The Luxembourg funds industry association, Alfi, holds its European Asset Management Conference next month. Funds Europe talked to participants and others in Luxembourg about relevant topics.


What are the key drivers that are shaping the future of the fund and asset management industry?
Increased focus by both institutional and retail investors on value for money as well as regulatory and political developments will continue to drive fees lower. Increase in regulatory spend and additional research expenditure will contribute to downward margin pressure.

‘Value’ is being redefined beyond ‘risk-adjusted net returns’, to focus on whether products are truly meeting investors` original savings objectives.

Global branded asset managers will continue to dominate both retail and institutional spaces for the foreseeable future. The top ten brands attracted 70% of all net new money in 2016.

Notwithstanding this, non-financial services brands have a greater brand recognition and trust with the millennial generation. This will create an opportunity for the non-financial actors to play a ‘connector’ role between the millennials and the global branded asset managers.

Macroeconomic factors will tend to drive product innovation over the forthcoming decade. These include:
   •  Persistent low interest rates in the largest economies.
   •  An ever-increasing ageing population in developed countries, alongside a growing middle class in key emerging countries.
   •  A growing focus, despite certain political setbacks, on the environmental and sustainability agenda.
   •  The continued shift of retirement responsibility from state to employer to the individual.

Technology will continue to innovate and reshape all segments of the value chain. Firms will continue to invest in talent that deliver a competitive differential advantage.

Fintech firms will continue to both innovate and disrupt the sector. Many will be acquired by the traditional asset management firms as a source for both technology infrastructure and innovating solutions.


How is customer experience design transforming fund servicing?

The fund servicing challenge isn’t understanding new technologies, it’s designing customer experiences.

Digitalisation disrupts industries by changing both our everyday technologies and our commonplace assumptions of normality. Remember mobile phones that couldn’t take pictures? Needing a TV to watch TV? How about buying everything in shops?

The convergence of pre-digital technologies has radically transformed our everyday experiences, but we barely notice because we’re too busy watching Netflix on our iPhones.

These behavioural changes resonate loudest in the B2C world, but they inevitably echo in financial services. B2C or B2B makes little difference, we’re all ‘omni-channel’ digital consumers now.

Consider the fund servicing industry’s interest in blockchain, digital identity management and artificial intelligence, all technologies that make processes faster, more interoperable, automated and self-service clickable. Why? It’s not revolutionising paperwork like the first wave of computerisation, it’s because we have new assumptions of doing frictionless business.

Today we expect to Google multiple suppliers for everything. We expect dashboard apps with real-time data on everything from finances to fitness.

We use an ever-expanding assortment of computerised gadgets, and expect every transaction to complete at superfast broadband speeds (that’s T-zero not T2S). We expect experiences, not processes.

Designing these new customer experiences is critical to the finance sector because services and products are becoming increasingly homogeneous through regulation, and commoditised by fintech innovations that increase customer choice.

That points to a future where customer experience becomes the main differentiator between competing financial service companies. That’s ‘phone meets camera’… it sounds strange now, but will sound normal sooner than you think.


Where do Ucits funds sit in the securities lending industry?
It’s estimated that institutional investors provide approximately $18 trillion (€14.5 trillion) of lendable inventory to the global securities lending market, with a significant percentage of this coming from Ucits funds as a sub-section of the broader mutual fund sector.

The breadth and depth of supply that these institutions provide the industry contribute significant and important liquidity to the demand side of the business, including prime brokers, hedge funds, market makers and proprietary trading desks, which helps facilitate the smooth functioning of the wider capital markets.

Approximately $8 billion in revenue was generated globally across the securities lending industry in 2017, and for many Ucits funds, the revenues received from their securities lending activities presents a compelling argument for their ongoing participation in the market; indeed, for some asset management firms, most notably index-tracking and ETF funds, securities lending is a key economic component of the funds’ broader investment strategy.

As the downward pressure on asset management fees continues, and the competitive environment for asset managers becomes ever more challenging, we see more funds than ever before – both large and small – either contemplating lending for the first time or recommencing programmes, in recognition of the performance points available from securities lending revenues.

Overall, Ucits funds remain an important participant in the global securities lending marketplace, and for those participants, securities lending can provide a valuable revenue stream. For funds that do not lend, there may be merit in revisiting that decision as the securities lending market develops, the regulatory environment evolves and revenue opportunities present themselves.


What are the key regulatory issues facing the European funds industry?
First of all, I would cite the initiatives of investment funds with regard to money market funds, cross-border barriers to the distribution of funds and the revision of the private placement regime.
   •  An EU regulation aims to harmonise the EU legal framework for money market funds to safeguard the integrity of the internal market by focusing on – among other things – eligible investments, internal credit quality assessment and liquidity risk management.
   •  The European Commission has identified numerous national barriers to the cross-border distribution of funds. An impact assessment has been launched to evaluate the opportunity to adopt a legislative proposal to facilitate the processes.
   •  The Alternative Investment Fund Managers Directive (AIFMD) includes a provision stating that the European Commission should review the application of the private placement regime. Such a review has not yet officially started.

Another important regulatory development is the evolution of the European Market and Infrastructure Regulation (Emir). Under Emir, the main updates relate to alternative investment funds (AIFs) that will be considered financial counterparties, and Ucits management companies and AIF managers that will be liable for ensuring that Emir reporting is done for the funds they manage.

Moreover, the investment funds industry will have to monitor regulations that have indirect impacts, such as the directives regarding access to anti-money-laundering information by the tax authorities and their transparency rules, as well as the entry into force in 2018 of the General Data Protection Regulation.

Finally, the Capital Markets Union programme is pursuing its effect. The European Commission has requested that the European Securities and Markets Authority (Esma) issues a report on the cost and past performance of retail investments, insurance and pension products. This mandate is in line with MiFID II (the Markets in Financial Instruments Directive) and Priips (the Packaged Retail and Insurance-based Investment Products regulation), which also require transparency in terms of costs and charges.


Is enough being done to improve gender balance in the asset management industry? Will greater gender diversity bring benefits to end investors?
I recently watched the new film Battle of the Sexes, which highlights the struggle of tennis players like Billie Jean King in gender equality, and I ask how much has changed since that iconic game in 1973? I am hoping more can be done by the time my daughter starts her career, and particularly in the sector I was fortunate enough to land in, namely the asset management industry.

Worldwide, fewer than 10% of fund managers are women, with the highest percentages in continental Europe (led by Spain 22%, Italy 19%, and France 18%) and Asia (led by Singapore 19% and Hong Kong 18%) with the UK, USA and Canada closer to the worldwide average of 10%, according to a 2017 Citywire report.

The HFRX diversity index shows that women outperformed the broader index over three, five and ten-year periods.

The sample and time frame is, however, limited as female managers still find difficulty raising capital and suffer lack of visibility in the industry.

Evidence on behavioural bias in women contributes to portfolios’ long-term success, as women are less prone to excessive risk-taking, tend to be more analytical in their decision-making and more thoughtful and considered than their quickfire male counterparts.

Women also interact well with their boards and investors with stronger intuition, ability to read social situations and listening skills. Morningstar research on manager performance between one to ten years found that mixed-gender teams were the best long-term performers, thus demonstrating the value of diversity of thinking.

Board diversity is also lagging. According to the ILA Fund Governance Survey, only 14% of fund board members are female. The European Commission has set a target of 40% of female non-executive directors. A 2017 survey showed that 23% of board members of publicly listed companies are female within the EU, compared with 13% in Luxembourg.

There is still a perception of long hours incompatible with family life and a historical bias against women (created over decades) of the ‘old boys’ network’, combined with the ‘lads’ culture’. The latter is quoted by 90% of female managers who leave the industry.

Norway and other countries have introduced a gender quota for boards and this has been seen as a success. Further steps can be taken by the industry to close the gap:
   •  Promote support for family responsibilities; ensure equitable promotion processes and pay; proactive recruitment, ensuring one of the final candidates is female; hold senior leadership accountable; unconscious bias training; nurture female talent; a culture that recognises and promotes diversity.
   •  Support industry initiatives (e.g. UK Gender Diversity Partner Programme).
   •  Investors to leverage their voting rights, particularly on board appointments.
   •  Leverage technology and millennial mindset for flexible working.
   •  Start young and encourage our daughters to be bold.


How do you see the changing face of European asset management, both over the past few years and looking ahead to the future?
Access to information has become easier than ever and at first glance, it seems reasonable to say that machines will soon be able to make reliable investment decisions.

Big data and machine learning are just two of the most well-known buzzwords that foretell the upcoming developments in the financial industry, but they are definitely not new concepts. The sheer volume, velocity and variety of available data has been increasing exponentially for decades.

Consequently, well-known asset managers are already established in this field. They use state-of-the-art technology and sophisticated infrastructure to systematically process and analyse all relevant data.

Typically, they are classified as ‘quantitative asset managers’: it is not the human being who takes the role of searching for economically plausible and significant interrelationships in big data by hand.

In fact, it is the human being that constructs a suitable machine for this purpose. When properly developed, this machine cannot only continually evaluate tens of thousands of securities using the most recent data, it also analyses its own forecasting errors and corrects them itself.

However, most of the techniques of machine learning and blessings of ‘big data’ seem simpler than they really are: ‘data fishing’, the practice that always seems to find supposed interrelationships by searching long enough in large sets of data, is just one of the many challenges in this context. Therefore, the magnitude of big data is a curse and a blessing at the same time.


What are the key determinants of investor behaviour? How do those determinants differ across cultures and what does this imply for fund flows?
Investment success is earned by accepting short-term pain to achieve a long-term gain.

In the language of behavioural finance, investors need to be patient and tolerant to losses.

The most patient investors can be found in Scandinavia and the German-speaking world and the least loss-averse investors are Anglo-Saxons. This has important consequences for money flows in and out of mutual funds.

We find that besides past returns of the funds, a higher degree of impatience and loss aversion results in less consistent mutual fund investments.

Investors from impatient and loss-averse cultures trade in and out more frequently from mutual funds, resulting in lower returns.


What is the most important issue facing the asset management industry that you expect to be discussed at Alfi’s spring conference?
To start answering the question with a quote, this is what I read on Wikipedia:
“Subsidiarity is a principle of social organisation that holds that social and political issues should be dealt with at the most immediate (or local) level that is consistent with their resolution. Subsidiarity is perhaps presently best known as a general principle of European Union law.”

Now, is it? Certainly politicians claim that it is, especially when they address the rising scepticism of their voters towards the ‘Brussels machine’. However, I am less sure when I look at the facts, like for instance the new proposals of the European Commission for the reform of the ESAs, which in my view is going to be THE hot topic discussed at the conference with politicians, regulators and industry representatives present. What is the sense behind requiring asset managers to submit all files containing delegation outside the EU to Esma instead of (or perhaps in addition to) the national authorities? What is the problem we are trying to solve, that cannot be solved any more at a national level? And why?

But perhaps I am asking the wrong questions. Perhaps this is not about problem-solving but rather about the power game between European institutions and in the relationship with national authorities. Or it is due to the fact that the United Kingdom is going to be a third country soon? Honni soit qui mal y pense [shamed be anyone who thinks evil of it] and let’s see where the discussion goes…


Is enough being done to improve gender diversity in the asset management industry? What does that mean for the organisation and the performance of the business? Does gender diversity also bring benefits to end investors?

After more than two decades in the financial markets, I will admit that many things have changed in terms of gender diversity. Still, the investment management industry is far from where it needs to be and the push for more women in finance must continue.

You don’t need to look far in financial literature to come across the concept of diversification. In portfolio construction, the idea is that a more diversified set of investments will, on average, yield higher returns and reduce risks. Yet the concept seems remarkably absent from team construction in investment management.

In the financial industry, the winners are those that solve complex problems, deliver the highest risk-adjusted returns, foresee market changes and are able to adapt quickly. To succeed, firms need to bring in the best talent irrespective of gender.

Still, investment management continues to be a male-dominated domain, despite no study having shown that one gender is better at making good investment decisions than the other.

I have little doubt that improved diversity can and will benefit the industry, affecting everything from investment outcomes to the long-term fortunes of the industry.

Research shows that few women are familiar with the investment industry and many perceive it as immoral and unethical. Clearly, this perception issue is a challenge and prevents us from accessing the best talent available.

The vital importance of finance must be better communicated. Without it, society would struggle to efficiently allocate capital to the best sustainable business ideas where it can in turn multiply, create jobs, boost wages, taxes and pensions to the benefit of all in society. These are tasks so important, they should be done by the best minds of both genders.


Which regulations are most likely to command time and resources over the next 12-18 months in the funds sector?
Most of the major post-crisis regulations are behind us now. These include the Alternative Investment Fund Managers Directive (AIFMD), Ucits V and MiFID II.

Since 2012, the fund industry has been strongly impacted by several regulatory changes.

Some had a direct and strong impact on funds like AIFMD and Ucits V, while others like Emir, the Securities Financing Transactions Regulation (SFTR), MiFID II or the Packaged Retail and Insurance-based Investment Products Regulation (Priips) impacted other financial products.

In the current period, financial markets actors (asset managers and asset servicers) will spend more time on upgrading/automating IT systems and processes with new reporting/monitoring tools and data collection.

Regulators will ensure that the funds industry is fully compliant with regulations and will carry out on-site visits.

It is unlikely that the review of the Ucits directive and AIFMD will move forward over the next 12-18 months in the funds sector.

Even if, in theory, funds were out of MiFID II’s scope, there will be gradually more regulatory convergence with funds during the post-MiFID II phase, in particular on fund distribution.

Distributors will request the same type of information as for other financial products. Those distributors will ask fund managers, management companies and certainly asset servicers to provide fund information in line with MiFID II.

Money Market Fund Regulation (MMFR) is the next regulation in the funds sector. All MMFs, whether the AIF or Ucits type, created after July 21, 2018 will have to comply with this new regulation. Existing MMFs have until January 21, 2019.
Finally, in 2019, the Securities Financing Transactions (SFTs) Regulation will require all funds to notify SFTs (repos, securities lending) to trade repositories.


Where are the main inefficiencies in cross-border fund distribution and what steps, if any, are being taken to combat them?
The ability to distribute Ucits funds within and outside the EU can prove challenging for fund managers. This can be due to differences in regulation across jurisdictions as well as differences in tax treatment of domestic funds.

The Capital Markets Union (CMU), which is currently under consultation, is looking to address these differences within the EU and level the playing field and we have seen that fund managers have been active participants in this consultation process.

Looking further afield, similar efforts are underway, through the Mutual Recognition of Funds (MRF), to lower barriers to entry for China and Hong-Kong domiciled firms looking to distribute their funds in France and vice versa, and Hong Kong firms looking to distribute their funds in Switzerland and vice versa.

Another example is the distribution of Undertakings for Collective Investment in Transferable Securities (Ucits) funds in Canada using European or other disclosure documents.

There are also operational challenges experienced by fund managers in distributing their funds across borders. These include connecting to local central securities depositaries (CSDs), adapting to local settlement practices and transacting in foreign currencies. Furthermore, local distribution channels have different support requirements.

To overcome these challenges, local client service desks are important in order to maintain relationships and product expertise is required in order to ensure the unique needs of a particular market can be met.

In this context, partnering with a security services provider can help to establish scale and enable fund managers to efficiently interface with their distributors across borders.

©2018 funds europe



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