September 2012

PARIS CEO ROUNDTABLE: Losing benefits of the eurozone (Part 1)

French chief executives representing some €2.4 trillion of assets under management discuss how the eurozone crisis is shaping the funds industry in France. Chaired by Nick Fitzpatrick. QFCA logoThe Qatar Financial Centre (QFC) Authority is proud to present the latest Executive Panel in the series of discussions organised in partnership with Funds Europe and Funds Global. Each panel looks at the core issues affecting the industry and includes some of the leading chief executive officers, chief operating officers and chief investment officers from companies driving the industry forward and shaping change. Many topics discussed are core to the QFC Authority’s beliefs: efficiency, transparency and integrity. It is the QFC Authority’s goal to build a world-class financial services marketplace where all participants, both domestic and international, will benefit from the considerable local market potential which they can use not only as a springboard into other countries in the Gulf Cooperation Council, but also as a powerful regional base from which to tap into the broader growth markets of the Middle East, north and sub-Saharan Africa and the Indian sub-continent. By supporting these initiatives, we hope to gain valuable insight into the future development of the global fund management sector and help us to realise our aspirations to become a regional hub for asset management in the Mena region. Shashank Srivastava is acting chief executive officer at the QFC Authority Paris-CEO-roundtable Naim Abou-Jaoudé, chief executive, Dexia Asset Management
Alain Dubois, chairman, Lyxor Asset Management
Philippe Marchessaux, chief executive, BNP Paribas Investment Partners
Yves Perrier, chief executive, Amundi Asset Management
Joseph Pinto, global head of markets and investment strategy, Axa Investment Managers
Pierre Servant, chief executive, Natixis Global Asset Management
Shashank Srivastava, acting chief executive, Qatar Financial Centre Authority Funds Europe: Will there be any lasting impact on asset management business models as a result of the 2008 financial crisis and the eurozone crisis? Pierre Servant, Natixis Global Asset Management: European asset management faces a structural decline in activity within the banking networks as a result of the liquidity ratios that banks will have to comply with in the future. Captive networks are outflowing and open architecture is becoming more tied to high-net-worth clients. On the retail side, there is a decreasing appetite for many kinds of funds. People are much less interested in long-only core and core-plus types of products. These funds used to be the main source of fees so this is clearly a challenge for asset managers that produced this expertise in the past. With regards to the eurozone, very few investors outside it are now interested in euro expertise. They believe the risk is too high. What we are seeing is the re-nationalisation of investment policies, specifically from large investors. As an example, consider sovereign debt. A lot of us have European sovereign debt expertise and we were formerly able to use this to play the differences between the debt of different European states. But now, a lot of investment companies and insurance firms are going back to buying their own national debt. This means the benefit of having eurozone expertise is diminishing. Alan Dubois, Lyxor Asset Management: As a specialised asset management company, we have seen more and more requirements from institutional investors for strong asset management skills, risk management capabilities and transparency. Institutions will be less and less tolerant concerning any risk management or reputational failures. But as well as a transformation in risk management and transparency, liquidity will have to transform. Joseph Pinto, Axa Investment Managers: There has been increased pressure on asset managers arising from fees, transparency, risk management, and regulation – yet, at the same time, there has been a reduction in clients’ risk appetite due to the economic situation. This means that on one side costs have increased, while on the other side revenues have decreased. In order to remain competitive, a number of players have had to adjust their profit-and-loss. This can be done in two ways: by adapting their cost structure to this new environment, and/or by choosing more carefully where and how they want to develop, especially with regards to which countries, which client segments and which investment expertise. For example, emerging markets are offering today strong growth opportunities for players like us. Philippe Marchessaux, BNP Paribas Investment Partners: European asset managers have to rebuild trust with their institutional and retail clients. The start point is to ensure clients are aware of the kind of expert help and bespoke solutions that we can provide – I am absolutely convinced that both individual and institutional clients still seek this from us. But the solutions asset managers provide must also be transparent. Clients need to be able to understand fully the products we offer, such as the risk-adjusted expectations that have been designed for them. The next big issue will be liquidity, because people will differentiate between more and less liquid products in the future. Naim Abou-Jaoudé, Dexia Asset Management: The world has changed, both structurally and economically. Uncertainty prevails and markets are more volatile. Together with new regulations, this is impacting on all investors. I agree we have to restore trust. In my view, to do this we have to place the client even more at the centre of our industry. It should not be about selling products, but about selling solutions that are adapted to the needs of the client. Business in the past ten years centred on selling products. Today, it needs to be about adding value along the entire value chain. This means increased risk management, reporting, education, and regulation. The impact of regulation is becoming more important; solutions heeding the regulatory and client needs will make the difference. Yves Perrier, Amundi Asset Management: Since the crisis our industry now faces two major challenges. The first, as mentioned, is the question of adapting products and solutions to each category of client. I feel that in the past the industry distributed the same products and expertise to clients regardless of whether they were mass affluent individuals or institutional investors. The crisis has obliged us to adapt our products to the requirements of each kind of customer. The second is the pressure on revenues. The financial crisis has caused the average margin of large institutional asset managers to decrease by 30% since 2007. This is due to the risk-averseness of clients, which means we are selling fewer higher-risk, higher-margin products. Given this, we need to take an industrial approach to the business in order to decrease costs – but one that also allows innovation. Innovation means we can find the right solution for each type of client. The eurozone crisis has made it harder to find lower-risk investments, which is a key challenge if clients increasingly want products with less risk. A further result of the eurozone crisis is that we have come to live in a world where deficits are in the West and savings are in the East – but since Italy’s problems in August 2011 we have seen a decrease in confidence from Asian investors towards the eurozone. Funds Europe: Does everybody agree that asset managers need to industrialise? Is the future only about large firms? Servant: Not necessarily. There is room for smaller asset managers with distinctive expertise. It’s just a different business model. To stay alive, though, the big players do have to innovate. Certainly, no miracle solution has been found yet to bring clients off the sidelines after a decade that saw them let down by equity products. Pinto: We have observed in the past a greater concentration of flows in the hands of a few asset managers for a number of investment categories. This winner-takes-it-all phenomenon forces players to choose their battles carefully and focus on winning them. Each of us has different strengths and weaknesses; these characteristics define who we are and help us define where we want to play. Abou-Jaoudé: Size doesn’t matter, but how you manage your business does. You can be big and efficient, small and focused and you can be a mid-sized asset manager and offer the best of both worlds. Funds Europe: What has been the key mistake by the industry over the past ten years that has resulted in client disappointment with equity products? Servant: Selling products that in hindsight were not well suited for clients, such as equity products with no protection for mass retail clients who did not understand much of the risk associated with equities. The industry did not do a good job there and it is paying for it now. These days, the mass retail client should be sold only safe products. Pinto: But the industry has learned. Asset managers have drawn lessons and have addressed them by understanding better the various clients’ needs and by offering the appropriate products to the right client segments, consequently. Dubois: Yes – the point is about shedding more transparency on the risks rather than whether or not to take the risk. Servant: But for mass retail investors, transparency is not the issue. We should not sell products to them that are too risky even if the risks have been properly disclosed in the Key Investor Information Document (Kiid) or prospectus, because you cannot be sure that people will read it. Funds Europe: How do investors based outside Europe view the European industry and what effect is this having? Shashank Srivistava, Qatar Financial Centre Authority: One trend in the Middle East to do with relationships between Middle Eastern clients and European or American asset managers concerns the drift towards emerging market investment. Links between Middle East clients and Western asset managers have always existed. However, investors are now looking for expertise in emerging markets and these investors are not quite convinced yet, I believe, that European and American asset managers really have the emerging markets expertise they need. Therefore, you can see a growing interest in asset managers from the emerging markets, such as Asian asset managers who have local Asian experience and expertise. There is definitely a vacuum in the market which needs to be filled – but it will be filled very quickly. Marchessaux: From my vantage point within my company, the Middle East has shown great resilience and created a lot of business for us, despite the crisis in the eurozone. The reality is that investors in the Middle East and elsewhere in the developing economies are looking for local expertise for emerging markets. This is why we have developed a business model that can perform at two levels, which we refer to as ‘local to local’ and ‘local to global’. The model is based on us developing on-the-ground expertise in Asia, South America and central Europe, and selling it locally. I now see much more cross-selling between, for example, South America and Asia, or vice versa, without going through Paris, London or Brussels. Direct relationships built between those emerging countries are very important. We try to stimulate this on our side, too. Funds Europe: Is the risk-averseness of clients making it difficult for investment managers to meet clients’ objectives? Marchessaux: It depends on clients’ objectives. Right now, these are more about reducing risk than about performance or return. They want us to protect their money, which is why they have a lot of cash. For example, it is extraordinary when you look at money market funds just now. There is cash in these funds from a broad spectrum of clients – including corporates and institutions – despite the fact that the yields are close to zero. The reason for this is that we are providing a true service with money market funds now. These funds are no longer mere ‘products’; they are performing a much-needed service offering diversification and liquidity. Servant: Defining clients’ objectives is also something where we can help. With many clients there is a kind of partnership between them and the asset manager based on trust. Through these partnerships we define objectives and solutions together. Dubois: One of the difficulties we have is that some large investors are staying on the sidelines. This is particularly the case with insurance companies that are still waiting for new Solvency II regulations to be finalised. Srivistava: A study we conducted recently found that alternative asset classes, such as private equity, have seen the most amount of growth in the Middle East, but the traditional mutual fund industry has seen very slow growth.   Pinto: As already mentioned, some investors have had pressure from regulations like Solvency II. This created new investment opportunities for them. For example, we have seen increasing demand for high yield, real estate loans or corporate loans. Going forward, investors like these will probably manage their assets in two pockets. The first one, the larger one, with a limited risk budget, investing essentially in govies [government bonds] and investment grade bonds. The second pocket will aim at diversifying their investments and taking more risk in pursuit of yield or more tilted performance. Servant: And there will be very strong pressure on fees. The level of fees is now very low, close to money market levels. Perrier: Long-term investors, especially insurance companies, are trying to manage a contradiction. On the one hand, they are risk averse and that means that they seek liquid investments. On the other hand, they need alternative assets, such as loans, in order to meet their commitments to customers. However, I believe alternatives will not be as important to them in the end, and I am quite optimistic in the longer term for equities. The best ‘alternative’ asset class for me at this present time in Europe is equities. End of part 1 ©2012 funds europe

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