Recovery in the Nordics

June 8, 2011

As our teams have been on the ground in 2011, we’ve been receiving particularly positive feedback from our clients and prospects in the Nordics about the future of the asset management industry.   PORTIA is a truly global business, and as such, is uniquely positioned to share insights on our markets based on real, on-the-ground conversations with industry experts and insiders.

The key message we hear from the Nordics is about recovery and growth.  The Nordics as a region are growing GDP and are economically healthy – these countries are not suffering from tightening credit, depressed real estate markets, high unemployment, out of control debt, or many of the other economic worries plaguing Western economies.  Sweden seems to be a hub of activity for asset managers in particular, with particularly strong economic growth coming out of the downturn.

Asset managers in the region expect positive inflows in 2011, with emphasis on growth in the institutional and wholesale markets.  While M&A is a global trend, the Nordics are seeing M&A activity influenced by regulatory change.  For example, as financial services firms grapple with the implications of Basel III on their cash positions, we may see large regional banks spin off asset management divisions to focus on their core strategies while asset managers use the opportunity to engage in M&A to achieve scale to compete and expand.

There are a few key issues in the region worth highlighting:

  • Products will remain largely unchanged, but asset managers in the Nordics struggle with the global issue of convergence (also called barbelling or alpha/beta separation) in their underlying investments.  That is, asset managers are achieving beta more and more through indexing, and are engaging in more aggressive alpha-seeking behaviour. 
  • Distribution in the region is unique, as asset managers often rely on banks to distribute their products.  With banks focused on cash management due to regulatory changes and requirements (ex: Basel III), asset managers may find it more difficult to leverage their bank partners to reach new markets, especially beyond the Nordics.
  • Regulation is both a concern and opportunity for asset managers in the Nordics.  The practical impact of UCITS IV is uncertain, but the sentiment is that it will provide opportunities for regional managers to attack new markets (ex: continental Europe).  As stated above, Basel III causes concerns about fund distribution, and may be a driving factor in the region’s M&A patterns as large regional banks rationalize their businesses.
  • Operations must adapt to the new economic and regulatory environment.  Asset managers are concerned about risk management (a global trend), and look to better manage clients via CRM investments.  One interesting trend is that operations outsourcing is growing as firms look to providers for their capabilities and expertise.

These trends have a major impact on how financial technology vendors approach the market.  We believe that PORTIA, with its global capabilities and reach, is uniquely positioned to meet the operational needs of asset managers in the region.

Regarding the above comment on products, there is ample evidence to suggest that alpha / beta separation will cause performance to become less of a differentiator over time.  According to McKinsey (The Asset Management Industry in 2010), even top rated funds are experiencing negative inflows, implying that it takes more than performance to differentiate asset managers:

 

We believe that firms in the Nordics need to work with financial technology vendors that can assist them with differentiation.  PORTIA, with its global functionality and multi-currency capabilities, can help firms achieve their global distribution goals by supporting global operations.  PORTIA’s world-class client reporting serves as a differentiator, especially for demanding institutional investors – the sector growing quickest in the Nordics.  PORTIA’s operations experience can help firms automate processes and increase transparency, easing regulatory burdens.  And of course, PORTIA can help firms outsource their middle-to-back office operations, from basic hosting to full scale outsourcing. 

We have approximately 15 years of experience working with asset managers in the Nordics to improve their operations, and we look forward to a productive 2011 in the region.  What trends are you seeing in the Nordics?  How do you see financial technology addressing the region’s challenges?

-Matt Bellias, Director of Strategy and Marketing

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