Investment Management Industry Faces Unprecedented Change

LONDON – 03 JULY 2006 – The investment management sector will confront enormous challenges in investment performance, distribution and the recruitment and retention of talent over the next few years, but despite these demands, investment managers remain bullish about their future revenue growth, according to PricewaterhouseCoopers 2006 Global Investment Management Survey.

In a survey of 81 investment management organisations around the world, representing aggregate assets under management of $9 trillion, more than half of respondents believe their revenues will grow by 20% or more over three years.

Simon Jeffreys, global investment management and real estate leader, PricewaterhouseCoopers LLP said:

�Our survey shows that chief executives are optimistic about revenue growth, but evolving investor demands, weak internal controls and risk assessment strategies, and the disruption to existing distribution channels will present a demanding environment over the next few years. The likelihood is that this will occur against a background of rising interest rates and more difficult market conditions.�

Investment performance has always been crucial but now it is being evaluated with greater sophistication than ever by institutional clients. Asset management companies are concentrating on developing sources of alpha that complement their existing strengths and are actively managing investment and research capacity.

When asked what they would be doing to improve performance over three years, survey respondents commonly mentioned recruiting and retaining the best employees, but 21% cited recruiting, retaining and incentivising talent as one of the biggest challenges they faced. The rise of specialist investment products, such as hedge funds, private equity and real estate and the increasing trend towards the use of derivatives, will also bring further demands for new skills and more sophisticated risk management.

Surprisingly, 91% of survey respondents considered that they did not have appropriate internal controls in place to adequately manage risk and 89% had not completed a comprehensive assessment of risk.

Across the board, survey respondents recognised the importance of distribution but many highlighted a lack of confidence in their distribution strategies. With the distribution power of the internet growing and existing distributors consolidating, asset management companies are coming under increasing pressure to develop new distribution strategies in retail and institutional markets alike. For the retail market, brand and quality of distribution are critical to winning business but these are two areas in which many investment management companies believe that they are notably weak. Firms will need to concentrate on their most valuable distribution relationships, and to service these well.

Regulatory changes were seen by nearly a quarter of survey respondents as the greatest and most immediate challenge they faced. The number of new regulatory requirements being introduced has created a significant workload for firms and consequently a draining of resources.

Outsourcing will continue to play a big role as asset management firms focus on core competencies. While most respondents believed that outsourcing has broadly met their expectations, there was disappointment across a range of specific areas. The survey suggested that companies are happier to outsource back office functions rather than those which touch customers.

Tax authorities globally have been reducing opportunities for tax planning in the industry. In this light it was interesting to see in the survey that a significant proportion of respondents will be paying attention to managing tax strategy and tax risk over the next three years.

Simon Jeffreys, global investment management and real estate leader, PricewaterhouseCoopers LLP, continued:

�In five years time the asset management industry will look very different. Firms are in need of visionary leaderships with clear perceptions of where competitive advantages lie. This need is greatest in the middle ground, among the traditional active managers.

�The winners will be those that focus on and reinforce their core competencies, outsource or sell non-core operations and have the flexibility to seize opportunities.�

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