How can Switzerland evolve into an asset management site?

How can Switzerland evolve into an asset management site?

The Swiss asset management industry is still seeking its “raison d’être” and associated business model. It is therefore not surprising that the alumni association of the University of St. Gallen organized a full day conference titled “How can Switzerland evolve into an asset management site?” Contributors from different segments of the market provided their perspective towards a solution. Key commonalities among all speakers where that, as asset management is an export industry and market access is key. Switzerland should focus on product and service quality and leverage its core capabilities around private banking. On the downside, the goals of the different players are to disparate to agree on a common strategy for positioning the Swiss asset management industry in a highly competitive world. At the end of the day, the conference ensured a shared understanding of the challenges faced. But an answer to the posed question remains far off.

The same question as last year? The same question as every year!”
based on DINNER FOR ONE

On Friday 13th, 2017 – what a coincidence – the alumni association of the University of St. Gallen invited to a full day conference on the future of asset management in Switzerland. A tried and tested topic that has kept its relevance attracted more than 120 participants. The invited speakers represented each a different perspective with respect to asset management, ranging from pension fund investors, global players, specialist, up to a universal bank making the seminar very enlightening.

Big picture

Prof. Ammann, as conference host, introduced the topic by showing how the 9.3% overall GDP contribution of financial services in Switzerland were spread across sectors (see Exhibit 1). He described asset management as an export industry and identified three traits required for success:

  • Market access allowing to export into foreign markets without local presence and / or license requirements.
  • Products which are sought after in the targeted markets.
  • High level of professionalism, especially with respect to knowledge and human capital.
Exhibit 1 – Structure of the financial sector in Switzerland as % contribution to nominal GDP in 2015 (source: BAK BASEL)

Exhibit 1 – Structure of the financial sector in Switzerland as % contribution to nominal GDP in 2015 (source: BAK BASEL)

The investor’s perspective

The pension fund representative identified strong developments towards insourcing asset management capabilities, mainly to

  • reduce costs,
  • avoid agency risks, and
  • improve quality through better control.

In addition, institutional investors increasingly focus on alternative risk premia. They invest in rule based strategies and start deploying artificial intelligence techniques for forecasting markets.

Also, investing in private markets is becoming a hot topic.

Most important needs from an investor perspective

The main characteristics that institutional investors are looking for in an asset manager are

  • the importance of a strategic partnership as relationship model, to ensure alignment of interests,
  • holistic advice focusing on solutions, rather than on product sales,
  • consistent and comprehensible investment performance,
  • a high level of transparency along the whole asset management value chain, and
  • operational excellence, mainly through cost-efficient technology.

Asset management offerings

The shelf of investment products offered by asset managers can be subdivided into three broad segments, as shown in Exhibit 2.

  • Focused investments, like private market investments or dedicated investment strategies, so called smart beta strategies, with reasonable growth potential.
  • Active investment strategies, with significant asset outflows over recent years.
  • Passive investments, mainly through ETFs, with significant growth potential.

Global players tend to position themselves at both ends of the investment funnel, reducing their exposure to actively managed investment products. Specialists are looking for a niche in the specialized investment segment, whereas asset managers part of a universal banks seek to be present in all three segments.

Exhibit 2 – Investment universe funnel (source: based on illustration from BlackRock)

Exhibit 2 – Investment universe funnel (source: based on illustration from BlackRock)

Another key trend identified is that global players believe in a business model in which the activities of

  • investment performance, that is, alpha generation, is separated from
  • communicating with clients on investment topics, including explaining investment performance.

Required capabilities

To deliver the offerings, asset managers need six key capabilities that can be divided into two categories, hard factors and soft factors, and related to the different components of the business model canvas, as proposed by A. Osterwalder and Y. Pigneur in 2011.

Hard factors

  • Investment capabilities, that is, skills to forecast markets and manage risk, to deliver the promised value proposition.
  • Distribution capabilities, including market access, to create and manage the customer relationship.
  • Execution capabilities focused on technology, to deliver the key activities behind the value proposition in an efficient and high quality way, including the construction of portfolios and execution of trades.

Soft factors

  • Investment culture, to ensure that the value proposition can be produced and delivered to the investors.
  • Human-capital and talented staff, building the foundation of the key resources behind the key activities.

Possible value propositions for Swiss asset management

Based on the various insights presented, I identify two possible value propositions for Swiss asset management.

  • Swiss asset management operates as a partner of private banking. Rather than focus on the whole value chain, it concentrates on offering discretionary wealth management and the various sub-elements, like a CIO function, portfolio construction and rebalancing, or risk management, in a B2B type business model, leaving the end-customer relationship management to the private banking partner.
  • Swiss asset management focuses on niche players, mainly in the alternative investment space, both from an asset class as well as from an investment approach perspective.

In both cases, distribution as well as production should be in Switzerland. There does not exist a consensus for hybrid models with local distribution centers abroad and centralized production in Switzerland.

My key takeaways
  • The asset management industry in Switzerland still hasn’t been able to answer the question how to differentiate the Swiss hub from its competitors.
  • It remains unclear to me, whether it is possible to successfully export asset management distribution capabilities, beyond pure product sales.
  • The value proposition partnering with wealth and asset managers allows leveraging core capabilities of the Swiss financial services sector, namely private banking.
  • Focusing on a niche of the asset management market is probably the most promising strategy, especially from an individual firm’s perspective. Whether it would be possible to position Swiss asset management as the preferred place to be for boutique asset managers remains to be seen.

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