Slow and painful haul to recovery for the industry

The ongoing financial crisis is reshaping business models in Europe’s asset management industry, and there is more turbulence to come, Schroders’ vice chairman Massimo Tosato suggests.

At a time when the integrated global investment bank was the business model to aspire to, Schroders took a critical decision, selling its own unit to Citigroup and focusing on its core business of independent asset management.

Eleven years later, it is a move Massimo Tosato, vicechairman of Schroders, has never regretted. “A credible asset manager needs alignment of revenues with the client’s interest. This is the ideal business model,” he says.

Tough times have proved that even more appropriate. Tosato admits the years ahead are going to be very challenging for the industry, making effective securities
selection – when markets are driven by “moods and flows of information spinning in high speed circuits” – extremely difficult.

As the only continental European on the Schroders’ executive board of directors, he will not comment on the eurozone crisis, only because events are unfolding literally hour-by-hour.

Ever changing trends

“The only thing I will say is that this is a political issue and over 20 years, I have been a witness to the extraordinary political will behind the euro. It is something that sometimes goes beyond rational considerations. So, I believe the euro has a higher chance of surviving, and it is important it does, both for Europeans and the UK.”

He agrees markets get exasperated because the political decision-making is complex, slow and decentralised. “But this is Europe. [Issues] are thoroughly debated at national level; small countries may have influence beyond their size; and the process is full of compromise and accidents.”

The first challenge for the authorities will be to reinforce the banking system. Once that is completed in, say, three to six months, he expects an eventual orderly
restructuring of Greece’s debt.

At the same time, fund managers are battling both short- and long-term trends. Clients are still in the process of de-risking and de-leveraging their investment
portfolios. Long term, Europe still lacks a significant defined contribution pension system as a source of long-term capital to the markets, so there is no significant share of constant savings flowing to asset managers.

There is another disturbing trend in the banking sector, controlling the distribution of financial products across the region. Clients are being driven out of managed funds and into balance sheet products (deposits, structured banking bonds and notes) to help prop up the banking liquidity. The wholesale funding market has been drying up for banks since the beginning of the summer, so they are turning increasingly to their retail base for financing.

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