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Survival of fittest

Copious column inches over the past weeks and months have attempted to explain the reasons for the financial crisis, assess just how long it might last, chart the way out and, of course, speculate over what the catalysts might be to allow this improvement to occur. For our part, we certainly are in no doubt that the current situation facing economies, their governments, fund managers, financial advisers and clients alike is arguably the most serious in a generation.

However, I am not about to deliberate further on these subjects in this article. Rather, I will attempt to assess just what the consequences might be for the asset management industry when the recovery comes (and there will be one at some point) and what could happen in the interim.

In the first instance, I would expect the significant deterioration in cost/income ratios for fund management companies to be a driver of change in this industry. The longer this crisis lasts and the more impaired asset management balance sheets become, the greater the likelihood of consolidation. Many asset management companies will be put up for sale or merged with others to create viable businesses once again.

The range of existing funds available needs to be consolidated and the industry will need to wean itself off the crazy practice of launching highly complex or specialised products that are only suitable for very small sections of the investing public, in favour of delivering greater consistency in the development of core vanilla products that are simple, transparent and easy to understand. In other words, the industry needs to get back to doing the basics well.

We can also be sure that one of the lasting legacies of this crisis will be an increased recognition of the need for tighter risk management and controls within businesses. Those businesses which are under-resourced in this area will need to add additional resource at a time when revenues are down, causing a likely cutback in other activities as a consequence. Overall staff levels are also likely to be reviewed, with cuts very much on the cards as non-core activities are scaled back heavily or closed. This has obvious consequences for key areas like sales and marketing just at a time when information flows and client contact will be crucial.

Part of the excitement about alternative asset classes will die down after a poor showing by some managers but good groups with the right level of experience and sensible, straightforward products will do well once we come out the other side of this crisis. We are also likely to see greater use of Ucits III flexibility, providing a link between hedge fund managers and traditional long-only in more straightforward products. Above all, quality and experience will be critical to survival, with huge opportunities awaiting the survivors.

The financial advisory sector will also need to adjust to deteriorating cost/income ratios and all the issues affecting fund management companies will be replicated in IFA firms. However, we believe that opportunities will present themselves in the next year or so as we look towards recovery. In such circumstances, business relationships forged with the right people over many years will prove vital, as we all get through this phase together, with closer working relationships a necessity between providers and advisers.

Well-capitalised, under-leveraged and focused businesses with stable management teams and a culture that seeks to deliver high quality, transparent products and maintain high levels of client contact and communication will undoubtedly be the winners at the end of this difficult phase.

Gary Potter is co-head of multi-manager at Thames River Multi-Capital

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