Investor Focus Change Means Growth for Independent Money Managers

December 12, 2007 ( - Independent and quoted money management firms, both traditional and alternative, will capture 33% of all assets under management by 2012, according to Putnam Lovell, a division of Jefferies & Company, Inc. focused on the asset management and financial technology industries.

A news release on the Jefferies Putnam Lovell report, “After the Belle Époque, the Future of Fund Management” said the firm predicts commercial banks, insurance companies, and investment banks which controlled the global money management business in its infancy, will increasingly find it more lucrative to assemble unaffiliated products and play the role of professional buyers. In addition, the firm said captive fund management operations of banks and insurers will gravitate toward more autonomy and spinoffs will become more common, particularly in Europe and Japan.

Traditional active management – long-only stock and bond portfolios charging asset-based fees – will contribute less than half of total industry revenue by 2012, down from about 69% in 2006, while more than 50% of revenue will come from performance fees, alternative investments, and proliferating long-short extension strategies, the report suggests, according to the news release.

The report attributes the predicted shift to a shifted investor focus on performance, not capital or brand.

Other forecasts in the Jefferies Putnam Lovell report, according to the news release, include:

  • ETFs and other less-expensive products will increasingly endanger active managers offering closet index performance at higher fees.
  • Hedge funds, now in more challenging markets, will be more easily distinguishable.
  • Institutional-grade firms generating strong performance in all market conditions will gain further market share at the expense of lesser competitors.
  • Roughly 20% of the current total, approximately 2,000 funds, will disappear in the next five years.
  • Firms primarily reliant on long-only mutual funds will be under the most severe pressure to reinvent themselves or face dwindling prospects.
  • Sub-advisors will capture increasing share, in particular in the U.S. mutual fund segment where they will control 20% of the market by 2012.
  • Demand for performance fees and customized benchmarks are on the rise, from both institutional and individual investors willing only to pay for outperformance.

“Fund firms that anticipate and adjust to these new challenges will enjoy a bright future, growing their businesses at the expense of those unable to let go of a rich epoch that’s rapidly fading,” said Ben Phillips, managing director and head of strategic analysis at Jefferies Putnam Lovell, and author of the report, in the release.

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