Thoughts about a business model for Swiss asset management

Thoughts about a business model for Swiss asset management

Two years have passed since the publication of a white paper on positioning Swiss Asset Management (SwAM). At least from a conceptual point of view, there seems to be a trend indicating that SwAM should stand for superior investment performance in a discretionary context. But when digging a little bit under the surface, various challenges pop up. Addressing those challenges requires finding a compromise with respect to customer intimacy, product leadership and operational excellence. One option could be to define the SwAM strategy as focusing on stable and sustainable investment performance as the driving dimension.

Exactly two years have passed since the Swiss Bankers Association and the Swiss Fund and Asset Management Association have published a white paper on Asset Management in Switzerland. The vision developed reads that Swiss Asset Management (“SwAM”) should stand for the highest level of reliability, independence, and quality.

At about the same time, I published a short post with the title “Is the future of Swiss private banks in asset management?”. I argued that there exist three broad strategies that could be follow in asset management:

  • Focusing on institutional clients,
  • becoming a fund provider, or
  • disseminating strength as a niche player.

Listening to the speakers at the 4th Swiss Asset Management Day (“SAMD”) in Pfäffikon on November 12th, 2014, I got the impression that SwAM is expected to stand for generating superior investment performance. Dr. Schlatter from UBS Global Asset Management defined SwAM as delivering suitable investment return within given fiduciary duties. Similarly, Dr. Bürer from Twelve Capital, proposed the definition of SwAM as taking investment decisions on a discretionary basis for a fee. Superficially, these definitions seem like a sound strategy. Unfortunately, life is not that simple, especially if SwAM should be a winning strategy.

Setting the Stage

Consider Michael Porter’s approach to competitiveness, as shown in Figure 1. He states that, broadly speaking, any successfully strategy requires differentiation with respect to competitive advantage and competitive scope. It is easy to derive that SwAM should not follow a cost leadership strategy

  • because of the relatively small size of the Swiss market,
  • because of the maturity of competition focusing on cost leadership, and

because cost leadership does not rhyme with Switzerland, that is, Swiss values.

Figure 1 – Michael Porter’s approach to competitiveness

Figure 1 – Michael Porter’s approach to competitiveness

Although Switzerland plays a major role as a financial center worldwide, believing in the possible success of a broad market differentiation strategy seems pretentious to me. Therefore I believe that the SwAM strategy should implement a focused differentiation business model, aiming at a well-defined market segment that is sufficiently large but not too broad.

Identifying the epicenter

To look forward, let’s take step back and review the proposed strategy for SwAM – focusing on superior investment performance – using Michael Treacy and Fred Wiersema’s three disciplines framework (see Figure 2). They state that, based on numerous empirical studies, any successfully company must excel in one the following three dimensions

  • customer intimacy,
  • product leadership, or
  • operational excellence

and be good, that is, achieve benchmark performance, in the other two. Reformulating these tree dimensions in the context of asset management means, putting the epicenter on either

  • customer needs,
  • product innovation, or
  • investment performance.
Figure 2 – Treacy and Wiersema’s three disciplines framework

Figure 2 – Treacy and Wiersema’s three disciplines framework

Reviewing the feasibility

According to the SAMD’s speakers, Switzerland should excel along the investment performance dimension and achieve benchmark in product innovation and satisfying customer needs. When reviewing this positioning approach, a least three challenges pop up.

Challenge 1 – Non-existing track record

Without a track record, usually endorsed by awards, focusing on investment performance remains wishful thinking but not a viable option. Although there exist individual investment products managed in Switzerland that can provide such track records, none of the current asset managers (apart from some small niche players) would merit that label.

Challenge 2 – Clients availability

Without clients, the best investment performances is worthless. Although superior investment performance will attract clients, even foreign ones. But assuming it is possible to build a strategy for SwAM without a domestic client bases is naïve at best. In Switzerland there exist two major client basis, that is, i) private banking clients and ii) pension funds, which could be relevant for SwAM. Unfortunately, private banks and particularly their clients, seek for value propositions that are different from pure investment performance – they look for stability and product innovation. The pension fund segment, on the other hand, aims at investment performance. But it is not large enough (and too cost sensitive) to base a whole industry strategy on it.

Challenge 3 – Access to sufficient talent

To deliver investment performance, and thus address challenge one, there exists a strong need for talent and access to talent. And not any talent, but highly skilled experts with a strong academic background in finance related topics and field experience. Unfortunately these are hard to find (partially due to the Swiss dual education system) and, going forward, even harder to import.

And what does this mean?

Do these challenges mean that SwAM is doomed to fail? I don’t believe so! But a change is strategy, moving away from mainly focusing on investment performance is required. Following the framework shown in Figure 2, three questions need to be answered:

  • With what value proposition should SwAM compete?
  • Whose needs should be satisfied by the selected value proposition?
  • How can be ensured that the value proposition promised can be delivered?

This means that the SwAM strategy should

  • allow for differentiation from other asset management centers, like London, New York, or Singapore, to name just the most important ones,
  • satisfy the needs of specific and well defined customer segments,
  • build upon capabilities and skills readily available or easily developed or imported,
  • allow for scalability, or as Porter states, allow leveraging the value chain capabilities, and
  • seamlessly integrate with the core values of the brand Switzerland and thus provide continuity over time.

A final idea

Although, I don’t have a final answer to all these questions, especially not one that would allow for consensus among the industry participants, I believe focusing on a value proposition build around stability of investment performance rather than pure performance could open an interesting opportunity for a successful SwAM strategy.

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