November 2010

CEOs: united we stand (Extract 1)

roundtable_410Ruppert, Helderlé, Du Toit, Servant, Parker, Corley and De Franssu: seven industry-leading chief executives and senior managers met with Funds Europe in October 2010 to share thoughts... This is the first of three extracts from the roundtable discussion between our seven top funds industry players         7_CEO_roundtable1
Funds Europe:
Has the reputation of the asset management industry recovered since the depths of the financial crisis?
Jean-Baptiste de Franssu (Invesco): There are many ways to answer this. In some shape or form asset managers were impacted by the financial crisis and investor confidence was dented. However, we need to be aware that when we talk about investor confidence, we are talking about it in relation to all financial services companies – not just asset managers.

Yet if we look at fund flows – which is one way of judging whether people have lost confidence in us or not – we see that there is good news for our industry in 2010, and even in 2009 to some degree. The level of net flows was back last year and is maintained this year. Flows are not at the best level that we’ve seen historically, but they are certainly within the first quartile range.

This means the financial confidence that investors have in our product, in our ability to deliver on our promises, and in the relative quality of the service we are rendering, has not been lost. But this doesn’t mean that we haven’t got more work to do to continue to build on that level of confidence. Todd Ruppert (T. Rowe Price):
During the crisis, around 70% of the net outflows were from bank-owned asset management companies. Much of these flows were really not necessarily outflows for their own sake but rather for churn to support the balance sheet of the banks.

If you look at the flows since then, they have been quite good for independent asset managers, but not as good for asset management subsidiaries of banks. This suggests that the crisis was more of a bank-dominated crisis, not asset management.

Less-sophisticated investors have lumped all asset managers in the same bucket, but I don’t think the wholesale investors – the professional fund buyers and institutional investors – ever lost confidence in the industry. It was more to do with the retail players.

Hendrik Du Toit (Investec): There has been a bifurcation in the industry subsequent to the financial crisis. The good players – those that didn’t have funds that either blew up or that were too heavily involved in the CDO [collateralised debt obligations] game – have had a very good run and have been rewarded by investors.

The challenge our industry is facing is more on the political front and it is to do with a regulator that is trying to deal with financial services as one industry, which it isn’t.
But as far as the logic of the market is concerned, it has worked perfectly: it rewarded those who did well, and it punished those who had flaky businesses. Elizabeth Corley (Allianz GI):
That’s right. The problem we have is more a supervisory and governmental one where there isn’t enough distinction between the role of the asset manager as a fiduciary for the client, and the wider financial services industry. We’ve got to do more to make that differentiation.

In terms of confidence, investors lost confidence in the markets after they saw a real destruction of asset value. They are coming back in now, and they are rewarding the better quality investment management companies. But more importantly, they’re looking for something different.

They’re not only looking for high alpha, or for the next benchmark that’s going to go up in value. Instead, they’re asking for proper advice, for asset diversification, and effective risk management, things like that. It is a different market now than it was pre-crisis. Robert Parker (Credit Suisse):
There has been a very significant flow of assets into ETFs [exchange-traded funds] since last March, which I think means confidence in traditional active managers has not returned.
I would caveat that comment, though, because coming out of the crisis, there are clear winners and losers. There is a very clear change in market share in favour of those asset managers whose performance is good and who have shown good risk management throughout the financial crisis and did not have accidents.

One area where there still are problems is hedge funds, although money is returning to that part of the industry too. In that sector, again, there is extreme divergence between the winners and the losers. It’s going to take a long time to regain investor confidence in those particular hedge funds that put up gates. Corley:
ETFs are being used in portfolio construction, and they’re being used to get efficient low-cost exposure to beta.

But in terms of manager selection for real alpha, we’ve seen a huge gain once more for active asset management, whether bonds or equities, with a much lower interest in passive. This is because everybody is recognising that buying the index is the one thing they do not want to do now. Du Toit:
One thing I would highlight is that, as an industry, we need to define what Ucits means, what are the implications that flow from the full power of the Ucits regulation. Even within many of our firms you’ll find that people interpret the mandate differently. So as an industry, we must be very careful not to oversell Ucits or over-promise what we can deliver.

We’ve seen what happened to the hedge fund industry and I hope firms that are serious about what they do learned from it.

Reading some of the IFA [independent financial adviser] press and the lower end of the asset management press, I get a little concerned. But the leadership we’re getting from industry associations is good. They’re asking the right questions and so we need to take them seriously. Pierre Servant (Natixis):
On the reputation side, I agree with Elizabeth. If you have the ability to give clients good advice and deliver products generating ‘real’ real absolute return, then you’re going to make headway. If you’re not able to do that, you have a problem. People are buying products that are different from those sold before the crisis, which means that post-crisis demand is different and managers have to adapt to it. It’s a Darwinian type of evolution that includes changes in the geographical client mix and in distribution schemes. De Franssu:
And it's a winner-takes-it-all environment. But to go back to the reputation issue, fundamentally this crisis has been a crisis during which weakness linked to the way in which Ucits are distributed became more different than ever. And this is beyond most of our day-to-day responsibilities. How products are distributed, both to the retail and the institutional marketplace, is a fundamental aspect we need to take action on.

We potentially have a very successful financial services market in Europe ahead of us, but more needs to be done and particularly in the field of distribution where today, for historical reasons, very little has been addressed.

Probably one of the biggest lessons for us is to question how we sell our products, who sells them, and what their liabilities and responsibilities are. These issues are fundamental. Du Toit:
Regulators are starting to ask questions, but they haven’t really got round to talking to the industry in a way they ought to be doing. They haven’t addressed how we can administer the savings pools that are entrusted to us as a broad industry. And here I include other suppliers who are not pure asset managers. I am really concerned about this, particularly after we have learned that banks – even those with strong balance sheets – could go bust.

Corley: There is a risk that regulators are thinking about regulation of retail products with a pre-crisis frame of mind. It’s the ‘Old World’ thinking, which is to look at disclosure and transparency. But that’s not the way you actually help an investor or retail client make the right decision.

Jean-Baptiste’s point about thinking about the whole chain of investment, including the distributor responsibility, is important. At a time when we need income sources, particularly because of demographics in Europe, we have to be very careful that people are not locked up in products that look too good to be true in terms of their risk, and not realising they’re giving up income as a result.

If we don’t use the opportunity of the Prips Review [Packaged Retail Investment Products] and other pieces of legislation going through the European Parliament, we may miss a once-in-a-decade opportunity to try and rebalance the way in which retail products and advice are regulated. De Franssu:
After the financial crisis we read on a number of occasions that this was a regulatory crisis. So what was the role of the regulators in this crisis? What did they do that led us to go through all that we’ve been through? What lessons can we learn for the future?

What concerns me in is that the Packaged Retail Investment Review is seems to be, for the time being, at the bottom of Commissioner Barnier’s to-do list, published at the European Parliament in April 2010. [Michele Barnier is the commissioner for internal market and services]. This means that although we are focusing on some very important aspects related to the G20 agenda, others, which relate to building sustainable financial services for the future and to safeguarding retail investments, are at the bottom of the list and that's a real concern.

The whole focus of regulation as it affects the asset management industry has been on systemic risk, systemic stability, the banking system, compensation in the banking system, and on the alternatives sector. There has been very little focus on the retail side of the asset management industry and very little focus on traditional asset management. Servant: We need to be careful when discussing retail regulations in a very risk-averse context. We don’t want to be over-regulated to the point where we cannot take any risk and become unable to provide a return for investors. For example in France, a new vehicle for real estate called OPCI was created, where you need to have 40% invested in liquid assets (money market, bonds, etc). The idea was to be able to provide liquidity whatever the market’s conditions, but performance is also much more difficult to generate with this constraint. True, we’re supposed to protect the capital of our client, but we’re also supposed to provide performance. De Franssu:
I’m not talking about product, though. What I was referring to was the circumstances under which products are sold: distribution and advice, which has not often been discussed. For example, although the Alternative Investment Fund Managers [Aifm] Directive is not a product directive but a manager directive, it still rotates around the issue of the product.

The industry, the European Commission and the European Parliament have worked on product over and over again but we have never looked at distribution. The only time we looked at distribution was through MiFID [Market in Financial Instruments Directive]. But what MiFID suggested has never effectively been applied across Europe. The circumstances under which products are being sold are the most important concern. This is mainly because we have limited control over this at all and therefore it can have the biggest impact on our reputation. Ruppert:
We’re all hopeful that things will change from a regulatory standpoint, even if just from the euphoria of the asset managers and distributors attempting to portray themselves differently. But if you look at a lot of what’s sold now by the banks, it’s not all that different to what they were selling back in 2000 after the dotcom crisis. Then, a lot of money was going into structured products. These proved to not be an intelligent thing for the end investor to have, although they were very judicious for the financial institution providing them. Corley:
We shouldn’t underestimate how risk averse the retail investor still is, particularly in mainland Europe. Capital preservation is still at the forefront of everybody’s minds. You cannot watch markets halve by 50% in a 12- to 15-month period and come out of that unaffected. As an asset management industry we need to think what we can offer the risk-averse client when what they need, as Pierre said, is income and yield rather than just protection. This fear factor is getting in the way of logical, thoughtful decision making and we need to do more to try and help the individual investor make the right decisions. Ruppert:
I agree with what you’re saying, but that goes back to the fact that the point of sale is the distributor. Most of the distribution is bank-driven and the banks are reselling balance sheet-related products that are beneficial to them and not necessarily to the end investor. Du Toit:
Not to mention the benefits the distributor can get from these products.

But let me shift the discussion slightly. I wouldn’t like the asset management industry to move purely into the guaranteed/absolute-return industry. This is why, in my opinion, absolute return is a very dangerous phrase. I much prefer using the term total return or absolute-return objective, which do not build in a guarantee.

We are going to sell a lot of these kinds of products, but we would do well to make sure that the promise is clearly explained. Long-term investors can feel fairly comfortable about their capital risk and are going for some upside. But there is short-term volatility there and we need to execute more discipline in the way we communicate this as individual firms and at the industry level. Parker:
The most important thing in our industry is that asset managers should never provide guaranteed products, because that’s either misleading the client or you’re setting up a trap for yourself. This is what happened in the US money market fund industry, which essentially was a guaranteed product. The problem is that if you do provide guaranteed product, you’re actually guaranteeing a very low return for your investor. Furthermore, if you’re providing a guarantee and you’re not hedging yourself then you are exposing your business to a very significant risk.

Servant: I don’t want to be pessimistic about regulation but I’m doubtful that more bureaucracy will automatically bring better advice or better service to clients. If you want to provide proper advice, it has to be customised. You need to have a real service delivered to the client and not a formal procedure where you tick boxes and file away forms to prove you have done it if there are any checks at a later date.

There is need for a change of behaviour from our industry in its relationship with regulators and the authorities. What has struck me over the last couple of months is also how bad a job we have done collectively to try and address some of the big problems that were ahead of us. We haven’t tried enough to work together toward achieving a common aim. The best example is the Alternative Investment Fund Management Directive, where we are as much to blame as the EC for where we are on this today.

But as Jean-Baptiste was saying, education is more important than regulation. We should do a better job, because most people don’t understand enough about financial markets and they need to be educated; we are responsible for this as asset managers. This is not about ticking boxes; it’s a long-term effort that we have to deliver one way or another. Ruppert:
The distributors are responsible as well; it’s not soley our responsibility. They are the point of sale. Servant:
Yes, but we cannot say that the distributor has all the responsibility; he’s selling our product and in the end it’s our brand that is at risk. Ruppert:
Education in general, however it’s provided, is useful, but we need to develop a healthier savings culture. Since most investors are delegators, choice is not necessarily empowering. They want someone to provide them with a solution, and so the creation of products that are solutions-oriented coupled with education, makes a lot of sense. However, if you don’t have a regulatory, governmental and fiscal policy that is supportive of that and provides incentives for it, then you’re never going to crack the whole problem. Corley:
I would take issue on the question of AIFMD being the industry’s fault. I disagree with that, though the industry was slow to propose an appropriate approach pre-crisis. What happened in the middle of the crisis was a radical 180 degrees shift in the willingness of the regulator to sit down and discuss solutions to shared problems with the industry participants. There was a period where we substituted consultation, cost-benefit analysis and thoughtful, appropriate regulation for politically motivated regulation, and I’m afraid that AIFM is part of that. We as an industry could have done a much better job of responding to it.

Some of the response was deeply unfortunate and not very helpful, and we’re living with the legacy of that now.

We need to learn two things from this.    One is how to reestablish that dialogue with the regulators at a time when they are distrustful of the whole financial services industry. The idea of dialogue between the industry and regulators was accepted ten years ago. But it now we have to prove again that dialogue is the right way to produce the best regulation.

Second, as an industry, we need to make sure we carry out this dialogue in a very careful, controlled and professional way that is not lobbying, to try and secure a long-term framework for the industry that makes Europe competitive. The biggest risk of all of this is to the European consumer and the competitiveness of the European asset management industry, and those two threats are absolutely real and are happening now. Ruppert: There has got to be a consolidated, crystallised, singular view from the industry. Du Toit:
We represent an industry that is highly distributed and decentralised and therefore we have to come together in single, strong industry bodies. Jean-Baptiste and Efama [European Fund and Asset Management Association] have done a great job in starting this. But there comes a point where we have to become effective and pro-active. It’s part of our role now. If you want to be in this industry and you want to be in the leadership of a serious company, you have to spend time on industry matters. Parker:
This is where we in the asset management industry have got a problem. We would all agree that the lobbying by the sell side of the industry and the investment banks is actually much more powerful than that done by the asset management industry. There’s one very simple reason for that: there are 20 top investment banks whereas there are a thousand asset managers. We’re a much more fragmented industry and therefore getting our act together is more difficult. Corley:
We do have an opportunity to re-base this now, because there are things we can do that the investment banks cannot. The asset management industry can bring its senior leadership into discussion, not only its lobbyists, heads of compliance or heads of legal. That’s where we can do significantly better than sometimes the investment banks can do, or even the insurance companies. Du Toit:
The difference between us and the banks and the insurance companies is that we have more stability. The leadership in our industry are people that have served the industry for many years and understand it, while at investment banks today, post-crisis, they’re generally pretty young and haven’t been around that long. They are still getting to grips with operational challenges in their businesses. So there lies an opportunity for our industry and we just have to take it. ©2010 funds europe

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