Study Reveals Best and Worst Asset Management Innovations

While innovation is considered to have produced mixed results over the last decade, asset owners have retained an appetite for innovation, as long as specific principles are met.

An annual, independent study commissioned by Citi’s Global Transaction Services and Principal Global Investors, indicated that the U.S. has been both a principal innovator as well as early adopter in asset management. The U.S.’s long renowned entrepreneurial culture is one factor, as well as its large pension backyard which currently harbors 58% of the world’s total pension assets according to the survey report, entitled Investment Innovations, raising the bar  

The study reveals a common sentiment that the defined contribution (DC) product pipeline is likely to improve in this decade with accumulation and decumulation options in order to attract ever more assets from trust-based plans.   

Over 500 respondents from pension plans, asset managers, consultants, administrators and distributors from 30 countries with a combined assets under management of over $29 trillion were surveyed and indicated that the five innovations that delivered the most value over the last decade were: 

  • emerging market equities
  • emerging market bonds
  • high yield bonds
  • liability-driven investing
  • exchange-traded funds (ETFs)

Pension plans that benefited from them attribute their success to strong beliefs in their intrinsic worth, a disciplined approach to buying and selling, and in-house capabilities to chase early mover advantage.  

Innovations that delivered the least value include: 

  • leverage
  • structured products
  • portable alpha
  • currency funds

Pension plans that lost out attribute the outcomes to the absence of intrinsic value, herd instinct and low engagement with their asset managers. Lack of client engagement is viewed as a major cause of failed innovation: 73% of pension funds surveyed are only rarely/occasionally engaged when asset managers innovate their financial products.   

Pension funds also said they did not heed the “health warnings,” nor did they have the skills and governance to enter into anything complex or risky.Fifty-seven percent of respondents said that emerging markets equities delivered most value while leverage recorded the worst performance, according to 40% of respondents.  

The study also found: 

  • 50% of pension plans believe a switch from products to solutions will be a key driver of innovation over the next three years; and 
  • A mismatch exists between asset managers’ and clients’ expectations – 39% of the clients think further product innovation will deliver genuine value over the next three years versus 64% of the asset managers. 

Barbara McKenzie, Chief Operations Officer of Principal Global Investors, said in a press release: “In the U.S., products of most interest tend to be those with high income producing capabilities, given the ‘living-in-retirement’ needs for a growing percentage of the population, but also emerging markets capabilities because of their growth and diversification potential. The report also finds that in the next decade, DC products will experience further innovation. The industry is already seeing growth in investment options, particularly in areas of target date and target risk funds.”  

The full report can be downloaded here