Dire Forecasts

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New York – A pending study has labeled the fund management as ‘overpaid’ and destroying $1.3 trillion in value each year.  Sell-side research is identified as contributing to the value destruction and subject to deep cuts in the next decade.

An unpublished draft report from the IBM Institute for Business Value, obtained by reporters from the Financial Times, claims the asset management industry is “paid too much for the value it delivers” and that “destroying value for clients and shareholders is unsustainable”.  The IBM report, “Financial Markets 2020”, is based on a survey of more than 2,600 industry participants and government officials across 84 countries.

The report cites $300bn in excess fees for actively managed long-only funds that fail to beat their benchmark, $250bn spent in fees for wealth management and advisory services that fail to deliver promised above-benchmark returns, and $51bn in fees for hedge funds that also fail to deliver their targeted returns.  Credit rating agencies, sell side research and trading are seen as destroying a further $459bn, largely due to the perceived inaccuracy of much of the analysis these sectors deliver.

Against this backdrop, the survey respondents indicate that significant job losses are inevitable.   In particular, clients forecast a 45 per cent headcount reduction in sell side research and 42 per cent reduction at credit rating agencies in the next decade, as the buy side takes more of this activity in-house.

We have reported previously on forecasts made by the IBM Institute for Business Value as part of an earlier study published in 2009.  Suzanne Duncan, an author of the previous study, predicted that the 70% of assets currently tied to long only active management will shift to passive management.  The forecast in 2009 was that 85-90% of total worldwide assets under management will move toward indexing or repackaged types of beta instruments over the next decade.

We will be interested to see the new report when it is released.  In the meantime, you can see the FT article here.  A summary of the previous IBM study is here.

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