Personalisation of Risks Is Reshaping the Asset-Management Industry

The debt crisis is forcing investors of all stripes to reassess their goals, according to the 2013 Principal Global Investors/CREATE-Research report entitled Investing in a Debt-Fuelled World. The report reveals that high returns are no longer the be-all and end-all of investment goals. Investors will increasingly distinguish between “product alpha” and “solutions alpha.” The first is about beating the markets and the second about meeting investors’ predefined needs.

This shift from wants to needs will be the most enduring legacy of the 2008 crash. It will also remain the key driver of innovation over the rest of this decade, as ageing populations ensure that 75% of retail assets are held by retirees or near-retirees over the next five years. Hence, new asset-allocation and risk-management tools will continue to emerge in three core investor segments:

  • Defined benefit (DB) plan,
  • Defined contribution (DC) plans
  • Mass market investors.

Based on a global survey of over 700 asset managers, pension plans and consultants, and fund distributors and administrators in 29 countries with a combined $27.4 trillion in assets under management, the report attributes this rise of solutions-driven investing to worries about progress on the debt front over the next three years. Only 10% of survey respondents expect significant progress in Europe and only 29% expect significant progress in the U.S.

Most foresee no “free lunch” with quantitative easing (QE). Only 40% see QE as a tonic for reviving growth. The rest view it as either deflationary or inflationary. They see the positives, but fear the hidden dangers.

As a result, two trends will accelerate.

First, the pension promise will be downsized and the closure of DB plans will accelerate. DC plans will grow and hold over 60% of global retirement assets by the end of this decade, compared to the current 43%.

Risk will be personalised. Alpha will be in the eye of the beholder. Each investor segment will have distinct priorities.  DB investors will target risk immunisation. DC investors will pursue retirement income benchmarks. Mass-market investors will pursue regular income.

In each case, legacy assets will migrate from products to solutions.

Second, asset managers will be increasingly enjoined to go from distant vendors to trusted advisors.

Many investors see today’s investing as a “loser’s game,” where the winner is not the one with the best strategy, but one who makes fewest mistakes. The scope for error is large, especially when there isn’t a consensus on the possible impact of the QE programmes.

In any event, personalisation of risk has a big downside. It transfers risk from those who couldn’t manage it to those who don’t understand it.

The report argues that asset managers need to make investors’ worlds easier. Product offerings need to have advice embedded within them — like target date funds, so that “doing nothing” on the part of investors could itself be somewhat financially savvy.

Asset managers should also implement three other complementary actions needed to meet the challenges created by deleveraging.

  • First, they must develop new investment capabilities, so as to capitalise on the opportunities created by the debt crisis (according to 67% of survey respondents).
  • Second, they must improve client engagement to better understand clients’ needs, liabilities, and risk tolerances (60%).
  • Third, they must improve the alignment of interest, in order to deliver products fit for purpose within a value-for-money fee structure (45%).

The report concludes that deleveraging will leave a lasting impact under the surface of the over-blown rhetoric of risk-on/risk-off cycles.

I encourage you to read the full report, Investing in a Debt Fuelled World, for important insights into the most topical asset management questions in today’s investment markets. Obtain your free report by visiting

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