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FINANCIAL SERVICES

Industry InsightsA snapshot of the key trends, issues and challenges facing

the investment management industry

March 2013

kpmg.com

KPMG INTERNATIONAL

http://kpmg.com

IntroductionTo say that these are interesting times in the investment management industry would be an understatement.

Global markets continue to regroup in the wake of the worst financial crisis in memory. While the eurozone appears to have stabilized of late, there are fundamental unresolved issues that could see the region slip into crisis any moment. Despite an increasing focus on growth from emerging markets, many observers remain skeptical due because of the serious governance challenges facing many of these regions. Then, of course, there’s the unrelenting storm of regulatory change that continues to drive industry transformation and restructuring in markets around the world. And as the backdrop to all of this, the financial services industry continues to scramble to rebuild the public trust that was shattered in the aftermath of the financial crisis and the wave of high-profile bankruptcies and scandals that followed.

Further complicating matters is the fact that today, even as the industry works to reclaim some semblance of normalcy, it is facing new threats from a crop of bold industry disruptors with the potential to alter the landscape of the investment management industry beyond recognition.

Indeed, interesting times.

What better time, then, to query the investment management business’s top minds about their thoughts, insights, concerns and predictions for the industry? We sat down with more than 30 Chief Executive Officers from a range of investment management firms throughout Europe. The objective was simple: to understand what are the most important and top-of-mind issues impacting the businesses of the industry’s leaders. Perhaps understanding and addressing these issues could help our clients gain an edge in this complex and competitive market.

The results of our discussions with this group of CEOs were illuminating, thought-provoking and, as some readers may find, perhaps a bit unsettling. Their candid observations and predictions paint a portrait of an industry that, on one hand, is still coming to terms with the after-effects of the financial crisis while, on the other, is bracing itself for seismic change on a number of key fronts. There are five areas, in particular, that are seen to be influencing the industry:

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© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

An unrelenting storm of regulatory change...continues to drive industry transformation.

1. Geopolitical instability - while always a pressure on markets, transformational changes in the energy sector, the Middle East, and China as well as developments in the eurozone are significantly influencing investment management.

2. Regulatory change -the implementation of regulations is forcing asset managers to look carefully at their operating and business models.

3. Changes to distribution models - competitive and market driven pressures are forcing firms to change their distribution models resulting in a significant shake up of the industry.

4. Due diligence and transparency - in the “post-Madoff” era these have increasingly become the focus of CEOs and leaders in firms around the world.

5. Impact on new potential market players - technological advancement has opened the door to the potential for new market entrants that could threaten current market players.

Alas, it would appear that turmoil and flux are the order of the day for the investment management industry for the foreseeable future. The industry, still recovering from one crisis, is entering an era in which is beset on all sides by challenges and potential difficulties. As Albert Einstein observed, however, “In the middle of difficulty lies opportunity.” While this wave of rapid, transformative change will undoubtedly leave a number of casualties in its wake, many of the leaders we spoke with suggest it will also present valuable opportunities for the most proactive, agile and forward-thinking players to evolve, to adapt and to continue to lead the industry forward in the years to come.

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The emergence of a new global order

A glance at the headlines of any daily newspaper quickly underscores the reality that, from a geopolitical perspective, countries from virtually every corner of the world remain in a state of incredible tension and flux. Indeed, there appears to be a new global order and set of alliances emerging, the results of which will likely lead to massive changes across the globe in the coming years.

Not surprisingly, the energy sector remains one of the key focal points of all this attention, with seismic shifts taking place on both the supply and demand sides of the ledger. Among the 34 countries that comprise the Organization for Economic Co-operation and Development (OECD), oil and coal consumption remain in decline, while consumption in China continues to increase at a rapid pace. There’s also a significant, new source of petroleum on the world stage, as the super-fields of Iraq are fully operational. In addition, the Shatt al-Arab river (Arabic for ‘Stream of the Arabs’), which lies on the border of Iran and Iraq, has been opened for shipping for the first time in more than three decades, giving oil tankers access to Basra and paving the way for a dramatic increase in oil exports from Iraq. The big winners remain the OPEC countries, as demand for petroleum increases and oil prices continue to climb.

There are significant shifts taking place in the west as well, as the massive extraction of natural gas and oil from North America’s shale beds have led to plummeting prices for natural gas. At the same time, an increasing number of coal-fired electricity generating plants continue to be converted to natural gas, given the combined attractiveness of the commodity’s low emissions as well as its low price.

Still on the energy front, coal remains the backbone of global electricity generation, with China still ranked as the world’s largest coal producer at more than 3 billion tonnes per year. Despite its place atop the coal production hierarchy, China still continues to import coal from countries including Australia to meet the country’s unrelenting demand for energy. The United States is the second-largest producer of coal at a current production rate of 936 million tonnes per year.

On the political scene, numerous countries in the Middle East, including Egypt, Syria and Libya to name just a few, continue to witness high levels of instability, upheaval and unrest. In addition, anti-US sentiment continues to run rampant throughout much of the region, particularly in Iran, where the chant for Friday prayers is ‘Death to America’.

The geopolitical outlook

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Numerous countries in the Middle East...continue to witness high levels of instability, upheaval and unrest.

The geopolitical outlookMeanwhile, there remains a high degree of concern among many countries (with the US and Israel at the top of the list) that Iran is enriching uranium not for purposes related to energy generation as the country continues to state publicly but, rather, as part of its pursuit of a nuclear armaments program. On a related note, the US continues to have as one of its key foreign policy goals to prevent Israel from conducting a pre-emptive bombing strike on Iran.

Given the effects and implications of globalization, there are few countries (if any) that are immune from the significant degree of uncertainty and tension on the global stage. Clearly, there are more questions than answers at this point in time. One thing, however, is clear: the coming months and years will bring with them profound geopolitical changes that will have extensive, real-world implications for the investment management industry.

Spotlight on China

With respect to the world’s most populous country, there are a number of important political and economic factors in play that could translate into significant implications for the investment management industry going forward. First and foremost is the fact that China continues to be in a state of political transition with the recent changes to the country’s politburo. Historically, such periods of political transition have tended to dampen policy change in China, an effect that may well be exacerbated during an economic slowdown like the one the country is currently experiencing. As such, China’s governing officials may be more inclined to maintain the status quo from an economic standpoint, which would likely translate into yet another wave of investment-led economic stimulus.

And while small and medium enterprises continue to represent a key driver of employment throughout China, many of these businesses are having increasing difficulty accessing the bank funding they need to finance growth.

Another growing trend that will likely have significant implications for China down the road is the fact that a significant percentage of its wealthy inhabitants are actively looking to leave the country to live elsewhere. A recent survey of 980 Chinese residents with more than USD1.6 million in assets found that 46 percent were seriously considering emigrating. An additional 14 percent have already emigrated or are currently in the process of doing so. Only 40 percent of the country’s wealthy class is not actively considering leaving China. This potential exodus of wealth from the world’s largest country represents a significant challenge for the government and would have significant ramifications for the country’s economy.

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Given its vast population and economic might, it’s clear that what happens in China will undoubtedly have implications for much of the rest of the world. As several astute business writers have observed, “If China sneezes, we’ll catch more than a cold.” It remains to be seen how the country will respond to this period of economic sluggishness and impending political change. In any event, the investment management industry would be well-served to monitor closely the happenings in China and to respond accordingly depending on the new realities the winds of change bring in the months ahead.

Old wealth in the new order

With all of this instability on the global geopolitical stage, many of the members of the world’s ‘old economic guard’ are finding themselves in unfamiliar and unpleasant territory, forced to cope with a host of political and economic time bombs. The eurozone is in utter disarray, with member countries struggling to come to terms with solutions to the unprecedented debt crisis that threatens to tear the region apart.

Greece appears all but certain to default and while the country only represents 2.5 percent of European GDP, with private investors already having taken a 75 percent ‘haircut’ on Greek debt, the country has essentially already defaulted on its debt obligations.1 The real questions with respect to Greece today are, “Who cares” and “Does it really matter?” What should be of greater concern is the potential contagion effect and the resulting impact on Spain, Italy and other struggling, debt-laden countries in the eurozone.

Spain represents another source of economic and political concern. The country, which is the fourth-largest economy in the eurozone, has suffered a massive real estate collapse and currently has an unemployment rate of approximately 25 percent2 which is putting social cohesion under threat. At the same time, yields on Spanish bonds are hovering between 6.5 percent and seven percent,3 which is placing an unsustainable burden on the country in terms of interest payments. And international consulting firm Oliver Wyman is currently reviewing the potential risk in Spanish banks’ balance sheets, which have already written down real estate debts by a whopping 30 percent.

There are similar concerns in Italy, where there is a cliff of refinancing on the horizon, with 40 percent of Italian debt being held by other countries and

1 http://www.minfin.gr/portal/en/resource/contentObject/id/0dac0191-f4fb-46eb-8df2-536893feb1872 http://www.cbc.ca/news/business/story/2012/10/26/spain-unemployment.html3 http://www.businessinsider.com/spain-bond-yields-2012-5

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The world’s ‘old economic guard’ are...forced to cope with a host of political and economic time bombs.

50 percent of that debt due to be refinanced within the next two years.4 Markets are also discounting the value of Italian banks, as the widely-held view is that the Italians have underestimated the risks on their balance sheets through their exposures to sovereign debt, loans to small and medium enterprises and for real estate and cross-financing.

For its part, the US is dealing with a massive and growing divide between the elite wealthy and the remaining 99 percent of the population – an income gap5 that continues to spawn unrest and protests, including the infamous ‘Occupy’ movement, throughout the country. To grasp the nature of the income divide in the country that still lays claim to the world’s largest economy, consider that in 2010, 37 percent of the country’s total personal wealth was generated by the top 0.1 percent of the population. The next 56 percent of personal wealth was generated by the rest of the top one percent of the population, while the remaining seven percent of personal wealth was created by the bottom 99 percent of the population.

Japan, that former economic powerhouse, continues to be an economic laggard, with the outlook for the country’s gross domestic product remaining grim by all measures. And many of the investment management industry executives we spoke with suggested that the country’s proposed introduction of a new consumption tax would likely serve to depress, rather than stimulate, economic growth in the region.

Meanwhile, widely-respected observers including Paul Krugman and Richard Layard, professors from Princeton University and the London School of Economics, respectively, argue in their ‘Manifesto for Economic Sense’ that there is no evidence that the drastic austerity measures currently being implemented by a growing number of countries will help increase confidence or spawn a recovery. Rather, they say, that while the best economic policies will differ between countries, they must be based on a correct, fact-based analysis of the problems at hand.

While the ‘old wealth’ has its hands full coping with the challenges associated with the shifting geopolitical landscape, there exists substantial opportunity for many of the world’s emerging markets. What remains to be seen, however, is whether these emerging markets countries will be successful in meeting the short-term challenges posed by factors including political stability, government effectiveness, regulatory quality, rule of law and control of corruption to name but a few. Indeed, it appears the future may well belong to the countries that are able to overcome these challenges.

4 http://blogs.ft.com/the-a-list/2011/11/29/italys-debt-must-be-restructured/#axzz2KnZtHFwJ5 From a presentation Professor Marvin Zonis, University of Chicago made at the Funds Forum

International in Monaco June 12.

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Of the many byproducts of the global financial crisis, perhaps one of the most prevalent and far-reaching nearly five years later is the enormous wave of regulatory change that continues to serve as one of the major drivers of industry transformation and restructuring. And while the US and the European Union remain the primary epicenters for this regulatory change, we are also witnessing similar reforms being introduced in jurisdictions including Hong Kong, China and Australia among others. In addition, there are a number of ambitious new ‘local’ regulatory initiatives, such as the Foreign Account Tax Compliance Act (FATCA) in the US and the Alternative Investment Fund Managers Directive (AIFMD) in the European Union that promise to have wide-reaching cross-border implications.

With the after-effects of the financial crisis still fresh in their collective minds, many of the world’s governments are clamoring to institute layer upon layer of stringent financial regulation. For the most part, these new regulations are tougher and more comprehensive than any of their predecessors, with complex new requirements and many more products falling into scope. Some of the areas hardest hit by this ‘tsunami of regulatory change’ include alternative investment managers and funds, the complex reporting demands associated with systemic risk of private funds and funds distribution.

As part of this regulatory backlash, there is a swift and simultaneous shift toward greater governance, increased transparency and enhanced due diligence as these things become industry best practices, driven in part by regulatory change and in part by demand by institutional investors. In particular, we are continuing to witness an increased focus on governance and operational due diligence in the hedge funds space, which has historically been one of the financial industry’s most enigmatic segments.

The AIFMD will have a significant impact on AIFMs’ overall businesses. The pressure was ratcheted up yet another level when the long-awaited Level 2 Implementing Measures were released in late December 2012, providing AIFMs with a set of detailed rules for implementation. Indeed, with the July 2013 deadline fast approaching, AIFMs that have not yet started preparing in earnest for the Directive should be feeling an acute sense of urgency to do so at the earliest opportunity. The business implications of the Directive are significant, the amount of work to be done is substantial and the timelines for preparation and are increasingly short. The Directive promises to bring fundamental change to alternative fund managers both inside and outside the European Union, as managers will be forced to deal with requirements including having sufficient substance in the management entity regarding risk and portfolio management functions, valuation and compliance

An avalanche of global regulatory change

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The enormous wave of regulatory change...continues to serve as one of the major drivers of industry transformation.

function and the documenting and disclosing of business operations, risk management, compliance arrangements, due diligence and selection process.

AIFMs will need to make extensive changes to their business models to comply with the AIFMD. Perhaps the most high-profile element in this regard has to do with the appointment of a depositary. At this stage in the game, the number of suitable depositaries that are ready, willing and able to offer the services spelled out under the Directive is relatively small. Furthermore, given the few depositaries that are prepared to deliver this key service, some may stop accepting new clients in order to mitigate the risks of having too large a client roster while they’re dealing with the AIFMD ‘learning curve’. The appointment of a depositary is one of the most important strategic decisions managers are tasked with under the AIFMD and this process will require significant changes to the internal organization of both the AIFM and the depositary.

Business transformation opportunities

Amid the profound and widespread changes taking place throughout the global financial services industry in 2012, there will undoubtedly continue to be a number of business transformation opportunities. For example, facing the intense political and regulatory strain associated with changes such as those associated with the Volcker Rule (part of the Dodd-Frank Wall Street Reform and Consumer Protection Act), some financial services companies are opting to divest of their asset management arms, generating significant opportunities for those seeking to acquire.

Other players may choose to capitalize on the changing landscape of the global financial services industry by adapting their business models, expanding their footprints via increased geographic coverage and/or introducing new products tailored for the new realities of the market and the new regulatory regimes.

It is also likely that investors’ demands for increased transparency around investments and risk management will lead to increased operational infrastructure costs, resulting in a profitability squeeze throughout the investment management industry.

Another byproduct of this new and more rigorous set of regulatory regimes will be the increased need for firms to efficiently and effectively manage the resulting ‘Big Data’ related to clients, investments and compliance. Investment managers that have not already done so would be well advised to leverage advances in technology in order to better handle the impending exponential growth in data management requirements (particularly related to their risk and compliance functions) as well as to help reduce the associated costs.

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As part of the process of gathering these insights into the current state of the investment management industry, KPMG talked to 25 CEOs and heads of distribution of European asset management companies to better understand how distribution models are evolving and to help pinpoint some of the more pressing challenges and potential opportunities for growth. One thing seems abundantly clear: With the continuing tidal wave of regulatory change, severe margin compression and increased market volatility, asset managers will be under intense pressure to reorganize their businesses in order to adapt to the ‘new normal’.

When asked about the various forces of change currently acting on distribution models in the industry, the executives we spoke with provided a number of eye-opening insights and predictions. Perhaps the most shocking assertion from the CEOs we spoke with was that between 20 and 30 percent of the people and companies in the asset industry today will virtually disappear over the course of the next decade. While it remains to be seen if this ominous prediction will come to fruition, if true, it will translate into significant turmoil for the industry.

Our group of executives also said they anticipated relentless pressure on margins, a trend they don’t see going away anytime soon.

Among the other potential ‘forces of change’ they discussed were a shift to lower-priced products, the continuing wave of regulatory change and the stark realization that, for the time being at least, market volatility is the new norm.

The move to solutions

While there are certainly some ominous storm clouds on the horizon relating to the challenges associated with factors such as scalability, complexity and hidden costs, many industry players remain optimistic and focused on working toward solutions that will help position them for profitability and success in the future. For instance, asset managers say they’re looking for deeper and longer-term client relationships. As a result, they say there is currently significantly more effort being invested in extending the scope and duration of relationships with existing clients.

Retail intermediaries, on the other hand, say simplification is the key and that they’re seeking simple, outcome-oriented product sets that they can then sell, in turn, to their end customers.

Evolving distribution models

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For their part, institutional clients say they are looking for product sets designed to help them better cope with the current market challenges associated with factors including long-dated liabilities, inflation and market volatility to name but a few.

Leading players reshaping their distribution models and strategies

As part of the ongoing evolution of the industry landscape, many providers are opting to make strategic changes to their distribution models. For example, in order to better maintain intimacy with local clients, some providers are refining their business models to help ensure what they consider to be a more appropriate balance between global and local operating structures. Others, perhaps looking to move up the value chain in the eyes of their clients, are putting an increased focus on what they consider to be ‘solutions’ rather than simply ‘products’.

Another tactic being employed by some players is the reorganizing or integration of their client-facing teams. One particular asset manager located in Brazil chose to co-locate their front and back office staff in order to enable greater levels of transparency for their end-to-end processes and to pave the way for better communication and more seamless collaboration between teams.

Yet other providers are opting to invest more in the product knowledge and selling skills of their sales teams. Indeed, the composition of sales teams throughout much of the industry is changing significantly, with highly qualified candidates, many who possess PhDs, taking their places on the team to help provide a more analytical perspective.

Another common theme mentioned by a number of executives was the need to ‘manage for margin’ by reducing complexity wherever possible in the value chain. But by far, the number one issue of importance according to these executives was being able to provide existing clients with better service. To that end, more and more sales forces are finding themselves conducting ‘structured selling’ and investing in getting to know their client companies through the coordinated pursuit of ongoing dialogue with clients.

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While there are a number of challenges facing the industry going forward, two that we have yet to address in this paper are the implications associated with operational risk in an evolving marketplace and the challenges associated with cost.

Operational risk

As many of our interview subjects told us, one of the most significant risk factors facing the industry today is the relatively new reality that operational risk is now central to their business models. This shift has much more fundamental implications than simply increasing budget allocations to better understand due diligence. Ever since the Madoff scandal made international headlines, operational due diligence has been viewed as part of the overall value proposition and, indeed, as a source of alpha.

One of the more often-overlooked aspects of operational due diligence is the need to perform an external audit of Information Technology (IT) infrastructure on a periodic basis to ensure the company’s IT infrastructure is robust enough to handle the demands associated with the growing complexity of instruments and markets. Indeed, for many firms, it is proving to be a constant and pressing challenge to update legacy platforms in order to adapt to this ever-changing investment environment.

In addition, the increasing complexity of the trading environment implies the need for substantial improvements in areas such as counterparty and collateral management, specifically with respect to over-the-counter (OTC) derivatives.

And finally, the collapse of companies including Lehman Brothers, Bear Stearns and others has helped shine a spotlight on the importance of employing independent asset valuations whenever possible. Given that illiquid assets are frequently marked to model rather than marked to market suggests the importance of such external and independent valuations.

Industry challenges



Going forward, the companies that win in the area of operational transparency will be those that are quick to introduce and maintain mechanisms to monitor each link in the operational due diligence chain. In addition, the implementation of robust IT-related processes will be key to enhancing the high degree of transparency that investors and regulators have come to expect and, indeed, demand.

Cost structures

The business models of many asset managers are also being challenged by the fact that costs are rising more quickly than revenues. This new reality has helped focus attention on what is considered to be a general lack of transparency in the area of cost structures. On that note, many asset managers currently face the challenge of understanding and accurately measuring their cost structures and appropriately allocating costs across their various product lines.

It is advisable for companies to adopt transparent managerial accounting practices in order to enable themselves to better understand and control costs throughout the entire value chain. Perhaps one of the more obvious alternatives might be for firms to apply cost accounting principles that are common in other industries, but which have not been generally applied in the asset management sector to date. It will be essential to examine and reappraise these costs broken down into categories including product, market data and customer, along the entire value chain.

Ultimately, the winners will be those firms that are able to implement flexible and efficient IT-based financial accounting systems that are fully operational and that know how to allocate and deploy these resources to maximum effect on behalf of their firms.

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Even as the global investment management industry struggles to adapt to a rapidly changing landscape, it finds itself facing a new set of serious threats from outside its traditional sphere of competition. The stark reality is that there’s an entirely new financial services industry emerging today that didn’t even exist five or six years ago. Thanks to incredible advances in technology and the ‘sector creep’ of industry giants like Google and Facebook, these industry disruptors are rapidly developing new business models that have the potential to fundamentally change the status quo in the investment management industry. These changes are taking place at a time when many of the world’s ‘traditional’ financial services providers are suffering from significantly diminished levels of trust from the consuming public. It is within this context of seismic change that newcomers to the financial services industry are identifying opportunities to enter the market with disruptive business models that may have a much broader appeal to key consumer segments. With that in mind, here is a quick look at just a few potential industry disruptors and the scope of the impact they could have, in a relatively short timeframe, on the financial services industry.

Apple

In the past year, Apple became the largest company in the world as measured by market capitalization. The company also has more than 400 million iTunes accounts, all attached to valid credit card holders.6 That’s a sizable and loyal client base from which to build a potential banking entity. Imagine if Apple were to enter the financial services arena with its Net Promoter Score (used to gauge client loyalty) of 70, compared with the major financial services brands, which have either low or negative Net Promoter Scores. In addition, research from advertising firm Saatchi and Saatchi reveals that companies like Apple, that create love and respect with their customers, are able to generate much higher client loyalty than other companies.

Google

What would motivate Google to enter the banking industry? As bank robber Willie Sutton once famously stated, ‘Because that’s where the money is.’ Banking wouldn’t be the first, nor last, industry that Google disrupted. The company has already caused significant challenges for the telecom, GPS, news media and advertising industries to name a few. Not only would a financial services offering lead to increased usage of the Google family of products (e.g. Chrome, gmail, etc.) but it would help diversify the company’s revenue streams and arguable lead to benefits for its customers, including ease of use, cost savings and an improved online banking experience.

Potential industry disruptors

6 http://www.forbes.com/sites/schifrin/2013/02/07/preferred-apple-idea-ignore-einhorn-and-buy-netflix/



Facebook

With more than a billion registered users who already use the site as their ‘virtual ID’, Facebook has access to more personal data and information on users’ behavior than any other company on the planet. And in 2011, 15 percent of the company’s revenue was generated by processing payments (primarily by users making purchases within social games).7 Having already succeeded in the difficult task of convincing nearly a billion people to use their site as a virtual ID online, the road to becoming a virtual wallet would be a breeze in comparison. Just the thought of Facebook entering the financial services industry would have to be enough to make even the most even-keeled banking executive sleep with one eye open.

In addition to these potential financial services disruptors that already exist as going concerns in other industries (Apple, Google and Facebook), there is also another crop of bold, new companies on the horizon, preparing to fundamentally challenge the status quo. While each is approaching the industry from a slightly different angle and business model, they are all based on one or more of the following key emerging trends: Namely, that data is the new gold, the increasingly important role of trust in business, the area of social media research and the move toward impact investing. Here are just a few of the emerging entrants with the potential to disrupt segments of the financial services industry:

Wealthfront

Wealthfront is an SEC-registered online financial advisor catering to the young and tech- savvy Silicon Valley community. The company, which only offers investments in ETFs and index funds is already thought to have millions of customers using its services. The company has adopted a ‘freemium’ model, whereby the first USD25,000 is managed free of charge and the next USD10,000 is managed free if you introduce a friend to the service. The company only charges 25 basis points on assets managed above this threshold. Using modern portfolio theory, users are able to work out their model portfolio in 60 seconds. These unique and innovative features seem to be popular with Wealthfront’s target market, many of whom dislike ‘traditional’ banks and asset managers.

The company’s marketing positioning centers around ‘making it easy’ and uses slogans such as ‘Join the revolution’, ‘The wave has begun’ and ‘Wall Street, take notice’. While Wealthfront’s services are not yet available to the public, it’s only a matter of time before that happens.

7 http://gigaom.com/2012/05/17/are-facebook-credits-the-key-to-the-social-networks-future/

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Dataminr

This real-time social media analytics company picks up more than 340 million tweets each day, which it then uses to predict events on behalf of clients in the financial and government sectors. The company represents an entirely new category of social media analysis. Their analytics engine has the potential to transform social media streams into actionable signals for financial services and government clients, providing what amounts to one of the earliest-warning systems on the market. How effective are the company’s algorithms? Dataminr reported the death of Osama bin Laden a full 25 minutes before President Obama’sannouncement that the terrorist leader had been killed. Clearly, this represents a powerful new breed of social media analysis tool that has significant potential to disrupt aspects of the financial services industry.

SNTMNT

Along the same lines as Dataminr, SNTMNT describes itself as the first Application Program Interface (API) in the world that gives predictions based on Twitter sentimenfor all S&P 500 stocks. The company says its algorithm provides an extra indicator on top of fundamentals and technical analysis.

SNTMNT’s ‘machine learning’ algorithms generate an indicator capable of predicting share price movements between one and seven days into the future with an accuracrate of 56 percent. The company employs a two-step process as part of its offering. The first is natural language processing that is sourced from Twitter, Facebook, blogs and news sites to identify what it calls ‘mood states’. Then, they employ machine learning and predictive analysis to make their predictions.

SNTMNT’s products include something called ‘Trading Indicator’ which provides hourly/daily predictions of S&P 500 stocks with an accuracy of 60 percent based on Twitter and another called ‘Financial Sentiment’ that uses a special algorithm that deals with financial jargon and which has a rate of accuracy of 84.3 percent.

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Conclusion

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The global investment management industry has entered a period of unprecedented change and turmoil. As the industry continues to work to put the global financial crisisin its rearview mirror, it finds itself forced to contend with a host of challenges and threats from an array of external forces.

As the CEOs with whom we spoke indicated, there are a number of key issues that willrequire careful attention from the investment management industry in the days ahead:

• Firstandforemostisthecontinuedinstabilityonthegeopoliticalscene.Whetherrelated to the changes in the energy sector, the political scene in the Middle East, developments in the eurozone or the continuing rise of China, these developments will have massive implications for the industry.

• Thecontinuingwaveofregulatorychangewillalsocontinuetoserveasadriverof industry transformation, including potential changes in business models, implications related to Big Data, possible divestitures and more.

• Thecontinuedpressureonmarginsintheinvestmentmanagementindustrywilllikely lead to significant changes to industry distribution models, with some of thCEOs we spoke with predicting as much as 30 percent of the people/companies in the asset industry today will disappear in the next 10 years.

• Inthe post-Madoff’era,investmentmanagerswillalsobepressuredtoreassestheir approaches to operational due diligence, independent asset valuations and operational transparency. At the same time, there will be increased importance placed on the transparency of accounting practices as costs continue to rise more quickly than revenues.

• Andfinally,there’stheclearandpresentthreatposedbytechnologycompaniessuch as Google, Facebook and a legion of nascent start-ups looking to capitalize on technology to disrupt the face of the financial services industry.

We will continue to monitor these issues and developments in the coming months, as well as the industry’s responses to these changes, threats and opportunities-responses that will undoubtedly play a key role in determining the fate of the investment management industry for years to come.

Contacts

UK Tom Brown Global Head of Investment Management KPMG in the UK T: +44 20 76942011 E: [email protected]

ASPAC Martin Blake Partner KPMG in Australia T: +61 2 9335 8316 E: [email protected]

Jacinta Munro Partner KPMG in Australia T: +61 3 9288 5877 E: [email protected]

US James Suglia Partner KPMG in the US T: +1 617 988 5607 E: [email protected]

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although e endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that

t will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination f the particular situation.

2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated ith KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International r any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights eserved.

he KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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ublication name: Industry Insights

ublication number: 121295

ublication date: March 2013

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