|Elizabeth Corley, CEO,
Allianz Global Investors, Europe
From a fund management corporate perspective, is the crisis unfolding worse or better than expected? Are you more or less optimistic now about the business outlook until the end of 2009 than you were in December 2008, and why?
The severity of the downturn and scope of the market dislocations certainly has become more transparent over the last months. At Allianz Global Investors we took a defensive approach at an early stage, both with regards to positioning our portfolios and from a corporate perspective. On the latter, we had started last year to align our expense structure to the new market environment which obviously is helpful now.
From a flow perspective, Allianz Global Investors has been able to weather the storm rather well so far. Net inflows in our European business in 2008 and YTD are positive.
Going forward the economic and business outlook remains uncertain. We expect the severe global recession to continue throughout 2009 despite the fiscal and monetary stimuli being applied by policymakers.
How do you feel the reputation of fund managers has been affected in the eyes of institutional clients and retail investors?
I think that investor confidence has suffered across the board and that has resulted in increased attention to risk management, more thorough due diligence, and increased clients’ demands for information.
In addition, for retail clients, their trust in the whole of the financial services industry has been shaken. Although asset managers were not central to the crisis, nevertheless we need to acknowledge increased client and adviser sensitivities and adapt accordingly as an industry. At an individual client level my experience is that concerns have generally been well managed but more broadly there is work to be done on education and higher levels of contact in order to contribute to a rebuilding of trust.
The key issue for us is to be close to our clients and their needs. This requires effective communication with our clients in these difficult times. Clients are telling us that timely communication and sales coverage as well as transparency are even more important now. At Allianz Global Investors, we are focused on listening to our clients. Our job is to make sure that our clients have access to the information they need.
Are product development and pricing reflecting changes in the financial and economic environment? How do you see this evolving?
Regarding products we are still too early in the post-crisis correction to do more than comment on changes we are observing so far. For example, it is no longer sufficient to discuss the needs of the "retail client" in an undifferentiated way. Greater client segmentation and depth of understanding will be essential to success. Clearly risk aversion favours stronger providers with good reputations and solid corporate structures. Products are either risk averse or, for the more adventurous client seeking high growth.
We are seeing sustained demand for a wide range of bond products; funds offering asymmetrical risk management; as well as classic, high quality fundamental equity in core markets such as the US (where fund selectors are very active in redefining high hurdles for manager and product selection). At the same time, China, BRIC and other potential high growth funds are being chosen by asset allocators who believe that these economies will bounce back and some equities represent good value. While ETFs do take market share, funds with alpha from strong stock-picking have a sustained appeal.
With institutional clients, we see strong growth in demand for advisory services and we have had several wins for fiduciary management.
In mandate selection, our pipeline for searches certainly slowed down over the year end and early months of the year but has picked up strongly since March across all asset classes.
In product development, more emphasis will likely be put on the wrapping, i.e. packaging of the product which not necessarily needs to be a classical mutual fund always. The recent decline in fund launches might already provide an indication for that - besides pure economic considerations.
Regarding pricing, this is affected by multiple factors. For one, the more conservative asset allocation reduces overall margins as does the higher share of professional fund buyers and their demand for institutional share classes. Especially on the institutional side, the share of performance based fees continues to rise.
How do you view regulatory developments so far and how would you like to see regulations change? Will regulatory developments help create a more level ‘playing field’ between fund products and bank products?
The main regulatory change for our industry was the new UCITS IV directive which predates the crisis. This directive is a great step forward into a more efficient asset management market in Europe and towards a true “internal market” in Europe for asset management products. Nevertheless, we should pay great attention to the implementation measures that are taken in each member country. The risk is that local tax law may hinder or destroy the progress that UCITS IV is aiming to achieve. If for example local regulation blocks the efficiencies that could be derived from the Management Company Passport possibilities, cost savings could be difficult to be achieved. If fund mergers are blocked by tax laws, it will be impossible to come to greater fund sizes which will be able to operate on a lower cost basis and thereby benefit the consumer. Tax regulation should not inhibit the progress that UCITS IV is trying to achieve.
Strengthening CESR (Committee of European Securities Regulators): It would be helpful if CESR could take majority decisions that would be binding for the local regulators. If the “rulebook” is the same for all national regulators and if the rules are applied in a similar way in the member states, the “college of supervisors” is a step forward towards a more stable financial system. This could be achieved even without a single European supervisor. It seems not very realistic for the moment to assume that governments will give up their grip on local supervisors and install a single European supervisor for institutions that operate across borders. Tight cooperation is the aim – and could be achieved if CESR is strengthened and rules are harmonized.
AIFM (Alternative Investment Fund Managers): the aim of the new initiative by the Commission is to close regulatory gaps. This is very much welcomed by many in the fund industry. Systemic issues are the focus, and the Central Banks and the regulators want to have an oversight of the impact of all financial market products on the stability of the system. The question here is whether “funds” or “managers” are regulated. This will be a fiercely debated topic and having clear objectives about the purpose of regulation (for example, financial stability or retail investor protection or both) will be essential to avoid purely politically-motivated arguments.
Packaged retail investment products: The exposure draft of the EU Commission is expected in autumn, a preliminary version was circulated some weeks ago. The discussion was initiated by the fund industry – and we could only benefit from it. We have an interest in “same transparency” rules for competing products.
How do you perceive risk management to be changing, if at all, in fund management? Are balance sheets and minimum regulatory capital requirements more important for fund managers now than they were before?
The market turmoil has clearly demonstrated that robust and effective risk management is fundamental in meeting our client's needs. Throughout the entire asset management industry risk management is becoming a much more integrated part of all business processes in comparison to prior times. It is likely that risk management will become an even more important aspect of competitive differentiation in the future.
Depending on the development of regulation, minimum capital requirements and therefore balance sheet will indeed become more important in the industry. We do, however consider that asset management is a fundamentally different business from banking and securities and, unless an individual manager chooses to assume risk by providing guarantees, capital requirements are quite different given the fiduciary nature of our role. This includes a high level of transparency to the investor on both the upside and the downside of a specific product.
The Turner Review in the UK wishes to see risk officers occupying a more visible place at the forefront of investment firms. How do you feel about this? Will the CRO be a main board appointment in the future?
Risk management has always had a very strong voice within asset management businesses – but clearly recent events will encourage firms to revisit their risk management procedures and perhaps give a stronger and wider platform for their activities. However, it does not necessarily follow that risk managers should sit on the board for the importance of the role to be reflected in an organisation.
We can see in the consultation paper on remuneration policies CP09/10 the FSA (and Europe) have asked for Risk Managers to have a ‘significant input’ into pay. It mainly focuses on the idea of Risk Managers having a role within Banks (asset managers aren’t mentioned) in ensuring that pay structures don’t lead to inappropriate risks being taken. Although not yet applying to asset management we think the implication is clear.
Has remuneration of senior fund management executives been affected by the bonus controversy within the banks? How do you see executive and manager remuneration changing?
We have always taken the matter of compensation and alignment of interests very seriously. A number of European regulators and governments are working on suggestions to ensure equitable and fair pay - eg. the FSA has published a draft on 10 principles "Reforming remuneration practices in financial services".
Allianz Global Investors has sound remuneration governance with formal Compensation Committees and clear process for compensation decisions.
The suggestion by regulators to have risk adjusted long-term incentive plans is already a reality with us.
The question of the right pay-mix is an ongoing one and we believe we regularly have to ask ourselves what the right proportion is between base salary-annual bonus (short term variable) and long term incentive. However the suggestion of some of the regulators and governments to defer the majority of any significant bonus cannot be seen in isolation from our point of view. A deferral of e.g. a certain percentage of the annual bonus would force some companies to increase base salaries and would dilute the clear distinction between the elements short and long term variable pay. At the end of the day the market plays a significant role in determining the right pay.
How do you see the players in the industry and the landscape changing in the future? Is there more scope for M&A going forward or will development be through organic growth?
Consolidation is likely to continue in the industry as certain players divest asset management businesses either because those businesses are not part of their core focus and/or because of the financial pressures caused by the current environment.
In the current M&A activity how will clients’ interests be balanced with shareholders’ interests?
One of the main goals in the industry is to be able to maintain the client service experience untouched as cost cutting and synergistic measures are being implemented. Although, naturally, clients continue to be sensitive to the implications of M&A activity, they now have more experience of it and there is some recognition that it can be handled well. By which I mean that some firms have achieved successful integrations with minimal client disruption, positive benefits in terms of depth and breadth of services provided and the confidence that comes from a stronger corporate structure.
Therefore, it is also likely that we will continue to see M&A transactions focused on capabilities aligned to the investment needs of the clients of the purchasing entity.
Do you anticipate any changes to distribution structures? Will banks still want to sell funds and will distributors be as supportive of mutual fund products in the future as they have been in past years?
There is no straightforward answer to this. It will very much depend on individual markets. Generally, I think banks will continue to be one of the most important partners for distributing funds. There is a lot of speculation whether we will see an evolution to guided rather than fully open distribution models.
In addition, over the mid-term it is likely that we will see significant growth coming from other channels as well, including the insurance area.
One of the most important factors to growth will be restoring investor confidence and trust. As asset managers, we need to make sure we are providing our clients with transparency and the right tools to address their needs, along with superior investment performance.
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