Innovation for asset management 2012 survey

Whats new?

Contents
Foreword . . . . . . . . . . . . . . . . . . . . . 1 Survey results . . . . . . . . . . . . . . . . . . 3 Categories and drivers . . . . . . . . . . . . . 5 Budgeted innovation spend . . . . . . . . . . . 9 Processes and committees . . . . . . . . . . 13 Outsourcing . . . . . . . . . . . . . . . . . . . 17 Future . . . . . . . . . . . . . . . . . . . . . . 19 Methodology . . . . . . . . . . . . . . . . . . 23 Contacts . . . . . . . . . . . . . . . . . . . . . 25

Foreword
Innovation. Increasingly, we find the word in many company brochures, annual reports and marketing campaigns. But what is innovation beyond the buzzword? Innovation is not a recent phenomenon. Man has been innovating since the first stone tools were used; however, research into the process of innovation itself is a relatively recent development. While innovation is no longer an alien term, it has not always been associated with developments in financial services. The legends of great innovations are ubiquitous. 3Ms Postit note began as a solution without a problem. The adhesive was invented in 1968, but it wasnt until 1974 that the idea of the Post-It note materialized. Post-It eventually became one of 3Ms biggest brands. Landmark innovations from the last 20 years alone include mobile phones, the internet and social networking. Indeed, the top five young technology firms; Apple, Amazon, Baidu, Facebook and Google are valued at close to US$1 trillion. Every entrepreneur knows that innovation and growth are linked, and that in mainstream businesses competing to maintain market share against cloned services, the mantra is innovate or die. Regardless of the current economic climate, demographics are shifting quickly: levels of wealth are increasing, especially in emerging economies; consumers are becoming more financially savvy and in turn more demanding; technology is increasing especially social and mobile technologies; and regulations are growing. With all this change, now more than ever, asset managers need to be quick to adapt and innovate on all fronts product, distribution and technology. Innovation is sometimes a pejorative word in the financial services industry. Public sentiment is that innovation in technology is good, but innovation in financial services is dangerous, and for many, it evokes memories of complex products and financial engineering that have been partly blamed for recent financial disclocations. Yet innovation has to be the sine qua non of the asset management industry in particular, and there are several drivers. Demographics is primary, given the need for decumulation to service the needs of ageing populations around the world. The economic growth of the BRICs and emerging markets around the world continues apace. And finally, the need to generate alpha, ideally on a guaranteed basis, in a business climate of greater transparency, variable correlations and concentration risk. Innovation, when coupled to fiduciary responsibility, boosts reputation the converse spells reputational risk. Ernst & Youngs Innovation for Asset Management Survey 2012. This is Ernst & Youngs first innovation survey for the asset management industry. The data behind the survey was gathered in conjunction with Institutional Investors European Institute faculty with participation from 36 global bank-owned, insurance-owned and independent asset managers, who collectively manage over US$10 trillion of assets under management (AuM). The survey canvassed the views of CEOs, CIOs and other heads of innovation across asset managers running different portfolio manager styles spanning active, passive, exchange-traded fund (ETF), quant, alternative, real-estate, UCITS and liabilitydriven investment (LDI) strategies. We would like to thank all respondents for investing the time and energy behind this initiative. Some of the key findings were recorded as follows.

1 Coca-Cola a brand, marketing, packaging and distribution innovator was ranked by Interbrand as the worlds most valuable brand in 2011. 1 | Whats new? Innovation for asset management 2012 survey

Seed capital is becoming harder to come by. 42% of respondents would seed a new product with more than US$30 million. The results suggested that the provision of seed capital correlated strongly with the firms AuM. 70% of respondents would seed for durations of one to three years. Although the investment backdrop suggests that seed capital is likely to remain scarce, not all firms are restricting seeding. For example, some firms said they would partner with third parties where the co-investor looks to receive a discount on fees, typically offered out within a 12-month cycle. Key geography for innovation is Europe. One might have thought future innovation would center on emerging markets. However, the majority of European based respondents indicated that Europe was still the top focus for product innovation and investment. Based on our scoring methodology, the top focus was Europe (47%), followed by North America (20%) and Asia (19%). Many respondents commented that the key drivers for innovation were demographic, for example, further developing defined contribution (DC) and decumulation strategies for developed markets. Fixed income and equities are still the main areas of focus. Individual firms indicated a preference for developing new funds and products such as farmland funds, new over-the-counter (OTC) instruments or offering distribution platforms. However, they told us that the majority of their innovation budgets remained focused on fixed income (26%) and equity products (29%), including equity income and absolute return. One asset manager puts this succinctly, Our current focus is centred around outcome oriented solutions based on multi-asset strategies.

Innovation comes from the CIOs and the CEOs. A majority of firms (83%) said that the Chief Investment Officers (CIO) was a key innovator. The results from the survey also indicated that clients represented the biggest source of innovation. However, CIOs and CEOs spend on average 20% of their time with clients and said that innovation was seldom an area of discussion. It is imperative that asset managers think of more effective ways of engaging their clients to innovate on products. Functions such as sales and investment professionals, that do interact with clients more frequently, need to be better leveraged for ideas in support of innovation. Outsourcing decisions need to be well thought out with regard to future flexibility. Several firms, described their relationship with select outsourcers as more like that of a business partner than a third party, directly providing additional input into the innovation process. However, 33% of respondents felt that outsourcing actually inhibited innovation rather than drove it under circumstances of significant regulatory change, stressed market conditions or complexity. Many firms expressed irritation at the loss of control. In the outsourced scenario, they tell us that outsourcers were sometimes slow to respond to the pace or depth of change requests, that change requests were expensive and that there was a lack of engagement when modeling extreme event risk. Innovation is clearly on the minds of many C-suite executives, and the results of the survey have given us grounds for renewed optimism, and many interesting insights. We are confident you will gain insights and value from reading our report.

Whats new? Innovation for asset management 2012 survey | 2

Survey results

3 | Whats new? Innovation for asset management 2012 survey

Whats new? Innovation for asset management 2012 survey | 4

Categories and drivers

5 | Whats new? Innovation for asset management 2012 survey

Unsurprisingly, asset managers have differing definitions of innovation

Asset managers had a wide range of different definitions of innovation and in many cases a firms definition of innovation provided deep insight into their ethos. Many viewed the meaning in different ways purists felt that it should only apply to something totally new, differentiable from peer offerings. While others regarded the term more broadly, counting repackages, style shifts, derivatives or structured products as innovative. Almost all asset managers considered the creation of new products as innovation. LDI and variants of ETFs for example were mentioned several times. Other examples included entering emerging markets, farmland funds, developing new OTC instruments such as variance swaps, or focusing on specific types of distressed assets such as packaged loan repayments. Creative solutions tailored to meet the needs of each client were cited by 31% of respondents in terms of defining innovation. Examples included pooled LDI funds, buildingblock Qualifying Investor Funds (QIF), tailored ETFs or custom liquidity swaps. Some firms defined innovation in terms of offering improved risk models/risk optimization. Others defined innovation in terms of productivity/ efficiency of product manufacture/distribution/ Independent Financial Adviser (IFA) or research portals according to principles such as total quality management (TQM) or immer besser. Firms with a quantitative orientation saw innovation in terms of making improvements to static or dynamic strategic asset allocation (SAA)/tactical asset allocation (TAA), or improving currency overlay, portfolio insurance or multi-asset capability. Finally, a significant minority cited the development of platforms, modeling tools or full-blown vendor solutions as innovative.

How does your business define innovation?

Which of the following categories would you classify as innovation?

8% 19% 17% 100 Product-based Risk-based Asset Allocation Dont know/No response Creative solutions Productivity/Efciency Other/General 31% 80 60 40 20 0 New products New combinations Business model Infrastructure Style shift Other 92% 69% 53% 39% 22% 11%

6%

8% 11%

Respondents were asked to select any applicable options.

Whats new? Innovation for asset management 2012 survey | 6

Clients, technology and regulations are top three drivers behind innovation
The survey scoring methodology shows clients to be the strongest drivers of innovation, followed by technology as an enabler. Perhaps surprisingly, global, regional or local regulatory measures and changes from governments applied particularly to their interaction with channels were cited as strong drivers of innovation as well. Equally, surprising perhaps were the lower scores reported for academia and investment consultants, although the survey did record that academia played a more significant influence in certain countries such as the US or France. There was negative comment that some investment consultants were actually contributing to client mandate risk by directing their innovation efforts at end investors. Other examples of drivers included changes to tax treatments such as Foreign Account Tax Compliance Act (FATCA)/financial transaction tax (FTT) or developments in high-frequency trading. While the survey results showed how clients were often the top drivers of innovation, the executives carrying the torch for innovation were the CIO in 83% of cases and the CEO or other investment professionals (such as the heads of distribution) in 72% of cases. These professionals were typically spending 10% to 30% of their time with clients. Other heads of sales, and especially product development, were only cited by 42% and 50% of respondents respectively. Even allowing for some bias on the part of CIO/CEO respondents, it was clear that the full spectrum of functions that interacted with the end investor clients were not always leveraged for investment ideas or commercial information in support of innovation. A result that could be easily and inexpensively remedied in several cases.

How do you rate the following as drivers of innovation in your organization?

5% 12% 29% Clients Regulations/Government Technology Academia Consultants Other

As an asset manager, which of the following do you view as an innovator in your firm?

100 80 60 40 20 0

83%

72%

72% 50% 42% 29%

16%

19%

19%

CIO CEO Investment professionals

Product development Sales Other

Respondents were asked to select any applicable options.

7 | Whats new? Innovation for asset management 2012 survey

Whats new? Innovation for asset management 2012 survey | 8

Budgeted innovation spend

9 | Whats new? Innovation for asset management 2012 survey

Firms do not have separate budgets for innovation

Only three respondents (8%) claimed to maintain a separate budget for innovation. This is in sharp contrasts to other industries such as hi-tech manufacturing, the automotive or the pharmaceutical industries where more than 10% of revenues might be reserved for innovation in the form of R&D budget. In the majority of cases innovation is a formalized, organic process leveraging the product development budget and therefore tapping into the business-as-usual structure of investment committees, product development committees and seed capital processes. The results from the survey suggested that these procedures were satisfactory and stable, indicating the trend was likely to remain so in future. However, 36% of respondents estimated that budget was affected by recent investment performance. In terms of reviewing investment styles or product development cycles, the results varied by the size and style of each firm. Some styles/strategies passive investing or quantitative strategies for example carried predefined structures, so the time to market for new products was likely to be unaffected by regulatory changes. Product cycles for firms offering active, ETF, hedge fund, UCITS, investment trust, money market fund or LDI styles was likely to be impacted by new regulations in both the US and Europe1. The time-to-market for new products will be extended to accommodate the new checks that need to be put in place, but more seriously, additional capital charges may place extra burden on the firms ability to provision seed capital. This is explained in greater detail later.

Does your firm have a separate innovation budget?

8%

Typically, how long would you be willing to invest in an innovation idea?

50 40 Yes No 30 20 10 0 9% 0% <3mths 3-6mths 6-9mths 17% 6% 9-12mths 1-2yrs >2yrs 25%

43%

92%

1 Some regulatory measures such as MiFID place restrictions on the execution-only marketing of products perceived as not non-complex to retailclassified investors. Some measures place restrictions on leverage (AIFMD) or incur additional charges through introducing liability measures (AIFMD/ UCITS V). Some regulators have powers to fine firms publicly for misselling or to intervene during product development cycles. Some regulators penalize firms for inadequate systems/controls relating to products that are leveraged, illiquid or complex in the form of insisting on higher capital changes (e.g., ICAAP). Some regulatory measures may increase cycle times from changes to the market microstructure (Dodd-Frank and EMIR). Additionally, regulators in the US and European Union are placing ETFs and MMFs under close scrutiny under proposed Shadow Banking measures that may also warrant higher capital charges. Whats new? Innovation for asset management 2012 survey | 10

Budgeted innovation spend by geography and category

Perhaps unsurprisingly (given that 81% of respondents were located in Europe), Europe received the highest bias for innovation spend in terms of geographic region, followed by North America and Asia-Pacific in equal measure. Mention of the BRICs was relatively underweight (despite growth exuberance in China), nor was there much mention of specific emerging markets. In terms of regions, there was relatively little mention of either South America (except Brazil or Chile) or Africa at this time. Several firms indicated that this asset allocation strategy could alter if the Financial transaction tax was introduced across Europe. A minority of firms such as certain hedge funds expressed the interest to diversify their investor base geographically and by investor type in order to mitigate correlation risk, and they placed incentives on their distribution team in order to achieve that aim. The results of the survey showed a significant bias towards assigning innovation spend to either product development or IT enhancement. Improvements behind product strategies has already been covered elsewhere, and the improvements to IT infrastructure cited in the survey were many and varied, ranging from leveraging social media or cloud computing to developing new platforms for distributions, in-house modelling and stress-testing, in-house valuation, collateral management, client reporting or improvements to reference data handling such as legal entity identifiers (LEIs). Innovation in other categories of spend seemed underweight. A smaller proportion of respondents ranked operations as a key focus; which runs against the tendency of some firms wishing to outsource back or middle office functions to providers. The lack of focus on regulation is a concern, given that this nondiscretionary component is likely to double in spend over the next three to five years.

Rank budgeted innovation spend by geographic region

5% 5% 4%

Rank budgeted innovation spend by category

3% 12% 32%

19%

Europe North America Asia South America Australia Africa

47%

14%

Products IT Business Operations Regulation Other

17% 20% 22%

11 | Whats new? Innovation for asset management 2012 survey

Seed capital provision

The provision of seed capital is sometimes viewed as controversial. In the minds of some, self-seeding demonstrates conviction, committing a firms own capital to achieve critical mass while taking some of the market risk away from self-insuring funds. To others, seeding implies a potential for conflicts of interest to develop, especially if the seeding consists of co-investing with specific distribution agents and this aspect is undisclosed to the end investor. Regulators are known to be keen to encourage disclosures in both instances. The survey results suggested that the provision of seed capital correlated strongly with the AuM of the firm, with longer time frames for seeding often coinciding with a generally longer product cycle time. Some of the more advanced asset managers adopted a bifurcated approach to seeding, with the cycle time recorded for seeding proportionate to the style as follows. 1) Seed capital commitment as R&D - the firm commits its own capital and this is typically seeded over anything from a one- to three-year cycle. As mentioned earlier, this approach implies a degree of skin in the game commitment, and some regulators are known to favor a greater degree of disclosure, particularly if there are positions on the balance sheet that extend beyond one year. 2) Seed capital commitment in the form of commercialization, e.g., co-investing or partnering with distributors, agency brokers or IFAs where the co-investor looks to receive a discount on the fees, typically offered out within a 12-month cycle to avoid prudential regulatory complications from having capital sitting on the balance sheet for more than one year. Some firms are known to favor hedging seed capital via a combination of high-yield bonds, cash or repo in order to address this issue.

What is your typical duration of seed capital investment?

What is your typical amount of seed capital investment?

50 40 30 20 10 0 30%

44% 26%

50 40 30 20 10 0 15% 8% 35%

42%

Under 1yr 1-2yrs 3yrs

US$10m US$11-20m

US$21-30m Over US$30m

Whats new? Innovation for asset management 2012 survey | 12

Processes and committees

13 | Whats new? Innovation for asset management 2012 survey

Innovation committees
The overriding sentiment from the survey was that no one firm had a monopoly on good ideas for innovation. Several respondents who felt that innovation was embedded into their firms corporate culture, believed that the combination of individual, bottom-up ideas coupled with top strategiclevel vision of the marketplace was key. The direction of travel seemed to be collegiate. Certainly regulators are less likely to view firms with a star fund manager culture or heavy portfolio manager conviction influence as kindly as before. It should be noted that while only 8% of firms had a specific innovation budget, 19% of firms possessed an identifiable innovation committee that met monthly, quarterly or ad hoc as the situation demanded, depending on the investment style of the firm. Innovation committees were typically tasked with generating, testing and challenging new product ideas, establishing the bases for product manufacture, distribution, repurposing or closure (including seed capital decisioning). Coverage typically concerns all lines of business and ensuring that all procedures were conducted in line with established stewardship practices. The survey established that the innovation committees (where they exist) consist of CIOs in all cases, plus heads of business (usually distribution) and usually senior C-suite functions such as CEO, COO or Chief Risk Officer (CRO) in about 66% of cases. Results varied considerably by styles of firms in some cases, chief strategy or chief administration officers also featured. While recognizing the small sample size, the area for some concern was the relatively low occurrence involving either the CFO or Chief Compliance Officer (CCO) on the innovation committee. The involvement of the CFO might become more prevalent as product profitability becomes a key metric and pricing decisions become challenged by regulatory transparency and greater use of search engines. The early presence of the CCO will help other professionals understand the ramifications of where the regulators are going when scrutinizing products that are labeled as structured, guaranteed, absolute or leveraged, and avoid the reputational consequences of misselling.

Does your firm have an innovation committee?

3% 19%

Who sits on this committee?

100 80 Yes No Dont know/No response 60 40 20 0 CEO CIO CFO COO 68%

100% 63% 68% 26%

89%

37% 21%

78%

CRO CCO Business Other

Respondents were asked to select any applicable options.

Whats new? Innovation for asset management 2012 survey | 14

Idea capture to release and review process

When products are viewed through a lens of effective risk management, faster time-to-market does not equate necessarily to a better result for the investor. The results from the innovation survey suggested an unhurried approach to product development. The ideal length of time from idea capture through to development and release for a typical product was between 6 and 9 months in 36% of cases. Some of these instances included seed capital decisioning that was covered earlier. Partly in view of reputational fears, such as fines or punitive capital charges, there was greater evidence of the risk function either involved earlier in the product cycle ( the idea phase) or even setting the framework for guiding the product development process. When it came to assessing product time-to-market, a similar bifurcation between simple and complex/leveraged/structured products, with extended product cycles was evidenced for many traditional asset managers. Most firms in the survey had formalized product review process frameworks that were reviewed typically on a quarterly basis or more frequently depending on the investment style of the firm. A typical review process might involve scrutiny and challenge according to factors such as investment performance, investor suitability, liquidity risk, and seed capital decisioning (opportunity cost). The survey results suggested that the review process often took place at management and board level. In the former case, committees such as the investment committee and management committee might discuss the findings on a monthly basis in the context of product manufacture, distribution and profitability. The quarterly board meetings would be focused on broader issues such as governance, client suitability, adherence to stewardship codes and reputational issues. In most cases, the frequency of products review correlated with the frequency of shutting down or repurposing funds (see below).

On average, what is the length of time from idea capture through to development and release for a typical product?
8% 20%

How frequently are new or developing products reviewed?

8% 11%

11%

<3mths 3-6mths 6-9mths 9-12mths Over 1yr Dont know/No resposnse

25%

25%

<3mths 3-6mths 6-9mths 9-12mths Over 1yr Dont know/No resposnse

56%

36%

15 | Whats new? Innovation for asset management 2012 survey

Review criteria of new products and number of funds shut down

The results of the survey showed that product review processes were revisited regularly according to the suitability of the product for the category of end investor or the risk-adjusted performance if that benchmark was relevant. Some of the other key criteria by which products were rated included sales, net flows and size of fund. Respondents generally agreed that there was a need to incubate new products in order to give things time to work. Cases of firms moving their product reviews back from semi-annually to annually were not uncommon. There was also a prevailing trend in favor of paying attention to the economics of innovation, because the process of closing down a fund can be long and cumbersome. One firm noted that: Weve been too innovative in the sense that we launched 20% more products over the last year. You end up building a high fixed-cost base when you do that. We are looking at increasing the thresholds to green light new products, because the cost ratio of starting up to shutting down a product range can be anything from 1:3 to 1:5. Most firms also demonstrated a recognized process of weeding/feeding and killing products that did not perform according to expectations. The survey results suggested that reasons for closing a fund down were many and varied depending on the size, style, culture and location of the asset manager. Some of the more advanced asset managers considered withdrawing seeding according to the criteria such as: a) promise to the client; b) investment/trading sustainability; and c) product indigestion (time allocation). In some cases, sector or style shifts (e.g., A desire to focus on active management) were root causes. Despite a lot of reviews, not many funds were shut down, firms instead chose to repurpose or soft-close their funds under different monikers in order to avoid the reputational consequences. The status quo concerning critical portfolio managers (either leaving the firm or becoming overloaded) were also key considerations.

What criteria are new or developing products reviewed against?

How many funds have you shut down over the last five years?

100 80 60 40 20 0

86%

83% 67% 53% 17%

40 35 30 25 20 15 10 5 0

38%

19%

15%

19% 9%

Returns/alpha Client suitability Risk management

Size of fund Client redemption

0-3 4-10 11-20

21-40 >40

Respondents were asked to select any applicable options.

Whats new? Innovation for asset management 2012 survey | 16

It only makes sense if you have internal skills to properly manage those outsource providers ... and it needs to be properly managed within. I think outsourcing enables you to do more than you could otherwise do. But then you are subservient to the timetable of the outsource provider. A lot of firms see outsourcing as a way to cut cost, and thats a very short-term view in my opinion. You need to retain high-quality people to ensure youre running the business properly. American asset manager

Outsourcing supports, enables and facilitates innovation. But outsourcers can inhibit innovation if they put a high price threshold on responding to change requests. European asset manager

Outsourcing

17 | Whats new? Innovation for asset management 2012 survey

Outsourcing may inhibit innovation

Outsourcing normally confers benefits by converting fixed costs to variable costs, providing the benefits of a shared solution architecture and common standards. The outsourcing of certain back office functions is relatively commonplace and there are various successful models. On the face of it, outsourcing per se does not tie up business capital, and should therefore enable innovation in investment styles, methods or products. However, only 22% of respondents felt that outsourcing supported, enabled or facilitated innovation by acting as a catalyst. 33% of respondents felt that outsourcing actually inhibited innovation under the current circumstances of significant regulatory change, stressed market conditions or complexity. The results were varied and depended on the size and style of the respondents, they did not correlate with AuM of the asset manager. Additionally, many firms expressed irritation at the loss of control when services such as administration, transfer agency or valuations were outsourced. The need to reconcile valuations in particular (in-house vs. third party per various times, and then resolving any variances) was a consistent challenge for illiquid or OTC instruments. Certain outsourcers were sometimes slow to respond to the pace or depth of change requests demanded from regulators or client mandate shifts. Common complaints from respondents included the fact that change requests were expensive and that there was a relative lack of engagement when offering solutions to firms modeling extreme event risk. In contrast, other firms described their relationship with select outsourcers in positive terms, more like that of a business partner than a third party, directly providing additional input into the innovation process.

Do you believe that outsourcing drives or inhibits innovation?

What functions do you currently outsource to third/external parties?

35 30 25 20 15 10 5 0

33% 22% 25% 20%

60 50 40 30 20 10 0

53%

50%

47% 28% 19% 8%

Drives/Helps Inhibits

Neither Dont know/No response

Administration Transfer agent Valuations

Bank provider Other Corporate strategy

Respondents were asked to select any applicable options.

Whats new? Innovation for asset management 2012 survey | 18

Future

19 | Whats new? Innovation for asset management 2012 survey

Where will future drivers come from?

The investment climate over the last five years has been choppy. Successive financial market failures, such as Lehman Brothers, Bernie Madoff and MF Global, coupled with other significant financial mishaps have put governments and regulators on full alert. Current macroeconomic and structural uncertainties with countries in the Eurozone have merely added to the sense of unease. The response from the governments from the G20, central banks and competent authorities was swift. Capitalintensive and pervasive measures such as Dodd-Frank, Basel III, Solvency II and FATCA are complex, highly prescriptive and in some cases, extra-territorial. It is clear that the economic conditions over the next few years will not be a replay of the financial conditions experienced during the last 25 years. Looking forward to drivers behind innovation for asset managers in general, a narrow majority of respondents commented that demographic shifts for example associated a move from defined benefit (DB) to DC pensions or the need for decumulation to service ageing populations would be the primary driver. Global, regional or local regulatory measures were also cited as a strong future driver by respondents, followed by new technology paradigms (such as social networking or mobile investments), political scenarios and emerging markets (such as investing in the BRICs) were also recorded as important in broadly equal measure. One universal bank-owned asset manager commented: You do not meet customers in the bank branch anymore. We meet them at 10 p.m. online on Facebook, and our clients keep changing their preferences for interaction.

Where will future drivers of innovation come from?

2% 18% 23%

22%

Demographic shifts Political scenarios New technology paradigms Regulations Emerging markets Other

16%

19%

Whats new? Innovation for asset management 2012 survey | 20

Specific drivers and inhibitors for the industry

Client acquisition, satisfaction and retention were ranked as the top drivers for innovation. Institutional asset managers rated specific client segments, such as sovereign wealth funds (SWFs) and pension funds/plan sponsors, as particularly important influencers, or sometimes codevelopers of strategies. Some responses also alluded negative consequences the wish by certain SWFs for example to change mandates, giving rise to mandate risk consequences in the event of downgrades to countries and/ or emergency intervention by the authorities. Many firms mentioned regulation as a high importance driver of innovation. Respondents commented how there was no let-up in the pace, volume and intensity of multiple regulations and changes to regulations, particularly in Europe, North America, Hong Kong and Australia, impacting firms both directly and indirectly. The trend was precisely reversed when it came to recording the chief inhibitors of innovation. Given the adverse publicity and strength of feeling expressed in the lobbying, it was unsurprising that a majority of respondents rated regulation as a strong inhibitor of innovation. Perhaps more surprisingly, many respondents cited their clients as important inhibitors, the most common reason being naturally conservative on the part of end investors not wanting to interrupt winning performance for the sake of it. The jury was clearly out on technology, academia and consultants. Some respondents felt that technology was a key enabler of better performance, while a similar percentage felt that too much technology or systems actually got in the way of better performance. Academia was rated as a positive enabler in the US, France and the UK by some firms. Respondents felt that investment consultants stoked mandate risk with a deterrent effect on innovation.

Rank drivers for innovation in the industry over the next three years
1%

Rank inhibitors for innovation in the industry over the next three years
1% 17% 17%

14%

29% Clients Regulations/government Technology Academia Consultants Other Clients Regulations/government Technology Academia Consultants Other 37%

16%

10%

19%

21%

18%

21 | Whats new? Innovation for asset management 2012 survey

Where do we go from here?

Asset management firms face challenges from several quarters decumulation pressures arising from demographics, political uncertainties, regulatory pressures, and high-maintenance end investors such as SWFs. Innovation is often seen as the alpha upgrade path escaping the cost burdens of non-discretionary spend in other areas. It is also seen as a brand enhancer. It was clear from Ernst & Youngs asset management survey that asset managers tended to have an overly optimistic view of themselves as innovators compared to other industries, such as the hi-tech, pharmaceutical, auto and telecommunications industries. In several cases, confidence was justified by consistent superior performance. Ernst & Youngs asset management survey also revealed some specific insights into how to maintain the upward trajectory. Results showed how clients were often the top drivers of innovation, yet the full spectrum of functions that interact with clients were not always leveraged for ideas or commercials in support of innovation. This should be imperative. Outsourcing could not always be regarded as a panacea. Many firms viewed outsourcers who did not respond flexibly and efficiently to change requests could actually be seen as impediments to innovation. There are opportunities for firms outsourcing back- and middle-office functions to work together to iron out these issues. Finally, managing regulatory shifts could differentiate winners from losers. By not tying up vital business capital and budget by trying to comply with global, regional and local measures on a case-by-case basis, firms can keep their cost to income ratios under control and dedicate more resources to R&D, thus providing the bedrock for nextgeneration innovation.

The factors powering innovation shown in green versus inhibitors in red

Regulations/Government -30

Clients
Regula tions/ Govern ment

+30

nts Clie
Co ns ul ta nt s

Tec hno logy

Academia

Neutral

Whats new? Innovation for asset management 2012 survey | 22

Un ive rsa l dr ive rs

Tec hno log y De mo gr ap hic s

rs to ibi inh sal ver Uni

ts ke ar gM gin er rios Em ena l Sc itica Pol ltants Consu

Academia

Methodology

23 | Whats new? Innovation for asset management 2012 survey

The survey was designed to collect qualitative and quantitative data on how asset management firms are innovating their investor products, drawing out themes and issues facing the industry. The questionnaire covered topics such as funding and investment in innovation, geographical priority, products and investment style priority, processes and models that generate innovation, product economics, infrastructure and future drivers. 21 telephone interviews and face-to-face meetings were conducted with CEOs, CIOs, managing directors, heads of product development and heads of risk from January to April 2012 15 online questionnaires were filled out completed by respondents The firms that took part in the survey represented more than US$10t in AuM.

Firm profile By geography Europe North America Asia-Pacific By AuM Less than US$10 bn US$10 billion to US$50 bn US$51 bn to US$300 bn US$301 bn and above Total respondents

Total respondents 29 5 2 6 7 15 8 36

Whats new? Innovation for asset management 2012 survey | 24

Contacts
Gillian Lofts Ernst & Young Partner, UK Asset Management Leader +44 (0)20 7951 5131 glofts@uk.ey.com

Anthony Kirby Ernst & Young Director, UK Asset Management Regulatory Reform, Risk and Regulatory Practice +44 (0)20 7951 9729 akirby1@uk.ey.com

Nicholas Phan Ernst & Young Consultant, Financial Services Advisory +44 (0)20 7951 6858 nphan1@uk.ey.com

25 | Whats new? Innovation for asset management 2012 survey

Notes

Whats new? Innovation for asset management 2012 survey | 26

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