Pioneer Investments, the asset management unit of Italy's Unicredit bank, has concluded the strategic review that will position it for future growth.
Pioneer Investments, the asset management unit of Italy’s Unicredit bank, has concluded the strategic review that will position it for future growth.
Years of low economic growth will severely impact Europe’s asset management industry, resulting in a polarising “winner takes all” prospect for firms, says Roger Yates, CEO of Pioneer Investments.
“The biggest threat is multi-year low growth,” said Yates. While the growing burden of regulation, and associated costs, are “manageable”, low economic growth feeds through to discretionary income, the credit cycle and client confidence.
There was already a clear tendency for capital flows to gravitate towards fewer product providers in recent years. But a new study puts numbers around the anecdotal evidence. Of an estimated $180bn of net flows into investment funds, $157bn went to just 10 providers. Asset managers, said Yates, had to be part of the elite, or face permanent struggle.
“It is no good to be quite good. If you are second quartile in terms of performance, you are losing assets.”
Speaking in Italy at the start of Pioneer’s bi-annual Colloquium, Yates said a 10% decline in markets usually results in a 20% decline in profitability for any firm. “Most firms try to mitigate that by cost reduction. We won’t see that decline immediately, it will only become apparent from 2012, because of the lag effect.”
He said the more subtle impact of depressed economic growth is already evident in investor confidence. “They move to low risk assets, which typically carry lower margins for the management firms. Retail investors just run for the hills. They take money off the table and it goes straight to deposits.”
Pioneer has just completed a Strategic Review, initiated after his accession as CEO in 2010, and was now well placed to cope with these trends. It encompassed all parts of the business, including geographical focus, corporate structures and opportunities, product lines and distribution policy.
Geographically, Pioneer is set to withdraw from peripheral areas, such as Russia and Australia, where the firm has not had a strong business. Yates said the cost of running offices in these locations was not the issue. “It is more about effort and focus, in terms of compliance and risk management.”
Product diversification was important, but so was regular “housekeeping”, said Yates. A diverse range of products is necessary to access certain platforms and to raise the corporate profile. Meanwhile the market was becoming more intermediated, with a “relentless increase in margin demanded by distributers”.
The firm is strongest in European markets, notably Italy, Germany, Central and East Europe, but he is looking at expansion in Latin America, and Asia (Taiwan, Singapore and India). By asset class, there is a new focus on emerging markets equities, where a new team will be based in London. Multi-asset and absolute return products are also popular.
The Strategic Review resulted in a decision to grow organically rather than by acquisition. “We looked at the competitive position of the business, organic growth opportunities and what it would take to exploit them.” The process included looking at a number of competing asset managers. “We concluded they needed us more than we needed them,” said Yates. “There are a lot of problems associated with those kinds of transactions, such as investment quality, profitability levels and Byzantine business structures.”
Yates said the Review has been disruptive but he had been determined to be very open about it. No client had raised any question of Pioneer’s position as a unit of Italian Unicredit bank, and there was no question that the parent would sell off the subsidiary to protect its balance sheet. “That is off the table,” said Yates. Some 60% of Pioneers $179bn assets under management derive from Unicredit, while the remaining 40% comes from third party clients.
Meeting future growth targets will be a challenge. Usually asset managers hope to achieve five percent of assets under management growth over a cycle, giving margin expansion of 2-3%, so that the business doubles every six or seven years. But with zero market growth this suggests inflows of €9bn a year, which is “demanding”, says Yates.
However, the newly positioned business gives the best chance of success. The “winner takes all” model has significant implications for distribution. “What we have learned is that there is a big difference between platform distribution and success,” said Yates. “You can be on as many platforms as you like but unless you are in the cross hairs of the buyers you are nowhere. You have to be actively promoted and bought by the distributers.”
Getting to that position means esuring investment performance, first and foremost, “not just the end number but how you got there”. But it is also about brand building, product ranges and business solidity.