Asset management and the inflation effect

Thu Sep 20, 2012

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Comment by Joy Dunbar, Editor of Absolute UCITS

The implicit and explicit effects of inflation can be felt globally and for the asset management industry this creates an opportunity as well as a challenge.

On one hand, investors need investment products, with risk-adjusted performance, that beat inflation - and this is an opportunity for the alternative UCITS industry.

The industry thus has an opportunity to develop and launch new products for retail investors who want to save either into a defined contribution pension scheme or long-term savings investment vehicle.

On the other hand, the returns from asset management are being squeezed in real terms by increased inflation - as well as the increased costs associated with changes to regulation, compliance and other global measures impacting the financial services sector.

This means in practise that charges will go up and/or asset managers will seek to cut costs - or a combination of the two.

Asset management companies should try to create long-term products that provide good risk adjusted protection from inflation and above real interest rates - creating funds that people want to invest in the long term - which would be good for their business.

This is where an onshore product that aims at absolute returns and which can also hedge, like an alternative UCITS, comes in. 

For the onshore investors, this can be a welcome development - if it protects on the downside, with low volatility and [hopefully] with a high single-digit return in the 'new normal' era - of low interest rates, shrinking growth and low confidence.

The solution to one problem may of course create another: if alternative UCITS do attract a lot of assets, then there will be larger funds - which tend to have lower performance compared to smaller ones.

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