Research reveals investor appetite for future innovation, but on new terms

  • Improve existing products before creating new
  • Focus on solutions which deliver targeted outcomes
  • Human judgement a key enabler
  • Third party administrators a partner for innovation

An annual, independent study released today by CREATE-Research, commissioned by Citi’s Global Transaction Services and Principal Global Investors, finds that while innovation is deemed to have produced mixed results over the last decade, asset owners have retained an appetite for innovation, but only where specific principles are met.

The report, entitled Investment Innovations, raising the bar, surveyed over 500 respondents from pension plans, asset managers, consultants, administrators and distributors from 30 countries with a combined AUM of over US$29 trillion. It asked respondents which financial innovations they believe have worked, which haven’t, what should be the main thrust of innovations over the next three years and what specific improvements and actions they want to see related to these innovations.

The headline findings cite 2008 as a watershed for financial innovation with many of the new products, asset classes, return enhancing tools and asset allocation techniques developed in preceding decades viewed as becoming increasingly fallible, as the financial crisis developed. This prompted a dangerous mismatch in expectations between asset managers, advisors and their clients. Now, client engagement is rising again and the report presents a call to action for asset managers and owners to work more closely together to add value in the innovation process, better aligning their interests and expectations for mutual benefit.

Prof. Amin Rajan, CEO of CREATE-Research and the study’s author, said:

“The global economy is still in a state of uncertainty and strong headwinds in the shape of financial regulation, scarcity of talent and revised client expectations are buffeting the industry. Against this backdrop, there has to be a clear line of sight between innovations and client needs. Asset owners will demand creative solutions which deliver tangible value. New products developed without such fundamentals and without clear client engagement will struggle to gain traction.”
Key findings of the report include:

  • Some 35 innovations saw significant adoption in the last decade. 57% of respondents said that emerging markets equities delivered most value while leverage recorded the worst performance, according to 40% of respondents
  • 50% of pension plans believe a switch from products to solutions will be a key driver of innovation over the next 3 years
  • A mismatch exists between asset managers’ and clients’ expectations – 39% of the clients think further product innovation will deliver genuine value over the next three years versus 64% of the asset managers
  • Lack of client engagement is viewed as a major cause of failed innovation: 73% of pension funds surveyed are only rarely/occasionally engaged when asset managers innovate their financial products
  • 88% of asset managers foresee further product innovations over the next three years, although of these, 52% believe they will be incremental, improving existing innovations, rather than creating new ones

Grant Forster, CEO of Principal Global Investors Australia, said: “The findings show that lack of client engagement is viewed by the industry as a major factor behind failed innovation. First and foremost, there should be a direct link between innovation and client need. That means building tailored investment solutions that are relevant and additive to clients’ business objectives, rather than creating copy cat products or those which rely on financial engineering. We believe that our multi-boutique model provides a strong platform to execute this strategy, enabling a deep knowledge of products combined with an ideas-centric, client driven approach.”
The report finds that pension plans increasingly want to see an overlay of human insight, foresight and empathy in the investment process, as quant models can only deal with historical data. This is highlighted by the failure of existing risk models during the last two vicious bear markets.
The report also highlights that product quality, better alignment and operational excellence will dictate the thrust of innovation in the near term. Asset managers intend to adopt more robust processes for promoting new ideas and stress-testing the resulting products. They also expect to rely more on their administrators in order to focus on their own core capabilities and continue an upward advance in the investment value chain.
Neeraj Sahai, Global Head of Citi Securities and Fund Services, said: “Underpinning the drive for innovation is the need for ongoing operational excellence. The findings show that looking ahead over the next several years, market participants are focusing on becoming more efficient, reducing risk and modernising the back and middle office, in partnership with administrators. This drive will be a key differentiator for distinguishing the leaders and the laggards of the new era of innovation.”
Click to download the full report –  Investment Innovations 2011

You must be logged in to post or view comments.