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For Europe’s asset managers, the financial crisis and an evolving regulatory environment have reinforced cost pressures that have been building in recent years, creating a need to achieve scale and efficiencies through a focus on core competencies. Already, a wave of consolidation has begun that is likely to continue while asset managers embrace new ways to reengineer their businesses amid changing investor needs.

“Over the next five years, the pursuit of scale through consolidation by asset managers is set to be a defining trend, with the potential to significantly enhance the efficiency of the industry,” said Stephen Smit, executive vice president and head of State Street’s Global Services business in the United Kingdom, the Middle East and Africa. “Asset managers are rigorously reviewing their operational models, and we are seeing an increased trend toward outsourcing of investment operations. And with the forthcoming UCITS IV Directive, managers are also exploring the potential to further streamline fund ranges and reduce costs.”

The paper explores regulatory change as another key factor for the industry, assisting the efficiency drive and intensifying the cost pressures that are forcing consolidation. Post-crisis, investors are increasingly adopting the ‘barbell’ approach that mixes low-cost passive exposure with alpha strategies. Over the next five years, large asset management firms are set to emerge with low-cost, scalable business models, while others will focus on building stables of boutique managers.

“Asset managers must develop businesses that can meet investors’ changing needs,” said Mike Karpik, senior managing director and head of Investments and Fund Products for State Street Global Advisors in Europe, the Middle East and Africa. “Success will come to those firms that can offer investors clear, relevant and compelling propositions. Above all, asset managers will need a sharp focus on what they do best, underpinned by a lean and efficient operating structure.”

State Street’s Vision Series addresses key trends and developments impacting the financial services industry. Previous reports have focused on pensions, UCITS IV, exchange-traded funds and sovereign wealth funds. To download a copy of this Vision Focus report or others in State Street’s Vision series of in-depth reports, please visit www.statestreet.com/vision.

(press release)

State Street Corporation is one of the world’s leading providers of financial services to institutional investors, including investment servicing, investment management, and investment research and trading. With $19 trillion in assets under custody and administration and $1.8 trillion in assets under management at June 30, 2010, State Street operates in 25 countries and more than 100 geographic markets worldwide. For more information, visit State Street at www.statestreet.com.

- FG