Annual Report and Accounts 2008

Market review

Market trends

Key global and demographic trends are changing the outlook for savings and we are well placed to take advantage of these developments.

The ratio of non-working to working age individuals in the major western economies will dramatically increase in the next 30-40 years. This is expected to have a major impact on the cost of state-provided pensions. Average life expectancy increased by over 10 per cent. in the period 1960 to 2005, with further increases likely, and birth rates are expected to continue to fall. In the future, individuals will be less able to rely solely on governmentprovided pension schemes to fund their retirement.

The ageing population is also forcing the closure of defined benefit plans, which fuelled the growth of institutional asset management. This has driven the move to defined contribution schemes and the growing importance of individual and 'instividual' savings.

For the asset management industry, accessing the individual retail investor, either directly or via intermediaries, will remain an important part of a large, global asset manager's strategy.

The retirement of the 'baby boomer' generation, that owns approximately 60 per cent. of global wealth, is also creating a major opportunity as this generation looks to use its assets to finance retirement. This is known as 'decumulation'. Currently, banks and insurance companies see the majority of these flows and as a result they are becoming an increasingly important channel to reach a growing customer base.

To address decumulation needs, we expect to see increased demand for capital protected and income generating products as clients seek to minimise risks.

Pension funds are also increasingly looking to match assets and liabilities through the use of outcome orientated products.

Investors continue to look to separate sources of alpha (excess return relative to market benchmark) and beta (market correlation). Passive products have attracted increasing inflows. In recent years, the demand for alpha has also led to growth in alternative products as savers look to diversify their investment portfolios in pursuit of higher returns. As a result of the current financial crisis, we expect traditional fixed income and equity strategies to be in demand.

The majority of new saving flows are expected to arise from emerging economies, particularly Asia. This has been driven by the growth of China and rapidly increasing wealth accumulation in the region. This includes Sovereign Wealth Funds and central banks which are becoming an increasingly important institutional market segment.

Our competitors include other publicly or privately owned asset management companies and asset management divisions within larger financial institutions, such as banks or insurance companies. We look to differentiate ourselves from our competitors by delivering superior investment performance, excelling in client service and developing partnerships of real value to the client.

The European mutual fund industry has suffered severely since the start of the 'credit crunch'. Investors reacted rapidly to the deterioration in market conditions and withdrew from both equity and bond mutual funds.

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