The Luxembourg funds industry association, Alfi, holds its European Asset Management Conference this month. Funds Europe talked to participants and others in Luxembourg about relevant topics.
DENISE VOSS, CHAIRMAN, LUXEMBOURG FUNDS INDUSTRY ASSOCIATION (ALFI)
Do people have enough money to save and invest, and to make the funds industry a viable industry in future?
Individuals in Europe and in many parts of the world are increasingly responsible for a growing portion of their own financial needs, including retirement. As such, saving and investment attitudes and habits have to change. In Europe alone, a majority of individuals’ savings are held in bank deposits, which currently pay little to no interest income and as a result, individuals’ savings are not growing to meet future financial needs. Investment funds have an important role to play in providing individuals with an opportunity to achieve their financial goals by investing their savings and growing those investments over the medium to long term.
What do you think is next for the asset management industry in terms of regulation?
The EU’s Capital Markets Union initiative seeks to develop non-bank sources of financing jobs and growth and as such the asset management industry has an important role to play in the EU economy. The European industry is already highly regulated, so while we all agree regulation is is important, before introducing new rules, lawmakers should take stock to ensure the cost and impact of regulation does not stifle asset management.
AMIN RAJAN, CEO, CREATE RESEARCH
You will ask your panelists what active managers are doing to retain their relevance in the fast changing investment landscape. What do you think the answer is?
First, the world of investing is cyclical, self-correcting and strategies come and go in fashion. Active funds have had a torrid time since the 2008 crisis.
As central banks gradually remove the ‘punch bowls’, active funds will stage a comeback, if history is any guide. In the meantime, active managers are taking three actions to retain their relevance: improving their investment capabilities to offer better products; enhancing greater proximity to their clients so as to understand their dreams and nightmares; and seeking greater alignment of interests so as to share the pains and gains more equitably.
Third, within the next five years, they will converge as a combination of factor investing and machine learning industrialises alpha generation. Artificial intelligence will penetrate every activity in the investment value chain. Yet, every strategy will have a place under the sun at different stages of market cycles.
Finally, the current debate has concealed the weaknesses of indexed funds. Cap-weighted funds include large companies irrespective of their intrinsic merits. Also, by encouraging extreme herding, they amplify the price momentum in both directions. In a down market, that can be lethal for investors who are obliged to follow the mark-to-market accounting rules.
ALAN O’SULLIVAN, DIRECTOR, PEREGRINE COMMUNICATIONS
What is content marketing and how do asset managers successfully use it?
Content marketing should engage prospective clients with material that they want to read, not just the information that an asset manager wants to communicate. Asset managers can successfully exploit content marketing through an approach that incorporates key message development, thought leadership creation, digital and print distribution, and rigorous measurement.
The problem, however, is that many asset managers are not effectively using digital channels to target their audience. These managers are online, but off-message. To improve audience engagement, managers can use content that is educational and communicate it with dynamic infographics or short, eye-catching videos. A sophisticated investor might have a better-than-average understanding of financial markets, but he or she will still be interested in learning about a new product or a territory beyond their normal coverage.
A joined-up strategy that incorporates the production of snappy prose, striking design, and prominent video will help to ensure successful campaigns.
MARIO MANTRISI, MANAGING DIRECTOR, INREG
What do you think is next for the asset management industry in terms of regulation?
We believe that asset managers need to look at CMU [Capital Markets Union] and should expect a revision of Ucits and the Alternative Investment Fund Managers Directive.
How prepared do you feel asset managers are for the distribution and product governance aspects of MiFID II?
Asset managers are finalising the impact analysis on MiFID II. It becomes evident that they are touched indirectly for Ucits and AIFs while on the segregated account side, they need to fully comply with MIFID.
Some of them have started defining the ‘target market’ for their various products, which in turn needs to be transmitted to distribution networks. What is still unclear is how distributors will respond to this, especially if and how distributors will report on ‘negative target market’.
Another aspect that is still unclear is related to costs disclosure. At this stage, we do not know if the regulators shall align the calculation methodologies in Priips and MiFID. The transaction costs disclosure remains a challenge, especially for implicit fees where the regulators ask to seek for mid-market prices based on three years’ transaction history.
Finally, each asset manager needs to determine to what degree they want to review their processes related to distribution oversight.
KEITH HALE, CEO, MULTIFONDS
MiFID II permits inducements for dependent advisers under the condition that “it enhances the quality of services for investors”. What do you think this means in practice?
Allowing inducements under the condition that it enhances the quality of service to investors is not a new requirement, but its second iteration will more narrowly define what it means. In practice, dependent advisers’ influence may be significantly reduced as they are forced to offer customers a broader choice of products, including from third parties, with good impartial decision-making advice and tools and good-quality reporting.
As a result, the advice market may well be subject to significant, potentially unforeseeable change as disruptors work out how to modify the way investors think about financial advice and fund distribution in light of more rigorous requirements. Since RDR, traditional advice models in the UK have begun to fall away, and the resultant scope for innovation has cemented the rise of DIY investment platforms for consumers and direct-to-investor models for institutions. MiFID II has the potential to do the same, altering the way that we think about fund distribution across the continent altogether.
JON BECKETT, AUTHOR, NEW FUND ORDER
Ahead of your presentation, can you give us some insight into why you think the value of fund selectors can probably be digitalised?
There are two directions that digitalisation for fund selection may take. The first is ‘robo-selection’, and we have already seen disruption in the advisory space. The ability of fintech to become fund selectors also requires the ability of robo to act in a fiduciary manner. The second route is ‘cyborg-selection’ – the integration of technology and human judgement. How both routes develop will depend largely on the direction of the industry itself, how millennials value fund selection and how fund selectors respond to digitalisation by making better use of technology and demonstrating their optimum economic value.
What do you think the key needs are of fund selectors today?
The answer to all of the above is more professionalism through global standards [for example, with the Association of Professional Fund Investors]; more efficient fund investing through ETF evolution; better digital access to due diligence information; the ability to share research globally; and to invest in a more sustainable way.
BENJAMIN GAUTHIER, PARTNER AT PWC LUXEMBOURG
Are any specific areas or functions within private equity (PE) and/or real estate (RE) fund administration acting as a drag on performance and can third-party administrators do anything about it?
PE/RE players use Excel intensively. Compared to banks or Ucits funds, the degree of standardisation and automation appeared, on average, really low.
Considering the strong PE/RE transaction activities that took place over the last years and the new reporting requirements imposed by regulation directly impacting these players (e.g. AIFMD) or indirectly (e.g. solvency requirements when investors are insurance companies), we start to perceive that going for a wider degree of standardisation/automation becomes a must. Third-party administrators could potentially help on this. However, merging both a strong knowledge of the PE/RE industry and a strong and well-established IT environment is a challenge. While this might look obvious in theory, some of our clients reported that the proposed offers are currently far from being homogeneous.
Are automation levels in private equity and/or real estate fund administration increasing? Similarly, are headcounts among firms increasing or decreasing and is automation a driver?
Investments in IT platform have increased. However, I would not mix it with automation. Indeed, a lot of strategy and transactions are involving technical specificities. Therefore, going for an automation per se is less obvious compared to the production of reports where a lot of input are the same day after day. Yet, I do not see a decrease in headcounts for the moment due to automation in the PE/RE administration activities.
The European Asset Management Conference takes place on March 21-22 at the European Convention Center, Luxembourg.
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