Globalisation is the topic for our asset management CEO roundtable this year. What does the increasing importance of clients in new and emerging markets mean for investment management businesses? Chief executive officers discuss implications for brand, service quality, and business models.But they also continue to engage with the challenges posed by the ‘shifting pendulum’ of East/West economic change, and with the wave of regulation that still burdens the industry. (part 2)
Alain Dromer (chief executive, Aviva Investors)
Greg Ehret (head of Emea, State Street Global Advisors)
Crispin Henderson (chief executive officer, Threadneedle Investments
Andrew Laing (deputy chief executive, Aberdeen Asset Management)
Alan Mearns (chief executive, BNY Mellon Asset Management International)
Akshay Randeva (director, strategic development, Qatar Financial Centre Authority)
Keith Skeoch (chief executive, Standard Life Investments)
Alain Dromer (Aviva Investors), Greg Ehret (State Street GA), Crispin Henderson (Threadneedle Investments)
Andrew Laing (Aberdeen Asset Management), Alan Mearns ( BNY Mellon AM International)
Akshay Randeva (QFCA), Keith Skeoch (Standard Life Investments)
Funds Europe: Currency has become more of an issue recently in global markets with the eurozone problems and the downgrading of US debt. How will this affect investment funds? And as currency issues develop, do you expect China’s renminbi to become a major operating currency over the next ten years?
Skeoch: Profound economic dislocation is causing dislocation in financial markets. This will create a different set of client needs and we’ve got to work out how we manufacture products to meet those needs. The world’s going to look very different and one of our challenges is to work out how we cope with it.
Henderson: At the moment the major developed currencies look like an ugly contest rather than a beauty contest and I can’t see that changing any time soon. We’ve had a financial crisis, now we have a growth crisis and that’s affecting major developed currencies like never before. The issue is essentially that over the next 40 or 50 years the balance will tilt from west to east, and the renminbi is not yet underpinned sufficiently to be a reserve currency. But sooner or later it’s going to have to adjust its exchange rate up and that will reduce its ability to accumulate reserves and that’s a key policy concern for China.
Dromer: Over the next decade, we will be growing more slowly in the West, with an ageing population that needs to save for its retirement. The faster-growing economies in the developing markets will need more financing, and we are likely to be a bridge between the two, trying to match those needs for retirement with faster-growing economies that are in need of long-term financing.
Henderson: Ninety per cent of central bank currency reserves around the world are held in currencies which are currently in trouble. I can’t believe that history isn’t going to reflect on this moment and, as it were, dictate a future change in paradigm.
Ehret: But from a client perspective, their liabilities are in the local currency and they still don’t look at currency as an opportunity that some of us might see. They tend to look at currency as a risk and how they can hedge it to make sure that they meet their liabilities.
Laing: We’ve just launched an Asian local currency bond fund and we’re having huge success with it. A lot of people who looked at Asia as being a small part of their asset allocation are changing their mindset; they’re realising that the growth of the East has now taken place. In other words, it’s established, it’s not just emerging, it’s emerged.
Henderson: We also have an emerging market local currency debt fund and it, like yours, is doing extremely well. It’s interesting in that it’s not an asset class which people really recognise.
Skeoch: Insofar as it’s possible to see into the future, three things are going to be important. One is a recognition that we live in a multi-speed world with very different rates of economic growth, different political systems, and different trade balances. Second is a massive focus on income and the need for income growth in a low-inflation world. The third issue concerns clients who have to face volatility in financial markets that has persisted for four years. Finding out how you insulate the client from volatility in this difficult world will be the defining characteristic for success over the next five to ten years.
Henderson: High-quality companies with great cash flow and strong market position will drive growth. If there is a growth solution for the world, it’s going to be driven by consumer demand in the US and in emerging markets.
Dromer: We see income as a major theme, and income can be generated from many sources: dividends, coupons, rents. The assets generating these income streams can be held long-term, they also present different tax advantages and can be wrapped differently in order to provide protection against inflation.
Henderson: The US is moving rapidly into a huge de-accumulation phase that requires significant income, and the East is still in the accumulation phase.
Mearns: It is important to create locally-relevant products and solutions that can address local inflation issues, product and pensions regulations, and demographic change. It’s also going to be very important to be able to customise products for local needs.
Henderson: We need to be extremely careful that the highest standards are applied to the new growth markets, too. The largest Far East markets are seeing a significant attempt by managers to pay high income, but at the detriment to capital. Paying dividends out of capital is absolutely the wrong thing to do.
Dromer: I agree. Japan is the place you have to watch in that respect.
Henderson: There is a standard in the world and we need to sustain those standards. Whatever the product is it’s got to be genuine and proper.
Skeoch: Clients want diversification, and diversification has to come through decorrelated sources of alpha and return. We must be absolutely clear about what we’re doing so the client understands where it matters in terms of their needs. The days of overpromising through product hype are long, long gone.
Ehret: Yes, but if you think about diversification as it relates to correlations of volatility between equities, private equity, hedge funds and fixed income, they’re all negatively correlated. If a client wants a lower volatility portfolio they need a different view on how they are going to benchmark themselves. They can’t be an absolute return investor when the markets are going down and a relative return investor when the market goes up.
Funds Europe: How are you going to deal with investor liquidity?
Skeoch: The issue here is the role of the global fund management industry in the capital markets. We are the allocators of capital on behalf of our clients. It’s incredibly important that regulators and politicians recognise that we’re not banks and that we start to open up conduits that connect savings in an efficient manner, because there is no shortage of finance available for recovery.
Dromer: And for the future, it’s massively important. In Europe, we are financed much more by banks and less directly by markets than in the US, and that’s a trend that might change. And in that new world, there is more of a role for asset managers.
Mearns: Yes, as over-complex structured products have lost their way, more conventional banking and asset management services have come back to the fore, and that means there’s going to be a lot more money looking for homes with investment managers.
Dromer: But maybe there was too much demand on liquidity in the previous world, especially if you are investing for the long-term on one hand, and you have income on the other hand.
Henderson: For illiquid assets, closing funds is probably the only reasonable solution. To have illiquid assets in mutual funds is a precarious proposition. It’s horrifying that we have around 65,000 mutual funds with $24 trillion [€17 trillion] in them.
Ehret: Regulation will slow the growth in the number of funds and certainly create a bigger barrier to entry for smaller players because of the importance of scale.
Funds Europe: How do you view regulatory change in the industry?
Henderson: We’re seeing a new way in which regulation impacts the investors and the industry. Regulation used to be a rather local thing, now it seems highly exportable. The US is exporting a political policy through Fatca [Foreign Account Tax Compliance Act], which is going to affect everybody sitting around this table. There is a similar thing coming out of Brussels.
Skeoch: Instead of getting global regulation, we are actually getting local regulators that are trying to export local regulation to the rest of the world and that becomes very difficult to deal with.
Dromer: One of the few places where there is something closer to a global set of regulations is in the Luxembourg product, which is recognised around the world. This has to be protected. Solvency II will change the way our parent companies manage their portfolios, and it will have some consequences. I am worried by the contradiction there is at the moment. On the one hand regulators say we should invest more for the longer term to build infrastructure; yet at the same time the providers of this long-term capital – insurers – are in most cases prevented by Solvency II from doing this.
Skeoch: With prudential and solvency regulation in general there is a fundamental disconnect between what regulators are trying to impose from a solvency standard and what client needs and aspirations are. The world would be a much better place if the two were connected.
Mearns: For asset managers regulation poses another customisation challenge. At a time when there is a need for volatility-managed solutions for investors we need to consider that some tools bring with them other risks. Solvency II brings a different challenge because of the greater use of derivatives will become extremely difficult from a risk-weighted capital point of view. It’s another area where asset managers need to be able to customise solutions.
Funds Europe: What concerns CEOs in developing their businesses over the next five years?
Laing: There is the perennial topic of keeping good people. Asset management is very much a people business and without keeping good talent, it’s quite tough.
Henderson: We’ve got outstanding performance and it’s based on talent. We are active managers and so the challenge is all about how to sustain that.
Dromer: For me, it is about making sure clients keep their eyes on the long-term perspective because everything in the marketplace is driving them towards knee-jerk reactions, or no action at all and moving back to cash. The market is creating opportunities that professional fund managers can identify and I hope we find a way to keep our investors focused on this long-term perspective.
Mearns: The challenges we face in the next few years will be quite different from the challenges we faced in the last few years. Inflation will undoubtedly become a real challenge. We also need to consider whether the products that we all market, which were probably relevant for yesterday, are as relevant in the future and we need to ensure our products are appropriate for the low-growth environment we face.
Ehret: Clients aren’t asking us about the opportunities they see; they’re talking to us first about their issues and their risk and they’re looking for advice, and the product is becoming the outcome of the solution sale. It’s not just sell it and forget it, it’s providing that ongoing advice to help walk through the challenges that they’re going to face as the market evolves.
Skeoch: Clearly, people are an issue, and not just in terms of retaining the talent we have, but attracting talent into the industry. Also making sure we deliver solutions to clients rather than products. The thing that worries me most is making sure I can understand their rapidly changing needs. The final thing I have a big concern about is that we get the regulation we deserve. We need to be part of the consensus that is yet to be formed by politicians, regulators and industry that shapes finance for a recovery, and if we don’t get that right, the challenge of building our own brands individually will be very difficult.
©2011 funds europe