entire event, including all Q&As, is also deemed important.
  • Social media – Investors do not currently view social media as a useful channel for company produced, investor-focused information. It is seen as repetitive of other channels.
  • Investor relations videos – Many Investors are cynical about the use of video by companies. They consider them to be promotional in nature, and unfocused in aiming at many audiences. Those Investors that value them concentrate on nonverbal information such as body language.
  • Investor relations apps – Apps are not popular with investors. Many Investors find the need to have an IR app for each company prohibitive; they are concerned that this uses up space and adds clutter to their devices, especially when following multiple companies.

Investors who participated in this project suggest that companies:

  • Reduce duplication and focus development towards tools and channels which provide new or additional information.
  • Acknowledge that investors follow more than one company by making tools and channels more consistent in scope and operation with other companies, making them easy to access and locate.
  • Make the purpose of each channel or tool clear to investors, and clarify its contents.

Investors have shown they are open to innovation when it meets their needs to access information relevant to their analysis, across companies and time. To enhance current digital reporting methods and innovate further, it will be important for companies to build on the attributes of current reporting that investors identify as being most helpful.

The Lab will build on the findings from this stage of the project to inform remaining phases. In the second phase, ‘Digital Future’ the Lab will work with companies and investors to develop ideas of how companies could use digital reporting in future to improve their communication with the capital markets. Do you have views on this area? The Lab would be interested in hearing from ClosIR users. The Lab has released a survey alongside the Digital Present report seeking views from those involved in the production and use of corporate reporting. The survey will be open until the end of June and can be accessed here.

You can read the full Lab report here.

BNY Mellon: Insights into North American Investors’ Views of Corporate Access

BNY Mellon recently interviewed 40 institutional investors to gauge opinions on non-deal roadshows by foreign issuers. The profiles of investors, their assets under management, styles and location varied. Findings make an interesting reading, especially in the light of current wave of regulatory spotlight surrounding Corporate Access in the UK.

Trends in North American Investor landscape: 

* There are $13.3 trillion in active  equity assets under management  in North America (approximately 60% of the total active equity assets managed globally), compared to $6.4 trillion in 2008.

* Over 3000 active asset management firms invest internationally in North America, a 75% increase since 2005.

* Top 5 investment centres for international investors are New York, Boston, San Francisco, Los Angeles, Toronto.

Survey findings of the survey (from report’s executive summary)

* 43% of investors rate their current level of corporate access to non-North American companies as ‘Average’ or ‘Poor’, driven mostly by dissatisfaction from investors located in secondary investment centres.

* Regardless of investors’ overall satisfaction with their current direct access, over three-quarters of study respondents state that they face limitations in obtaining access to non-North American companies. This is most pronounced with investors from secondary investment cities, where 87% claim to face some  limitations in gaining access to non-North American companies versus only 69% in primary centres.

– 60% of respondents assert that lack of corporate access eliminates a non-North American company from their investment universe.

– Over a quarter of investors have decreased the number of investor meetings
facilitated by the brokerage community – with the mean percentage of meetings
facilitated by brokers at 68%.

– Before initiating a position in a non-North American company, 72% of investors
require at least one meeting with senior management in order to establish confidence in the team and gain a detailed understanding of the company story and strategy.

– A majority of study respondents agree that operational heads of non-North American companies should be more visible to investors, because their technical knowledge and unique perspectives provide additional invaluable insight to the investment community.

The growing equity assets under management of investors with global mandates will continue to present opportunities for IR teams around the world. However, it will be increasingly difficult for IR teams to facilitate face to face meetings with growing amount of investors, especially in tier 2 and tier 3 investment centres.  We believe effective use to technology in investor engagement can play a large part in bridging this gap in the future.

Download full report