From AuM to RuM: the future of institutional asset management?
This article is also published by Fondsnieuws.
The FD (Dutch version of the FT) reported on July 9th about the approaching end of the European investment bank ambitions. According to an anonymous initiate investment banker:
Dutch multinationals have become largely dependent on US banks.FD: July 9th 2019
The European continent in decline
The picture is not much different in the Dutch institutional asset management landscape. I do not dare to state that Dutch pension funds and insurers are largely dependent on US asset managers. That consciously opted for outsourcing to foreign asset managers (especially US and UK) is. The figure below supports this statement.
The figure above can be constructed on the basis of a list of external asset managers published by ten Dutch industry-wide pension funds. The pension funds in this set have a combined invested capital of approximately EUR 800 billion. (There is no insight into the multi-manager pools in which some of these pension funds invest. Experience shows that these usually also include foreign asset managers. In our analysis, these pools have the Netherlands as their country of origin).
The figure does not show a distribution based on AuM, but a distribution based on the number of external asset managers appointed by country of origin. For asset owners, these are outsourcing relationships that must be managed, or Relationships under Management (RuM).
Outsourced asset management requires new set of skills
Although the Netherlands is known as the birthplace (Dutch only) of the securities trade, we have since lost this leading position; from investing and transactions, to allocations to external asset managers. For European banks, the picture is even more grim (Dutch only). In an earlier publication we already stated that it is up to our stand (and savings) to be and remain a forerunner in securities trading and asset management.
Is outsourcing of asset management (to foreign parties) by definition bad then? The answer to this is no, but it does bring a different dynamic for asset owners and a different set of skills. There are relationships (RuM) that must be managed. Outsourcing to (foreign) asset managers not only increases the importance of ODD, but also the importance of focusing on the objective of ODD activities. From our point of view, for example, ODD can be a means for:
- gaining insight into the operational structure from an asset manager and the “ability” that the chosen investment strategy can be implemented efficiently and consistently.
- minimization of implementation risk: the risk that the implementation does not correspond to the strategy intended by the asset owner. In outsourcing relationships where there is a big difference in time, distance and culture, implementation risk lurks around every corner.
- creating partnerships and sustainable cooperation between asset owner and asset manager, where there is an exchange of principles, objectives and investment beliefs and how these can be implemented or not implemented by the asset manager.
Is it clear in your investment organization what the purpose of Operational Due Diligence is?