In order to compete in an environment of rising regulatory costs and increasing competition from passives, active managers must take steps to innovate through the use of shared technology, according to a report by the New City Initiative (NCI).
Amid rising regulatory costs, asset managers must employ solutions such as blockchain and "shared technology" to achieve greater economies of scale, the NCI said in its paper Delivering value for money - The case for boutique active management.
Charles Gubert, author of the report and consultant to the NCI, which represents the interests of asset management boutiques, highlighted opportunities for the industry "through increasing the use of shared technology or collaborative purchasing of outsourced services", but said this will require a "concerted effort and organisation".
One NCI member said: "Distributed Ledger Technologies (DLTs) such as blockchain permit scalable, auditable and secure solutions that can facilitate workflow, particularly in areas such as the middle and back office or in regulatory transaction tracking."
An emerging markets member added: "The industry does need to become leaner given the fee pressure it is facing. It needs to reduce costs and apply more pressure on service providers such as index providers and IT services companies."
The report also called for innovation in the area of data management through the use of technology.
The report said: "Better use of technology by managers, custodians, fund administrators and transfer agents could facilitate an easier, accelerated process of investing in pooled funds.
"Direct investment into a pooled fund (not through a platform or other intermediary) often involves completing a detailed application form and providing anti-money laundering (AML) paperwork in hard copy, a process which requires multiple manual interventions in processing. Automation in this area is being progressed, however, and this may generate savings."
Better fee structures
Meanwhile, Gubert also called for a change to the existing fee models to closer align them with performance instead of charging a flat fee for the management of a fund.
One equity fund manager suggested "having managers offer a lower fixed management fee, but a higher performance fee, that is refundable in the event of subsequent underperformance. This would mean managers are incentivised to generate long-term sustained performance rather than chase assets."
This suggestion is in line with the move made by Fidelity International last week to offer the option to pay a variable fee on its active equity funds, which would be linked to the manager's performance.
The NCI suggests this would work particularly well for boutique asset managers that focus on delivering alpha, helping to align their interests with clients and differentiate them from increasingly popular passive offerings.
"The active management industry has a lot to confront, but boutiques, with their owner-manager culture, specialist approach and greater alignment of interest, are in a strong position," the report said.
NCI members added the rise of passives had introduced more competition to the market, which had raised "the bar" for active managers by making outperformance even more crucial.
Gubert said: "It has been a long time coming, but the transparency and wide availability of information means managers need to be at either end of the spectrum - either passive or truly active, with fees that reflect the difference.
"Customers can then make a decision as to what they believe represents value for money. Those in the middle that charge active fees but hug the index are in a very difficult position and must adapt or suffer."
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