I think this is bad for the long-term interests of clients; the industry must recognise that it must adjust to a lower fee environment as part of restoring investors’ trust. The 1990s saw cost-income ratios go from 50% or so to figures that were in the 70% or so range and this became the norm.
I’ve been in this job for ten years and I’ve been consistently wrong that performance fees would become more widespread and that fees generally would go down. But I still haven’t seen good arguments against wider adoption of performance fees.
Some people complained about the application of the investment bank rules on remuneration to asset managers. But we were all happy to be paid the same as investment bankers when things were good, so we can’t be that surprised.
That said, the constraints on bonuses in investment banks are a problem for us as a business because they have encouraged us to expand our fixed salary base. It makes it much harder to connect pay to profits and investment returns, the model that had helped the industry adjust to cycles in profitability. This will be much harder now.
The only real threat on the regulatory landscape is FATCA in the US. If that is not significantly changed, it will have a massive impact on international investing by drawing a dividing line between US-domiciled investors and the rest. Given the more pessimistic growth outlook in the US, a change here is likely.
The same deteriorating economic outlook means that we may have some moderation of the prospective capital requirement regime in the UK. In general, though, I’m not kept awake by regulatory reform; I think there will be moderation.
For us the Volcker rule is not a big issue, either; we’ve just started our second infrastructure fund and we will put in $60m rather than the $100m we would have allocated before the change; this isn’t a big problem for us.
When it comes to emerging markets, the way you interact with the regulator has to be very different
But in developing markets it’s much more about keeping the regulator informed so that they understand what you’re doing and there are no surprises – it’s more of a mutual education. It’s also very personalised; you need to work hard to build a relationship with those running the regulatory bodies because the regulation is often heavily influenced by these individuals.
I think we can expect to see continued growth in ETFs. As large numbers of people retire, they will want to manage their own money more. They know that much of it comes down to asset allocation; they’ll lock a certain amount of their assets up in ETFs. It’s true that as a convenient means of managing both strategic and tactical asset allocation, passive managers took a knock during the crisis because high volatility increased their trading fees
But it’s been especially hard for active managers: especially in the US, the growth of high frequency and momentum trading has made it hard for value managers to outperform. I think there is still a long way for the share of passive funds and ETFs as a proportion of total assets under management in the industry to grow – intuitively it feels like 40% or so might be a stable share of the market.