Funds Europe talks to London-based asset management firms about the challenges of regulation, and advances in technology.
Rob Sanders (global head of marketing, Aberdeen Asset Management)
Gary Collins (head of wholesale Emea, Columbia Threadneedle)
James Bowers (global head of products and distribution services, Henderson Global Investors)
Carlo Trabattoni (head of pan-European intermediary distribution and GFIG, Schroders)
David Aird (managing director, Investec Asset Management)
Funds Europe: How is the European distribution structure changing as a result of the total or partial ban on commissions enshrined in various regulations or proposed regulations?
James Bowers, Henderson: I think we’ve got abit of a head start, as UK-based entities, because we’ve obviously had to adapt our business model significantly to deal with change in the UK, like RDR [Retail Distribution Review]. I don’t think the changes in Europe will be as disruptive for a UK provider as those in the UK were for us three years ago.
Rob Sanders, Aberdeen: For me, it’s clear that distributors are going to be under pressure from current regulation. Their revenues will diminish, so there will be more growth in passive to help maintain margin. Pressure on fees will be passed on to us, as active asset managers. So whether it’s super-RDR or similar sorts of things, there’ll be a lot more variance, I think, in our pricing. There will be more growth in sub-advisory or, alternatively, banks rebuilding or refocusing on asset management businesses.
Gary Collins, Columbia Threadneedle: As you see MiFID II implemented across Europe, the need for partnerships will become ever-increasing. If you’re a niche player, trying to engage across Europe with all the additional costs and margin compression, particularly if we see an increase in sub-advisory mandates, then that plays into the hands of the biggest managers.
Sanders: And I think there’ll be much faster rotation of assets in distributor portfolios, if you’re a component manufacturer, as most of us are. I think it’s a huge change in Europe. Perhaps over the next five years, our industry will be transformed as we respond to the results of regulatory change.
Collins: I’m sensing there may be a two- or even three-speed incorporation of MiFID II. I think open architecture will probably move towards guided architecture. I can see more self-advised mandates coming in, in certain parts of Europe over the next two to five years. We’ll have to fundamentally think about that sort of private banking challenge you talked about there. Clean share classes are inevitable. Obviously they’ve already got that in Holland, and what’s happening in Switzerland is slightly different, with the private banks.
Carlo Trabattoni, Schroders: They’re repositioning out the offering. We see clear hints towards that from the banking institutions. Let us not forget – and we’re not dismissing your competence at all in continental Europe – but the mindset, as most of you are UK-based, is the fact that the UK market has walked away from the bank distribution many years ago. Continental Europe is all about bank distribution.
Funds Europe: How has the pension market within Europe changed over the last five to ten years, and what opportunities has this created for asset managers? Are you confident enough that new investors are sufficiently sophisticated to manage their own investments?
Bowers: As a product person, dealing with pension advisers and pension funds directly, it is the space where innovation is most prized. For instance, a UK pension fund that wants to take their UK exposure into a global exposure. We build a global product. They seed it with this amount of money, and then two years down the line, it is then sellable to other parts of our global distribution business.
Often it is the case that UK consultants and UK pension funds, are no longer satisfied with UK-type products and they want differentiated global products. Consultants are often trying to differentiate themselves from one another, and they have got very smart people who want to be able to say, “We work with a provider to create a new type of multi-asset credit fund that includes a real broad spread of underlying assets from loans, from mortgage-backed securities to emerging market debt.”
Sanders: There is a clear theme of assets flowing from DB to DC. There is also consolidation of assets and schemes in the Netherlands and Nordics. So, larger mandates create fee pressure as schemes have scale. Internal asset management is increasing.
David Aird, Investec: We’re incredibly optimistic about the European pension and savings markets. I mean, you can apply this comment to the entire globe. The globalisation of our clients’ DB and DC schemes, to a certain extent, is unstoppable, and then the move away from home bias assets is unstoppable as well.
In the DB space, it’s fascinating for us; the growth buckets within a DB scheme are getting smaller and smaller but now are getting far more complex. There’s a huge demand for long-duration assets and capturing illiquidity premium, which we think is a fantastic opportunity. It’s not huge volume but it’s high-value add to the client and actually, the margins for this type of business are very good.
Funds Europe: To what extent is the fund management industry polarised between large players with broad offerings on one side and niche or specialist players with a focus range on the other? Is it necessary to be either of these two types of industry actors in this day and age?
Sanders: I think it is an oversimplification to say the industry is polarised. There are a range of successful firms. However, while boutiques have focused product ranges, they face challenges dealing with regulation and client service models as they scale fund distribution.
Trabattoni: Asset management is a broad industry. You have the independents and you have those who belong to large conglomerates, mostly financials and insurance. It’s therefore important to put things into the right perspective. And on some occasions, size matters – it is a fact that the industry will be divided up between larger players and smaller players, concentrating on different focus ranges depending on the market segment the asset managers decide to cover.
Aird: I would potentially go back one step and say which jurisdictions, which countries, and then which channels? What type of client do you want to engage with as an asset manager? There’s a place for small companies, and we all know the challenges they have with regards to managing just one type of strategy with one investment process. But if you want to plug into global distributors, then the pure complexity of cross-border distribution and the choice of what they want means a one-strategy boutique is very uncompetitive. So I think you have to take it right back to say what markets, what channels and what solutions or what asset bases are you trying to sell to? Then I think the answer’s very, very simple.
Bowers: Being from a firm which is probably a medium-sized player with a broad offering, you’ve got to try and figure out, if you are going to make the move to be a big player, can you afford the time and can you run a broad number of strategies and get a number of them right and go head-to-head with some of the bigger players in terms of price, ad spend, promotional spend?
Aird: But why do you have to compete with the big guys on brand and spend? You could argue that if you choose your distribution channels and partners carefully, for instance, in certain countries you may not wish to build a brand as the distributor’s brand is far more powerful.
Bowers: You’re absolutely right. You do have to be smart. If you’re going to be a global player, you’re going to try and be represented in a number of different global markets. You have to be smart about how you pick your position, and about what your ambitions are.
Aird: There’s a critical mass size, isn’t there? In the middle ground and upwards, you then have a larger cost base due to the complexity of cross-border business. As such, your revenue line needs to be able to sustain this cost commitment. Because of these costs and complexity, this is where the boutiques can get filtered out.
Collins: In an increasingly interconnected world with rising volatility and low interest rates, investors must be able to quickly adapt to changing market conditions and for that, they require the expertise of asset managers that have global investment capabilities in all asset classes and regions. I think if you’ve built a business on one or two strategies without the diversification that many of us have got, clients probably won’t be quite as forgiving if that one strategy they’ve supported suddenly underperforms.
Aird: Whereas if you are selling a single investment fund to a private bank or a multi-manager, actually, divorce can happen very quickly. A broad waterfront of funds supported by a distributor is a much more stable relationship.
Funds Europe: How important is corporate brand for an asset manager? And similarly, is the brand of funds in general sufficiently developed? Is it complete retention within financial services? Who’s done the most recent rebranding?
Collins: It’s quite a challenge to get a message across with a brand. You need to try and get across consistency, persistency and trust, and then probably stability. The only selling point we generally point towards, as an industry, is past performance. But clients are increasingly looking at other criteria such as sustainability and outcomes. I also think our industry is extremely fragmented. It’s quite unique and can be overwhelming for end investors. The largest market player has less than 3% of entire market share. But there is definitely a shift from product-centric, performance-driven brands to client-centric, outcome-oriented messages. This is what we have embraced with the launch of Columbia Threadneedle Investments. Your success. Our priority.
Trabattoni: I believe a strong corporate brand is becoming increasingly important. In a crowded and competitive market, it is essential to know what the company stands for and what its core values are. This is particularly important since communications are more and more geared toward the end consumer.
Aird: Where we build domestic adviser businesses, we need brand to be incredibly high-profile, but no one is going to tell me that, when we’re engaging with sovereign wealth funds or American public-sector pension schemes, we should look at branding and name recognition in the same light.
Bowers: I think firms maybe struggle to articulate what they stand for, particularly those with such a broad offering that it’s difficult to put on the back of a corporate gift. I think the danger is if you try and go down one particular asset type as being your area of expertise or particular specialism, you don’t get the exposure you want in another area or in a different market.
Sanders: Our industry suffers from a kind of brand contagion from the wider financial services sector.
Bowers: The reason Australia is the most sophisticated and fast-growing pension market in the world is because it’s compulsory. There are no two ways about it. There are steps you can take if you want to get your retired population off the public services balance sheet by the time they’re retired... and Australia is, I think, the best example.
Aird: Our industry has got to collectively start educating the world, switching on the light bulb to say the state is not going to be there for them in retirement.
Collins: I think sometimes you’re looking for catalysts, aren’t you? What’s going to fundamentally change this market? I think what we’re seeing is regulation in the UK, with the move from collective passivity to individual responsibility, the focus is very much on achieving good outcomes to and through retirement... Ultimately, more freedom for investors means more responsibility for fund managers and other providers. We need to be ready to tackle the challenge by delivering products that can provide retirees with sensible alternatives to annuities.
Sanders: It’s no secret we’ve acquired a business called Parmenion in Bristol. This is effectively online guidance and distribution through intermediaries, but also direct to consumer. We’ve partnered with Hymans Robertson to provide other guidance tools that can help us take this to workplace DC schemes – it takes the friction out of servicing from the corporate to the member. I think you’ll see more and more of these sorts of things coming through in the future.
Aird: But that comes back to how we get people in the workplace to actually allocate anything, even the minimum, or match their employers’ contributions in the DC world. Most young people in the generation or two behind me, if you ask them if they would like to put their money into a pension scheme, or instead into a workplace savings scheme that is open-ended and where they can get access to their money, they will always go for the latter. And again, collectively, we’ve got to tell them that the state will not be there for them in 60 years. I think we need to be careful that we don’t also confuse client communication and product messaging with branding.
Funds Europe: Is the industry quick enough to harness technology in order to know and serve its customers better?
Bowers: The engagement of younger consumers with brands, with companies, their expectations of service and responsiveness, are so different from what we’re used to, and obviously to what other, older generations are used to.
Sanders: I don’t think fund managers are doing enough to harness technology at all. If we don’t adapt quickly, we’re going to see disruptors come into the market.
Collins: I would agree our industry is quite a long way behind a number of other sectors. Having said that, there are new developments in this area. For example, we launched TriGlide this year, a mobile tablet application that helps financial advisers and their clients identify investment solutions that fit their needs during retirement. We are also active on social media.
Aird: Clearly, social media doesn’t have to be generationally biased at all. The one thing we think about deeply is making sure our data is available on sites through social media, so it’s of the highest quality.
Bowers: The companies starting from first principles have got the platform, have got the smart kit. If they make a shift into our industry, the danger is they’re two miles ahead of you.
Aird: There are some leading banks now who have asset managers attached to them, or they have external managers where, on mobile technology, you will be able to move money from your current account to your deposit account, from your deposit account to your investment platform, at the touch of a button.
Sanders: The customers have to come first. Whether they are a pension fund trustee or direct client, these are the people we need to serve. We need to understand how to communicate with them better and service them in the right way.
Trabattoni: Digital technology is developing at lightning speed and it is increasingly difficult for asset managers to harness that progress. But we are starting to look at data more closely and in more innovative ways, and we are starting to adopt more efficient ways of communicating with our clients. In 2014, we purchased a minority stake in Nutmeg, a UK online discretionary wealth manager. Why did we do it? We want to engage in the digital changes that will influence the industry in the coming years. We see fintech companies not so much as a threat, but as a tool we can leverage.
Funds Europe: In broad terms, what is your level of optimism for the industry over the next two to three years, and why?
Aird: I think the seismic shift from public to private provision of long-term savings and retirement responsibility is in our favour. No one’s going to tell me within the next five or ten years, interest rates are going to go back to anywhere near those long-term 100-year trend lines.
So in a low interest rate, low inflationary, low bond yield world, if we can’t provide great outcomes for our clients in that environment then, you know, we’ll have missed a trick.
Trabattoni: Referring to continental Europe, and using the markets as a benchmark, we see that recent market movements have impacted significantly on operational profits. We also saw all markets get back on track and improve post-the summer Chinese crash. However, if markets were to dip again, we would see volumes thin and this is where the industry could suffer. We are currently still feeling the aftermath of volumes thinning and we have yet to come back to the same volume level as prior to July earlier this year.
Overall, we believe the industry is facing a transformation, and those market players who are in tune with that transformation will be able to gain more exposure to the end investor. As it stands, a lot of the asset management activities are not visible to the end investor... We believe it will be vital for asset managers to be part of the transformation and be more transparent with the end investor, within the regulatory frameworks.
At Schroders, we see a number of areas for growth: for example, the continued rise in defined contribution and our development of investment solutions.
Bowers: Yes, well, I’m also very optimistic. I think, being a UK-based firm, we’re probably, two-thirds or three-quarters of the way through a decade-long transformation in terms of our market and our regulatory environment.
Trabattoni: I’m sure all of you have been called by European distribution, saying, “Can you come and tell us how you implemented RDR?”
Bowers: Yes, and it’s been painful, expensive and disruptive and it’s distracting from your core business – but actually, I think we’re really well-placed to meet the challenges of selling to clients in the modern world.
If you stick to your core principles, which for us is about service and about investment performance, not much has changed in terms of your key strategic objectives, but the way you get there feels more like a modern way of doing business.
Collins: I’m optimistic. We’re thinking more about outcomes and solutions for end clients. We should never lose sight of the fact it’s a real privilege, of course, to run money for our clients. So the challenge for the industry is that we continually need to prove we’re good value for money.
Sanders: Optimistic as well. As governments and corporates withdraw from supporting individuals in retirement, the end investor is becoming more aware of their wealth needs and a more important driver of distribution. Regulation is enforcing customer focus and industry change and this has created great opportunities for asset managers who can adapt quickly.
Aird: There’s a real danger to look at what we do through the lens of an Anglo-Saxon telescope. As global fund managers, we can learn a lot from Asia and Africa about how we should engage with customers. There may be a slight ‘we know best’ type of approach, and we need to be very careful of that.
©2015 funds europe