With innovations come increasingly complex investment vehicles that threaten to widen the ‘risk gap’ between investment managers and end investors. 76 PricewaterhouseCoopers
Why? Thought Leadership. Resources The resource sector experienced another spectacular year with revenue increasing 25 per cent to $222 billion. In the midst of such strong returns, many stakeholders began to question how sustainable the growth would prove when confronted with burgeoning demand and increasing environmental concerns. <strong>PwC</strong> once again got to the heart of boardroom thinking with comprehensive annual global surveys examining the state of the world’s top utilities and mining companies. In June <strong>2006</strong>, mine* – let the good times roll, a review of global mining trends, analysed 40 leading companies representing more than 80 per cent of the industry by market capitalisation. The report paid special attention to the impact of the ‘awakening giants’ of Russia, China and India and the future of what have been recordbreaking years for commodities. The fi ndings indicate the industry’s performance has exceeded that of the overall market by 300 per cent over the past two years. While profi tability is at a high, operating costs have also increased and may create challenges if commodity prices fall. CEOs appear focused on maintaining supply and maximising production, while navigating issues of safety and political uncertainty in many resource-rich regions. Financial Services The Big Leap surveyed the changes that are being made or need to be made in technology, investment, mergers and acquisitions, effi ciency, cleaner fuels and customer relationships in the utilities industry. The responses from senior executives in Europe, North and South America, the Asia Pacifi c, Africa and the Middle East were largely consistent. The power and gas sector is facing ‘revolutionary’ changes unprecedented in recent times; the pace of change needs to be increased with more focus on long-term solutions; and political and regulatory policy continues to be both the leading catalyst and hurdle to change. Additionally, the National Generators Forum and Energy Retailers Association of Australia commissioned <strong>PwC</strong> to undertake an independent survey considering the level of liquidity in the electricity fi nancial contract markets in the context of the National Electricity Market. The independent analysis found the majority of respondents perceived the current levels of liquidity in the Australian market to be adequate for managing risk. The fi rm expressed its concern about the heavy toll that over-regulation is taking on fi nancial institutions. In a July <strong>2006</strong> opinion piece in the Australian Financial <strong>Review</strong>, Banking & Capital Markets Leader Michael Codling noted that too much unnecessary regulation had come out as the number one risk facing our banks for the second year running, according to a survey of industry participants sponsored by <strong>PwC</strong>. While individual banks don’t collapse as a result of regulatory overkill, it can damage the banking system as a whole, and the industry is now rightly throwing down a challenge to regulators as to whether they have the right balance of cost and benefi t. In an Asset magazine article, Why planners need to know about product rationalisation, partner Peter van Dongen argued the current legislation in Australia either inhibits investment product rationalisation or, where it can be practically achieved, makes it expensive, cumbersome and high risk. Industry data shows that Australia has a similar number of funds to the US, but only 6 per cent of the assets under management. With all other fee assumptions being equal, Australian investment managers have to price approximately 15 more unit prices per dollar of revenue than their US counterparts. This heightens risk and increases the need for legislative change to facilitate sensible product rationalisation. The <strong>PwC</strong> Investment Management Survey was conducted during May and June, involving 30 investment management organisations representing more than $700 billion in assets. The survey found CEOs generally optimistic about the business environment, though conscious that many risks still exist. <strong>PwC</strong>’s analysis indicated organisations need to better align internal processes with service providers, ensure emerging risks are understood by advisors and end users, establish more creative staff retention strategies and evolve customer focus beyond fundamental customer satisfaction. In November <strong>2006</strong>, we released an analysis of the annual results of Australia’s four major banks. The fi ndings showed resilient earnings, up 13.7 per cent on the previous year, primarily due to volume growth. Cost-to-income ratios improved despite the banks boosting the number of front-line staff and branches in a bid to improve the customer experience. As the banks move into an environment of softening demand for credit and fi erce competition, investment decisions will remain key. <strong>Annual</strong> <strong>Review</strong> <strong>2006</strong> 77
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