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25 years, 25 CEOs: Mohamed El-Erian, Pimco - "too much ambiguity in regulation”
03 September 2011
Global Investor/isf is marking its 25th anniversary with 25 CEO interviews, here Mohamed El-Erian, CEO and Co-CIO of Pimco, explains the need for more regulatory clarity, and why banks will play a smaller role in the future asset management industry
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Mohamed El-Erian
Pimco
regulation
sovereign debt
Bill Gross
Global Investor/isf: What concerns you the most about the state of the asset management industry at the moment?
Mohamed El-Erian: With the current unusual set of national and global realignments, Bill Gross and I often wonder how any investment manager can sleep properly these days. The previously inconceivable sovereign debt crisis in the Eurozone, the most elite economic grouping in Europe, is an example of this; as is the downgrade of America’s sacred triple-A credit rating. Meanwhile, the regulatory environment is extremely fluid.
We think of this as a world in which some of the industry’s parameters are turning into variables. This impacts every part of the value chain that we deliver to clients – from the positioning of their portfolios for superior risk-adjusted investment returns, to the design of robust investment vehicles.
Given the unsettling feeling that accompanies massive re-alignments, this also requires much more intensive interactions with clients. Remember, the most critical component of the financial service industry is trust. As such, the industry cannot afford a repeat of the confidence shock that took place in 2008-09 in the context of the global financial crisis.
Is the industry in a state to inspire confidence in clients?
The biggest risk to confidence comes from firms not properly understanding and positioning clients’ assets for the ongoing national and global realignments; too many firms appear complacent, denying the possibility of a major shift despite all the evidence to the contrary. They are not helped by policymakers that repeatedly fail to address mounting structural problems. But the apparent passivity and lack of intellectual curiosity pose a threat to the credibility of the industry as a whole.
Does the current regulatory environment represent a threat to the industry?
When it comes to regulatory changes, the biggest worry is the lack of clarity at both the country and multilateral levels. We believe that the industry can, indeed must, adapt well to whatever decisions are taken by regulators. Unfortunately, today there is too much ambiguity to a process that is not only changing some of the rules but is also altering borders between different types of firms within the financial service industry. All this is rendered even more complicated by the fact that national jurisdictions are proceeding at different speeds and, in some cases, with different ideologies.
What changes can the industry expect in the near future?
Looking ahead I think the industry is set to change in five significant ways over the next couple of years. First, we will see more banks exit from the investment management sector. Second, there will be further consolidation within the sector as firms internalise the higher regulatory and operational costs and respond to clients’ evolving needs. Third, cross-border activities will be subjected to greater regulatory differentiation.
Fourth, analytics and technology resources will be revamped to deal with the changes we talked about earlier. Finally, successful firms will increasingly be those that complement strong portfolio returns for clients with an understanding of their clients’ changing needs, including a gradual shift from a product orientation to a solution orientation. I think that the industry is yet to recognise sufficiently that clients are migrating from a product orientation to a solution orientation.
How important is scale in the current environment?
Scale will continue to be an advantage as it enables a more effective solution orientation and facilitates the absorption of higher regulatory and operational costs. We expect this to be a factor that encourages greater consolidation within the industry. Some of this will be highly visible, taking the shape of new mergers and acquisitions. Others will materialise from successful investment professionals moving between firms.
What is the most important driver of success in the retail market for asset managers?
Success in the retail market requires first, and foremost, that you deliver superior investment returns. This is an absolutely necessary condition. But it is not sufficient. Managers will also need to communicate better with clients who may inevitably feel some degree of discomfort with the heightened market volatility that accompanies global re-alignments. In doing so, they will be required to offer forward-looking analyses and frameworks rather than stick to backward-looking ones that fail to grasp the dynamics of change. Finally, managers will have to ensure that their investment products, including the analytics that underpin them, can properly navigate this changing world.