IMA presentation to HMT on 15-09-08 The Economic … Economic Role of the Investment Management...
Transcript of IMA presentation to HMT on 15-09-08 The Economic … Economic Role of the Investment Management...
The Economic Role of the Investment Management Industry
Dick SaundersChief Executive
HM Treasury 15th September 2008
1. The industry’s role2. The changing retail market3. Competitiveness of the UK4. The credit crunch
The intermediary between investors and their investments
What this means
• Investment manager has agency relationship with clients, different from that of, e.g., a bank– Client assets are not on investment manager’s balance (unlike
bank or life company)– Held by independent trustee or custodian– Arm’s length management fee– Aligns investment manager’s interest with those of client –
incentive is to keep client and maximise value of investments
• In capital markets, investment managers act as “buy side”– Act as agents for end investors (ultimately individual savers)– Users of the market, as opposed to investment bank “sell side”
who are the market– Interests of the two sides are quite distinct
Some numbers (Dec 2007)
• Assets managed in UK - £3.4 trillion (34% of EU assets)• £1 trillion for non UK clients (est. BoP contribution £3bn)• Industry revenues (est.) - £10.2 bn (0.6% of GDP)• UK funds £468 bn (non UK funds £570 bn)• Ownership of UK listed shares – 44%
Some charts (Dec 2007)Assets managed in the UK – ownership
of firmsAssets managed in the UK – client type
Some more charts (Dec 2007)Assets managed in the UK – asset
allocationAssets managed in the UK – equity
allocation by region
Who are the biggest institutional players?
Who are the biggest retail players?
Top UK Retail Fund Companies
(December 2007)
Industry concentration
Market share of largest Asset Management firms
(% of total UK AUM 2002-2007)
Fragmented, competitive and low barriers to entry
Economic functions
Domestic• Providing investors with diversified, professionally managed
investments– Enabling savers and investors to manage risk
• Seeking accountability from company boards– Promoting efficiency in corporate sector
Global• Gathering assets for investment via UK markets
– Critical factor underpinning UK’s global financial centre
1. The industry’s role2. The changing retail market3. Competitiveness of the UK4. The credit crunch
Two key trends…
• Movement away from DB schemes, caused by– Increasing life expectancy– Too low contributions in the 1990s leading to scheme deficits
post 2000-03 crash– Increasing recognition by sponsor companies of open-ended
liability• Why should corporates (and their shareholders) carry that risk?
– Exacerbated by accounting rules– Not by ACT abolition!
• Movement away from old-style “with-profits” savings products, caused by – Over-distribution of bonuses in 1990s– Need to rebuild solvency post 2000-03 crash leads to small or
zero bonuses
…resulting in a move to fund and fund-like products…
• DB pensions and with-profits savings both give a promise backed by opacity as to investment
• Replacement products: DC pensions, unit-linked funds, mutual funds
• Increasingly “wrappers” around mutual fund (as are, e.g., ISAs)
• Implications:– Investment risk (though not default risk) and put into
individual– Increasing intermediation between mutual funds and
investors
…and a word about Europe
• Series of UCITS* directives since 1985 has established a pan-European framework
• Fund management the most advanced cross border financial services market in Europe (though not saying much!)
• Managers want to be able to see Europe as one market comparable to US
• Current UCITS 4 will help that• UCITS established as the leading global brand (eclipsing US
mutual funds), accepted in many jurisdictions, e.g. In Far East and Latin American
*Undertakings for Collective Investment in Transferable Securities
1. The industry’s role2. The changing retail market3. Competitiveness of the UK4. The credit crunch
Three aspects of the business
• Portfolio management – supply side driven– Labour pool, market liquidity, regulatory environment, etc.– UK remains strong, though can never be complacent
• Marketing/distribution – driven by location of end investor
• Head/middle/back office – cost driven– Dublin and Luxembourg success stories, though others may
emerge– UK has suffered because of regulatory and tax costs– Many regulatory costs now sorted out with FSA
Tax and fund domicile
• KPMG report October 2006
• Impact of tax rules makes UK unattractive as fund domicile
• Not about lower taxes, but about streamlining and introducing certainty; more funds domiciled in UK would increase tax revenue
• Currently in constructive dialogue with HMT and HMRC
1. The industry’s role2. The changing retail market3. Competitiveness of the UK4. The credit crunch
The root cause
What will end it
• Banks to come clean about losses
• Rebuild balance sheets where necessary– From the market– From strategic investors– Disposals
• Close down if it comes to that
• Banks will resume lending because that is how they make money
But until then…
Impact on investment managers
• Direct impact limited– Institutional money market funds focused on highly liquid AAA
paper not affected– Enhanced yield money market funds were exposed to toxic
paper– Not a significant feature of UK market, but MMFs big in
continental Europe – EFAMA noted (April 2008) 4 fund closures and 8 still suspending redemptions
– Bond funds potentially exposed, but no significant losses come to light in UK
• But clear impact on investor confidence…
Impact on investment managers
But not as bad as continental Europe
The Economic Role of the Investment Management Industry
Dick SaundersChief Executive
HM Treasury 15th September 2008