A sset managers are rarely slow to react to investment trends. Thanks to their impressive responsiveness, investors are confronted with a bewildering array of fund choice in every asset class, both traditional and alternative.
However, when it comes to identifying and pursuing opportunities to gain first-mover advantage, asset managers are often less than proactive. At least, that’s the view of Magnus Spence, a consultant with market intelligence firm, Spence Johnson. He maintains they are “extraordinarily reluctant” to seize opportunities to supply third-party funds presented by the growing defined contribution (DC) pension fund market in the UK. He says they regard the DC market as “a horrible low-margin waste of time” and prefer to concentrate their efforts on winning mandates from defined benefit (DB) pension schemes.
Spence Johnson’s research spells out the lessons that asset managers can draw from the long-established DC market in the US. It shows that investment houses eyeing the DC market in the UK will have to be patient, as the business opportunities are only slowly unfolding. For
starters, no one knows exactly how big the DC market is at present, with estimates of its size ranging from £70bn (€80.8bn) to £550bn. The latter figure, if accurate, would suggest that DC is now about two-thirds the size of DB, but Spence Johnson believes DC, at around £360bn, is still only half the size of DB. While predicting that in 20 years DC will be double the size of DB in the UK, Mr Spence thinks it is “incredibly short-sighted” of asset managers to ignore this market.
Asset managers who think there is little money to be made in the DC market are advised to target smaller retail schemes. While it may take more time and expense to build relationships with IFAs specialising in the retail market, the report says smaller plans promise stable flows, sticky assets and higher margins. By contrast, managers that provide large DC plans with more institutional-type products are susceptible to losing such mandates.
A key lesson for asset managers is that so-called lifecycle or target date funds are now offered by more than two-thirds of DC plans in the US, where they account for 20 per cent of all contributions. The report forecasts that target date funds will be offered in at least half of UK DC schemes within five years and will emerge as the primary choice for default funds. Consequently, asset managers are advised to make target date funds a “vital component” of their DC fund offerings.
The drawback, however, is that proprietary target date funds dominate net sales in the US and this situation is not expected to change in the short term.
Another drawback is that, unlike in the US, passive management is forecast to continue to account for as much as 50 per cent of assets under management in large UK DC schemes, thereby limiting opportunities for active managers.
On one hand, it is understandable that such hindrances might deter asset managers from making concerted and costly efforts to penetrate the DC market. After all, while DB may be shrinking as an opportunity, the asset pool will remain large for many more years and DB assets are increasing again in line with stock market rises.
That said, many investment houses have gone to the trouble and expense of forging joint-venture relationships in promising markets such as China and India, in the full knowledge that patience is required and success not at all guaranteed. So why not DC?
Henry Smith, editor
henry.smith@ft.com
