Asset managers are divided over the future of their industry post credit crisis according to a report* commissioned by Citi's global transaction services and Principal Global Investors.

The study covered the impact of the financial crisis on asset managers, the likely scenarios of the industry's evolution and its underlying assumptions, how asset managers' business models are evolving to withstand both bull and bear markets and key features of the winning model in the new competitive landscape. Issued today, the global study envisages three possible scenarios for the industry's evolution over the next five years.

The report found that respondents expect increased regulation will raise costs, intensify competition, create fee compression and hasten mergers and de-mergers.

Although no dominant scenario was predicted for the next five years, 70% of respondents expected the industry to become more polarised with large players rising to positions of dominance within one of three scenarios: commoditisation, vibrancy or segmentation.

At one extreme around a third (34%) of respondents expect their industry to become commoditised as a result of increased regulation and risk aversion by clients, as investors seek capital protection. Under this scenario scale will be the key to success as commoditisation delivers standardisation of products and processes that are consistent with economies of scale

At the other extreme only 17% surveyed expect their industry to become more vibrant with a closer alignment of interests between clients and asset managers. Under this scenario innovation which adds value to clients will be critical.

In between is a scenario that envisages a segmented industry characterised by consolidation, separate centres of excellence that best serve different client segments, alliances across front, middle and back offices which allow a greater concentration of capability and a changed fee structure which delivers a closer alignment of interest. Almost half (49%) of respondents anticipate this scenario.

The report indicated that business models associated with the segmentation scenario have already started to appear with larger fund management houses decoupling manufacturing and distribution. Under half (40%) of respondents expect this to continue.

The report said outsourcing of non-core activities will continue. This should free senior management to concentrate on four strategic business areas: investment capabilities, increased alignment with client's interest, service proposition and business capabilities.

"Asset managers are now responding to the realities of the new environment and are increasingly exploring opportunities to adopt variable-cost models by outsourcing administration functions. This is an important structural shift in the model for the industry's value chain, and the ultimate reward could be a more efficient use of capital and maximization of alpha," noted Neeraj Sahai, global head of securities and fund services at Citi.

* Future of Investment: The Next Move? by CREATE-Research, an independent think-tank. The report is based on a survey of 225 asset managers from 30 countries responsible for a total of $18.2 trillion of assets (April 2009) and interviews from pension funds, wealth managers, distributors and industry regulators. The research was commissioned by Citi and Principal Global Investors, a diversified asset management organisation and a member of the Principal Financial Group which manages $189.1 billion (at March 31 2009) in assets primarily for retirement plans and other institutional