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Shaping reputations

P E N RO S EF I N A N C I A L

The Future of theInvestment Industry Survey

Penrose recently conducted its second annual survey on the outlook for the investment industry. The survey comprised 13 questions, on a range of issues affecting the industry today. Outlined are the results from this survey, taken from over 100 senior figures within the pensions and investment industries including CEO’s, Managing Directors, CIO’s and Heads of Communications. The fieldwork was carried out between June, July and August 2010.

Details of all respondents remained anonymous in order to encourage candid commentary, and a selection of these quotes has been included in the below summary.

We hope you find the results an interesting and revealing insight into the industry and indication of sentiment towards the future of the pensions and investment landscape in the UK and Europe.

If you are interested in discussing the results in more detail, please contact;

Andrew Fleming [email protected] Tel: +44 (0)20 7786 4823James Morgan [email protected] Tel: +44 (0)20 7786 4833

Penrose Financial Limited, 2nd Floor, 30/34 Moorgate, London EC2R 6DNTelephone +44 (0)20 7786 4888 Fax +44 (0)20 7786 4889 Email [email protected]© Copyright 2010 Penrose Financial Limited

P E N RO S EF I N A N C I A L Shaping reputations

Penrose Financial: The Future of the Investment Industry Survey 2

1. Astheinvestmentmanagementindustryundergoesfurtherchange,whattypeoffirmislikelytoemergeasthemostsuccessful?

AnswerOptions ResponsePercent

1. Traditional long-only 6.2%

2. Multi-strategy with both traditional and alternative offerings 49.6%

3. Specialist boutiques 29.7%

4. Passive 7.6%

5. Fiduciary 6.2%

6. Other 0.7%





1. The Alternative Investment Fund Managers directive (AIFM) means non-EU managers will face problems marketing within the EU, but EU institutions will inevitably find a way round this

35.8%

2. New approaches, such as Newcits, will enable hedge funds to grow their investor base

36.8%

3. Hedge funds will continue to be perceived as expensive, elite products which have failed to provide absolute returns

19.8%

4. Other 7.5%

2. Whatistheoutlookforhedgefunds?

“Acceptance that there is a limited number of true alpha providers will make the best hedge funds even more attractive and lead to the need for better ways of cheap “HF replication” for many new HF investors.”

“Much will depend on their performance but the pricing model of 2 and 20 will become increasingly hard to justify. As the rewards in the sector shrink, talent will go elsewhere and the hedge fund market will contract to a more appropriate size.”

“AIFM will be altered to not exclude non-EU managers, and this has already started to occur.”

“The focus on costs in terms of the underlying TER of funds will become increasingly important as a result of the impact of RDR. This will give end investors increased transparency over what it actually costs to do business.”




1. 0-5% - emerging markets still present several risks for an investor, including inflation, sovereign debt default and political uncertainty

8.6%

2. 5-20% – investing in emerging markets is gradually proving more popular as concerns increase about the credit worthiness of sovereign debt in the developed world

65.7%

3. 20-40% - investors recognize that this is a long term rather than opportunistic trend, and this interest is likely to continue as investors seek to diversify portfolios

25.7%

4. More than 40% - exposure should be high as emerging markets such as Mexico and Brazil are resource rich, have large trade surpluses, and the risk of default is lower than some developed countries. There are bigger currency risks in Euro, Sterling and Dollars

0.0%

3. Howmuchshouldinvestorsallocatetoemergingmarketsoverthenext12months?

“There is arguably more upside and less relative downside in certain emerging market equities than in their equivalents in the West. Just look at BP’s share price performance ...”

“Ultimately allocations to Emerging Markets will have to rise. With market cap at around 12% of the ACWI Index it is irresponsible not to increase the allocation to this asset class.”



4. Whichemergingmarketregionoffersthemostcompellinginvestmentpropositionoverthenextthreeyears?


1. BRIC countries (Brazil, Russia, India and China) 35.2%

2. Latin America 15.5%

3. Central and Eastern Europe 6.3%

4. Middle East and Africa 4.2%

5. Asia 32.4%

6. Other (please specify) 6.3%

“Best to identify attractive stocks rather than countries; geographical allocation of this nature is increasingly redundant.”




1. Yes, fiduciary managers will gain market share from traditional consultants

22.9%

2. Yes, as investors will go direct to managers offering more competitive fee structures

19.0%

3. No, consultants’ role may change but they will continue to add value in providing an important link between investor and provider

34.3%

4. No, consultants are adapting to meet the changing requirements of investors

15.2%

5. Other (please elaborate) 8.6%

“This does not mean consultants add more or less value , rather most people are not comfortable with change.”

“With the decline of DB and the foundation of bigger government directed funds, the importance of consultants will diminish.”

“In many cases, fiduciary managers are the traditional consultants, and they are trying to refocus their business towards asset management, as it’s more profitable.”

“The boundaries between “traditional” asset managers, consultants and fiduciary managers continues to blur, but clients are still seeking advice, even if they are not quite sure where to look for it.”

“Consultants will continue to provide very little added value but will continue to serve as a buffer against taking fiduciary responsibility for plan assets.”

“No, as consultant use is largely driven by trustee ignorance and fear and those won’t change.”

5. Doyouthinktraditionalinvestmentconsultantswillbecomelessdominantinthenext12months?




1. Risk aversion – with 70% of default funds invested entirely in equities, there is a pressing need for a more diversified approach

29.8%

2. Investment returns – given growing longevity assumptions 17.3%

3. Flexibility – traditional lifestyling can leave savers at the mercy of falling markets, depending on the timing of their retirement

46.2%

4. other (please specify) 6.7%

“Diversity is key; the fund should have a multi asset mindset set. DGF are the perfect option for default funds. These provide a good asset mix with an absolute return framework.”

“A guaranteed minimum level of annual contributions. Without these, DC schemes are unprofitable to run on a commercial basis.”

“Brand - unfortunately for the participants in the scheme.”

6. WhichsinglefactorismostimportantinthedesignofaDCdefaultfund?



7. lltheintroductionofNESTfrom2012beapanaceaforboostingpensionssavingamonglowtomiddleincomegroups?


1. No, NEST may lead to more people saving, but the amount saved will be inadequate

31.1%

2. No, but it will be a useful component of employees’ savings options

25.2%

3. No, in fact, NEST may still not happen, at least in the form originally envisaged under the previous government’s proposals

19.4%

4. Yes, NEST will offer an affordable and practical savings vehicle for millions of people currently unable to save for retirement

1.9%

5. Yes, many more people will save for retirement than did so before, helping to develop a retirement savings culture

11.7%

6. Other 10.7%

“A Huge degree of regulatory uncertaintly needs to be cleared away before individuals will collectively decide to lock more money away in current pension structures.”

“Assuming it does go ahead (and a significant probability should be attached to it not happening) I think it will raise awareness of the need to save for retirement.”




1. Fixed income 15.1%

2. Alternatives 26.4%

3. Equity Income funds 17.0%

4. Multi-asset 36.8%

5. Other 4.7%

8. Whichassetclassdoyouexpecttoseethehighestinflowsfrominstitutionalandprofessionalinvestorsoverthenext3years?



9. Inviewofrecenthighprofileevents,whichofthefollowingismostlikelytoencourageshareholderengagement?


1. Enhanced rewards for shareholders who engage 8.8%

2. Increased expectation from clients about the level of shareholder engagement undertaken by their fund managers

64.0%

3. Stricter regulation 22.8%

4. Other 4.4%

“Another downward lurch in stock prices will prompt more shareholder engagement.”

“Returns and a reduction of non-investment risk is helping to ensure Boards act for the interests of shareholders rather than themselves or inadequately.”




1. This is a growth sector with potential for outperformance 23.64%

2. Environmental factors pose a significant risk to investment portfolios, so these non-financial factors must be taken into consideration

43.64%

3. You have an ethical policy which requires these actors to be taken into consideration

12.73%

4. I wouldn’t, this sector is underpinned by government support which could be withdrawn at any time

12.73%


“Significant risk but also a significant opportunity for investors.”

“Environmental risk should be treated the same as any other risk. Some sectors are more prone to incur costs related to environmental damage than others. The regulatory risk/cost has to be watched on a similar sectoral basis.”

10.Whywouldyouchoosetoincorporateenvironmentalfactorsintoyourinvestmentstrategy?




1. A significant increase in the pension age for members of public sector schemes

29.5%

2. Significantly higher employee contributions 16.2%

3. Closure of Defined Benefit schemes in the public sector and replacement with Defined Contribution schemes

33.3%

4. Closure of final salary schemes and replacement with Career Average provision

16.2%


“We need the best possible skills within our Public Services. Currently they cannot be attracted by net remuneration alone.”

11.WhichsinglemeasurewouldyourecommendtotheHuttonCommissiononthefundingofpublicsectorpensions?



12.WhatistheoutlookforEurozoneeconomies?


1. There is a real risk of contagion from Greece as measures taken so far have merely delayed, rather than prevented, future problems, resulting in an endemic problem for the Euro

33.3%

2. Recently introduced measures to address government deficits, combined with growth in the global economy, will lead to an easing of pressure over time

21.4%

3. The crisis is likely to involve one or more countries leaving the Eurozone, and this may not just be one of the weaker members

19.7%

4. The problems of Greece won’t spread. The real risk is of market jitters precipitating a double-dip recession

8.6%

5. Investors will cut exposure to sovereign debt, placing even greater pressure on cash-strapped governments

14.5%




13.Whichofthefollowingsectorsdoyouworkin?


1. Asset Management 60.4%

2. Pensions 14.2%

3. Consultant/Advisory 16.0%

4. Other 9.4%

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