REFILE-PREVIEW-Reprieved fund firms face up to failings

(Corrects typo in first paragraph of June 28 story)

* Market volatility sets investment dilemma for CEOs

* Asset prices have appreciated but inflows remain muted

* Investors still fighting shy of equities

By Claire Milhench

LONDON, June 28 (Reuters) - Fund managers meeting in Monaco this week for their annual summit may have been given a reprieve by last year’s stock market rally but it helped to paper over the fundamental cracks identified at the 2009 conference.

Industry bigwigs such as Martin Gilbert of Aberdeen Asset Management ADN.L and John Flint of HSBC Asset Management HSBA.L will debate the best business models for these turbulent times, with managers who fail to reposition their businesses likely to find themselves in difficulty.

The 2010 Fund Forum conference, which runs from Tuesday to Thursday, comes at a time when the sovereign debt crisis has triggered a another bout of volatility and investors are showing a reluctance to load up on equities.

It is very different from the situation last year, when bouyant markets removed the pressure on managers to look closely at the nature of their business and relationships with clients.

“The global market put its foot on the throat of this industry and then took the pressure off with the rally so a lot of the misery and angst of the reorganisation that the industry would have had to go through didn’t happen,” said Shiv Taneja, managing director of Cerulli Associates, a research group.

"The market improvement has provided a balloon of oxygen for a number of players but fundamental issues remain," agreed Alain Grisay, chief executive of F&C Asset Management FCAM.L.

Industry bosses like Aberdeen’s Gilbert, one of the most acquisitive managers of recent years, now face a tough choice. Do they continue to invest to steal market share from weaker rivals, or do they protect themselves against a possible substantial market decline across the board, which would further rounds of retrenchment and cost-cutting?

“This is where real judgement will be called for,” said Taneja. “If you over-extend you might have to pull back if volatility continues, but if you don’t invest you might miss an opportunity next year.”

As a result, 2010 is proving to be a much more difficult year than 2009.


Factbox on asset management industry [ID:nLDE65M17E]



Taneja said that some big firms had simply put their heads under the desk for 18 months, before coming out post-crisis and carrying on as if it was business as usual.

“But others thought long and hard about their businesses, and made root and branch reforms and they are the ones who will be better equipped for the future,” he said.

JO Hambro Capital Management (JOHCM) is one UK boutique that cut costs in the downturn and has diversified its revenues by building its institutional and private client businesses.

Gavin Rochussen, group chief executive, said he had expected more Darwinian cleansing across the industry in terms of restructuring, consolidation and polarisation but the government-stimulus-triggered rally had stymied the move.

“When this (government stimulus) is withdrawn, those businesses that didn’t make the changes they should have will fall by the wayside,” he said.

One of the key issues the conference will address is that although fund managers have seen asset prices appreciate, the volume of assets under management has only modestly increased.

Taneja said in 2009, the mutual fund industry grew by 16.2 percent globally but of this market gains contributed 15.1 percentage points and net flows only 1.1 percentage points.

“A very large number of investors sat on the sidelines,” he said. From an industry standpoint this is not a great place to be. “Where your entire growth is based on the stock market then this so-called recovery is pretty fragile.”

Managers also have to grapple with the fact that fixed income has grabbed the lion’s share of fund flows rather than equities. Taneja said that in 2009, U.S. investors moved more than $500 billion out of money market funds, but equity funds received only $22 billion in positive net flows.

A strong 18-month rally in equities might reverse this but it might also signify a structural shift in investor behaviour. Such pressures are prompting several UK players to build more sophisticated fixed income offerings [ID:nLDE6510LN].

The impact of regulation is also expected to be debated at the conference. F&C’s Grisay, who has just acquired Thames River [ID:nLDE63R09I], believes smaller firms will be hit harder by increased regulation as they have less ability to absorb the costs from the changes. (Editing by Karen Foster)