Jon Little, vice chairman, BNY Mellon Asset Management
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?
I’m more optimistic than I was in December but I am worried that the market will react too positively, too quickly. Whilst markets always anticipate events rather than lag them, many of the problems in the real economy aren’t cured by a market rally.
How do you feel the reputation of fund managers has been affected in the eyes of institutional clients and retail investors?
I think we only look ok because there are other easier targets for public opinion to focus on. There are still many strategies that didn’t do what was promised and complex, high cost products which don’t work well enough. It would be a good idea to start addressing these now whilst the public is still focused on worse offenders.
Are product development and pricing reflecting changes in the financial and economic environment? How do you see this evolving?
Yes I think it’s starting to happen. Prices in most alternative asset classes are moving down somewhat and I think Private Equity is the next shoe to drop. We will also see more firms in the hedge fund space either become more mainstream or – more likely – pare back to one or two real core strengths, too many of these firms tried to stretch themselves too far in the search for additional revenue only to find that all they were good at was their original core business.
The G20 looked at the issue of global regulation and risk. Though mainly focused on banks, governments are also interested in other regulated financial firms.
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?
I’m puzzled as to quite why hedge funds have received so much of the flak, hedge fund investors bought vehicles which fully disclosed what they do. Most investors and bond holders in Insurance businesses such as AIG or banks like RBS were taking hedge fund type risks without the required disclosure. Even the dramatic part that hedge funds had to play in the rapid unwinding of positions in Q4 2008 and Q1 2009 had as much to do with their lenders getting into trouble than the funds themselves.
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?
I think it all depends what you do – but yes as we saw at The Reserve Funds in September 2008 a lack of capital can bring down a firm in 48 hours. This is less crucial for equity and alternatives firms but even there the greater regulation of these firms means that operational errors will fall increasingly back on the firms rather than their clients. If you manage a concentrated business with £1bn under management its is not inconceivable that you could have an error which costs £10m to fix – that’s a lot of capital for a small firm in addition to their minimum solvency requirement.
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?
Yes I think that would be a good thing.
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?
I think that in the mainstream of our industry remuneration has always tended to be based on profits or performance over a reasonable period of time. This makes it hard to manipulate the system versus a trading desk type environment. I think we may see more bias towards long term incentives and I think one year performance fees with no high watermark or benchmark are probably going to be very rare in future.
The Executive Panel organised by Funds Europe and reported in December 2009 began by talking about consolidation. The last six months have seen a significant number of acquisitions in fund management across Europe.
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?
The latter will be important but I honestly believe that the next 12 months will be a very busy time in the industry.
In the current M&A activity how will clients’ interests be balanced with shareholders’ interests?
I think actually there will some good alignment here. Many of the firms that are being sold are either not delivering well for their clients, are strategically challenged or are frankly in the ownership of a parent who is in deep trouble. Most clients will be keen to see their manager be part of a more stable parent or be put on a better footing.
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?
Banks will still sell funds and other similar vehicles but they won’t sell their own to retail clients; that game is over.
©2009 funds europe
Jon Little, vice chairman, BNY Mellon Asset Management