At the end of 2016 Funds Europe hosted a roundtable to talk about industry change, featuring asset managers and operational providers, and about topics including distribution and technology.
Joseph Pinto (global chief operating officer, Axa Investment Managers)
Richard Street (head of Europe & Middle East, global client coverage, RBC Investor & Treasury Services)
Paul North (EMEA product manager, BNY Mellon)
Jonathan Willis (chief commercial officer, Calastone)
Erin Leonard (EMEA product head and global head for fixed income products, HSBC Asset Management)
Nick Blake (head of European marketing and product, Vanguard Asset Management)
Funds Europe: What product change is there in the market-place? Is there more emphasis on multi-asset investing?
Paul North, BNY Mellon: Loan funds are generating business and interest, partly driven by banking reforms and banks shedding their balance sheet assets, but also by people trying to lock in assets that will generate a long-term, predictable yield.
There is also a growing interest in property funds and real assets. And passive investing, of course, although maybe that is more of a reaction to all the commentary around the active-versus-passive debate and people feel they need that product in their armoury, whether they really buy into the concept or not.
Regulations are driving product development and innovation, particularly in the pensions space.
Erin Leonard, HSBC: Asset managers have a duty of care and a responsibility to look at value for money for our investors, and so costs have come to the very centre of product development whether in a single-strategy fund or a multi-asset fund.
For sure, as an industry, there is a move towards multi-assets from single assets, much of which is driven by the shift from DB [defined benefit] to DC [defined contribution] and the shift of responsibility away from pension trustees towards individuals. The duty of care means asset managers and distributors have to pay more attention to making sure that these products are appropriate for end clients and this is a cause of the drive more towards multi-asset investing.
Nick Blake, Vanguard: In a low-rate environment, there’s a danger that people overreach for performance – for example, they start going up the yield curve without understanding the difference in risk, or they start buying equities instead of bonds, forgetting what bonds were doing in their portfolios originally.
The trouble with performance is that it’s speculative, while costs are certain – so if my returns are 5% but the product is costing me 2%, that’s 40% of my returns gone.
I daresay that may account for the shift to passive – it’s a move to low-cost vehicles and products, because cost is the controllable element in a low-return environment.
There’s a real danger of the industry building interesting products that facilitate this overreaching for yield.
Joseph Pinto, Axa IM: There’s a lot of pressure in respect of cost at the moment. However, clients will pay for quality products. As long as you deliver true alpha, they’re willing to pay for it and the industry therefore needs to ensure that we are providing products or solutions that meet client needs.
What they don’t want is to be overcharged. If active managers don’t deliver alpha, then the obvious alternative is lower-cost, pure beta products.
Jonathan Willis, Calastone: From a retail perspective, clients want simplicity. The regulator is driving towards greater transparency, towards understanding of charges and towards understanding the impact of trading costs on returns. A fund manager chasing return can accrue high levels of trading costs that eat into performance. Retail clients want long-term predictability and yield, among other things. They want a fund to do what it says on the tin, to be relevant to them at their stage in the life-cycle, and to know if they are still accruing capital or about to disinvest.
Pension reforms [in the UK] are interesting. People no longer have to buy an annuity, so they now put more money back into the market. There will have to be simple products for consumers who are either executing investments themselves or with limited guided advice.
Blake: Hopefully it is right to say there is a drive to simplicity because the industry has confused innovation with proliferation.
There are many more funds – but are they actually innovative and delivering what clients need?
Smart beta is a good example, where the number of indexes as shot up through the roof. Are they all actually smart indexes and will they deliver a smarter outcome?
There are four or five factors for which there is enduring evidence that they exist over the long term and investors may have to put up with underperformance for significant periods. There are thousands of smart beta indexes out there which may confuse and not deliver that.
Smart beta could be useful. If people work out that the high-cost active product they’ve been buying is essentially, say, a value fund and they can buy a value factor at 22 basis points rather than 80, then I think smart beta’s got a really interesting role to play in replacing some high-cost actives.
But I hope innovation does move us towards simplicity and not proliferation.
North: But does the construct where a firm is known for its investment style or process still work in this new world where there’s a shift towards value for money?
Retail clients will have lots of choice and, for them, brand is probably a key factor in value – their brand recognition and whether their peer group recommends it.
Richard Street, RBC I&TS: Brand recognition and performance get that attention because there’s perception that investors are perpetually checking the markets. Many aren’t. How often do people actually go and review what they’ve done?
North: The investment fund world has always been an area where consolidation has never really seemed to happen.
There’s still 57,000 funds in Europe; the average size is about €200 million. Consolidation would seem to have to happen at some point.
Pinto: The drivers for consolidation are all there. There are too many small funds in Europe that are not delivering value to clients. However, consolidation is a very challenging process, with big barriers when it comes to execution which will need to be overcome.
Funds Europe: Traditional methods of distribution are changing from face-to-face advice, towards online. Is this change ongoing and are the ages of investors a key determinant?
Leonard: Investments have typically been the realm of high-net-worth individuals than average consumers in Europe. Compared to the US, Europeans are less savvy in terms of investment knowledge and investment awareness and the level of financial education is much lower.
At the same time, we’re seeing the increasing democratisation of investment, so the question is how we educate consumers. That’s a major area of disconnection at the moment.
Blake: The risk created by the increase of information is investors being roused to take action when they don’t need to. If you’re investing for 30 years, why get a constant stream of market updates on your phone?
For the time being at least, many advisers do a great job at being a client’s emotional circuit-breaker, telling them to sit back, leave their portfolios alone, and to not be swayed by noise.
Pinto: Costs and transparency are, again, key issues in distribution, and robo-advisers may actually be able to fix those parts of the value chain. As traditional asset managers, we’re going to have to embrace that technology and we’ve got to effectively equip our distributors for that, too.
North: Many robo-advisers are promoted via social media, so it’s possible that distribution could become disassociated from the industry and move into the social media space. In this case, the way people make their choices would be informed not by anything the manufacturer tells them, but by other vehicles and means.
Blake: We might be making a mistake if we think technology only serves as a distribution channel for millennials.
I don’t think there’s a correlation between age and technology usage.
Where there is a generational divide is when it comes to the wisdom of crowds: younger people might make their investment choices based on wider public sentiment as opposed to researching the views of individual experts or advice bodies.
Willis: Technology will force fund managers to simplify their distribution chains.
If you look at any other logistical distribution chain, it doesn’t have as many participants as our industry does. Technology has brought the end consumer far closer to manufacturers than ever before in most sectors, yet we haven’t really reacted to that.
Blake: High costs have supported the extended distribution chain. If those high costs are not there in future, some distributors will fall away.
Leonard: Regulators want us to increase our disclosures and transparency, but the lingo of the industry is simply not understood by retail investors. We’ve conducted consumer surveys that reveal many people don’t even know what a bond or credit risk is.
Blake: As the adage says, don’t give children sharp scissors. If consumers really don’t understand the industry, it’s up to us to help them or at least make sure we’re equipping people with safe products that are going to do what they want them to do.
North: Do you think your average investment manager thinks like that?
Blake: No – I think the average investment manager thinks, ‘How can we sell more products?’
Funds Europe: Moving away from the subject of distribution technology, how do you see funds processing technology evolving? How will technology merge with the regulator landscape?
Blake: Whether technology revolutionises the industry or not, it’s naïve to think these new technologies either won’t arrive, or that we can control their emergence. They’re going to arrive and it’s a matter of how we respond.
Regulation is lagging technology, so the question is about to what extent regulators are going to control the use of technology and I’m not sure they even can. Right now, they’re still trying to catch up.
It would be a shame if regulation stifled the benefits that might emerge through technology, whether that’s education, investor behaviour or efficiencies.
North: A big problem for the funds industry is there are so many legacy systems in the market infrastructure. It would be very hard to suddenly move onto something like Blockchain.
These technologies likely won’t materially disrupt what we do in the next three years – but they undoubtedly will create more regulation for us, and ultimately more cost.
Blake: Blockchain is either a threat or an efficiency gain. It depends on where you stand.
Street: We’re likely some way off before Blockchain is viable to be implemented across the industry. Think about how long T2S took to get to where it is today on the custody side. Think the same, and then globalise it. The technology is a fantastic concept, but everyone needs assurance that there’s a transition of ownership from one point to the next, seamlessly, inherently, without question – and every single regulator in every single market from every single perspective needs to subscribe to that and agree to it and write it into regulation.
Willis: Yes, and the funds industry is so far away from other industries. Calastone have just produced a white paper looking at how many proper, true technologists sit at very senior or board positions within financial services organisations, and the lack is scary.
The challenge that creates is that you have very good junior people coming up with very good ideas that won’t go up through organisations because, at the top, it’s still done exactly the same way it was done years ago. What we’re seeing today is the industry thinking about distribution and product manufacturing in the same old way it has always done, then going down to the IT guys with a spec and asking them to build it.
Street: The challenge is that technology is constantly evolving and requires resources to keep abreast of what is happening, how it’s changing society and how the funds industry needs to adapt. The industry will be left behind if it is not willing to do so and adopt the changes needed.
We keep hearing discussions around meeting the millennial generation’s expectations as if it’s decades away and it’s not. Inevitably, those that make the change will survive and prosper.
Leonard: Maybe the industry needs to wake up and view their IT budgets as a core part of business.
Street: This goes back to the point of what role different companies play. Are asset managers specialists in creating alpha, or are they specialists in attracting capital into those funds? Or are they everything?
Pinto: In the industry, we need to make sure we don’t outsource functions that are at the core of what we do. Where necessary, we need to bring IT in-house, but we need to remain agile.
The revolution in asset management is undoubtedly coming, but it’s coming bit by bit. We cannot ignore it, though, and we also need to be mindful of the fact that new technology can always be supplanted by even newer technology. A winning solution today may become redundant or out of date in just a few years’ time, so we need to stay up-to-speed with developments.
North: In the past, people found pockets of inefficiency and made a business case around it. Now it’s almost gone the other way, which is finding those pockets and engineering them out of the whole process, and this will disrupt existing players’ business models.
Still, there’s a long way to go for that to happen.
Willis: The industry looks at everything through 20-year-old glasses, while completely disruptive technologies start on a piece of white paper. The disruptors build a business and worry about the legal requirements further down the road.
I hear again and again that Amazon and Google won’t come into the funds industry because the industry is too regulated, but eventually they will – they’ll go after it.
Funds Europe: Does the panel have views on the impact of Brexit on the funds industry?
Street: The big question is whether smaller constituents are able to make quicker, informed, appropriate decisions or whether combining everything together and making one decision covering several countries at once is easier and more efficient.
North: It is possible that politically, we’re moving into an environment where trade barriers are going to become the norm again after spending 30 years trying to break them all down. That would be a big problem and I’m not sure technology could necessarily solve that.
Blake: Brexit may be an inconvenience, but not a game-changer. The more interesting question is what does globalisation actually mean?
I’d love to have one Ucits range I could sell all over the world, but it could be that the reality is we increasingly have to be local in all jurisdictions in which we serve clients.
Willis: We’ve seen over the last few years an increase in non-UK-domiciled funds purchased by UK investors. Will Brexit change that? Very few fund managers sell their UK fund range outside the UK. At most, they’re sold to Europe, but never into Asia where the new money is.
Street: It depends on how much benefit asset managers receive from having a bigger pool of assets managed in a single fund, and how much pain they have to go through, rather than setting up a domestic fund which does the same job in a single market.
Willis: Distribution needs to be simplified rather than standardised. Some firms have over 2,000 distribution agreements in Europe. It doesn’t matter if you standardise that many agreements – it isn’t going to make a bad situation any better. There’s no way on
Earth you’re getting value from 2,300 distributors, so standardisation in this context ultimately means finding a slightly cheaper way to do something inefficient and costly.
Cut the number of distribution agreements down – that’s the right answer. If you have 50 agreements, they don’t need to be standardised – with that few agreements, who cares if they’re a little bit different?
Funds Europe: How do you view the industry outlook as we enter 2017?
Pinto: Very positive – this is a growing industry with the rise of the middle class and mass affluent. Wealth creation means a growing demand for expertise to manage wealth and asset managers have a significant role to play in this.
Blake: Also very positive – but there are some risks. One of them is the industry has been blessed over the past 20 years with serving perhaps the luckiest generation that’s ever lived. When I think of my kids, they won’t have defined benefit schemes, they won’t have housing booms and they won’t have state benefits. The boomers had all that.
The upside is that there are still terrific opportunities in the next 20 years as the boomers move through retirement. Around 10,000 Americans will retire every day over the next 15 years – in the UK it’s 2,300. There’s a lot of opportunity to be had managing that for clients.
But there are questions about who’s serving the generations behind them, about who’s encouraging good savings behaviour? There are opportunities there, too, if we get technology right, if we get cost focus right and if we deliver value to clients. If we don’t do that then we don’t deserve clients.
Still, the challenge for the industry is to accept that what’s been great for 30 years won’t necessarily continue to be great in future.
North: The industry increasingly has to run faster to stand still, given the burden of regulations and transformation programmes. Already, firms have to forgo or delay business product developments because they
don’t have the money or resources to do everything they want to do.
The next two years are going to be rough, but those who are still standing when it’s over will begin to shake themselves down and say, “All right, where have we got to, where do we take the business now?”
Willis: That’s a danger, though, in my view, because in two years something else will have come along and we won’t have had the time or resources to effectively take stock.
Still, 2017 could end up being a fine year. Brexit hasn’t seemed as bad as it was cracked up to be and Trump seems to be retracting everything he said in his campaign.
The real challenge for the industry is keeping everything going while also having to think in a completely different way and I don’t see it reacting to that.
Leonard: The complexity of the business environment and pressure on profit margins are often overwhelming, but it can still be a rewarding journey if we focus on the value proposition that we can bring to clients. Ultimately, we can create a more sustainable business model.
Street: All of us, no matter whether we’re asset managers, asset servicers or asset distributors, need to become more efficient, quickly. This means we need to do two things – collaborate where appropriate, and invest in our technology. On the asset servicing side, my experience is most firms have been focused on other priorities including implementing regulatory change, managing in a low interest environment, fixing the plumbing in the existing architecture and so on.
While these are extremely important, those that do not embrace a digital age risk becoming extinct.
We continue to hear discussions about how to meet the demands of millennial generation as if it’s decades away. It’s only around the corner.
©2016 funds europe