The investment management sector will confront enormous challenges in investment performance, distribution and the recruitment and retention of talent over the next few years. But despite these demands, investment managers remain bullish about their future revenue growth, according to PricewaterhouseCoopers’ (PwC) 2006 Global Investment Management Survey.

In a survey of 81 investment management organizations around the world, representing aggregate assets under management of $9 trillion, more than half of respondents believe their revenues will grow by 20% or more over three years.

Raj Kothari, PwC partner and leader of the Canadian investment management practice said: “Our survey shows that chief executives are optimistic about revenue growth. However, the survey also highlights concerns and challenges related to evolving investor demands, retention and hiring of good talent and the effectiveness of the internal control environment particularly as it relates to operation controls.”

Kothari also cited additional concerns and challenges that included: risk assessment strategies; distribution channels and potential disruption threats; investor expectations and rising interest rates; and increased and changing regulations

“Investment performance has always been crucial but now it is being evaluated with greater sophistication than ever by institutional clients. Asset management companies are concentrating on developing sources of alpha that complement their existing strengths and are actively managing investment and research capacity,” said Kothari.

When asked what they will do to improve performance over three years, survey respondents commonly mentioned recruiting and retaining the best employees, but 21% cited recruiting, retaining and providing incentives to talent as one of the biggest challenges they faced. The rise of specialist investment products, such as hedge funds, private equity and real estate and the increasing trend towards the use of derivatives, will also bring further demands for new skills and more sophisticated risk management.

Surprisingly, 91% of survey respondents thought that they did not have appropriate internal controls in place to adequately manage risk and 89% had not completed a comprehensive assessment of risk.

Across the board, survey respondents recognized the importance of distribution but many highlighted a lack of confidence in their distribution strategies. With the distribution power of the internet growing and existing distributors consolidating, asset management companies are coming under increasing pressure to develop new distribution strategies in retail and institutional markets alike. For the retail market, brand and quality of distribution are critical to winning business but these are two areas in which many investment management companies believe that they are weak. Firms will need to concentrate on their most valuable distribution relationships and service these well.

Kothari added: “In five years time the asset management industry will look very different. Firms are in need of visionary leaderships with clear perceptions of where competitive advantages lie. This need is greatest in the middle ground, among the traditional active managers. The winners will be those that focus on and reinforce their core competencies, outsource or sell non-core operations and have the flexibility to seize opportunities.”

Regulatory changes were seen by nearly a quarter of survey respondents as the greatest and most immediate challenge they faced. The number of new regulatory requirements being introduced has created a significant workload for firms and consequently a draining of resources.