Sandro Pierri and Joseph Pinto are two of the most senior executives in European asset management. Both are based in Paris. In our special head-to-head feature, they discuss the asset management industry as it enters 2023.
The average profitability of the asset management industry is today similar to where it was a decade ago, which for Joseph Pinto is a sign of how firms have used a mix of greater product ranges and adjustable costs to adapt to the business landscape following the 2008 financial crisis.
Pinto – who is chief executive officer of Natixis Investment Managers International – took part in the Funds Europe Paris CEO roundtable that was last held in 2012. At that time, Europe was struggling to recover from the shock of a collapsing banking system and dealing with a eurozoe crisis.
Recently, Pinto sat down in discussion with Sandro Pierri, who in July 2021 became chief executive of BNP Paribas Asset Management. Funds Europe hosted the discussion to partially recreate our 2012 roundtable.
Natixis IM has $1.4 trillion of assets under management and headquarters in Paris and Boston, and BNP Paribas AM - part of the French bank BNP Paribas - manages €488 billion. Both firms are two of the largest asset managers in Europe.
According to Pierri, the next ten years in asset management will be unprecedented owing to four major disruptive factors, including sustainability and demographics.
In this special ‘head to head’ feature, the two senior executives discuss the industry of the last decade and the decade now unfolding.
How would you describe the business landscape at present for asset managers and their clients?Pierri – The next five to ten years are going to be unprecedented in our industry. Four major disruptions are happening: sustainability, technology, demographics, and geopolitics. They are happening simultaneously, and they are self-reinforcing. In some cases, they are self-conflicting. For example, the demographic discussion clearly has an impact on the speed of the sustainability transformation. How do we engineer a just transition when most emerging economies are growing from the fossil fuel economy?
The first implication this has is that active management will be back in favour over the next few years. With disruptions, there are winners and losers – countries, industries, companies – and this is the best environment for active managers. On the sustainability side, where the availability and quality of data are questionable, there is an alpha advantage if players invest time, money, and resources building a solid data framework.
Passives will still have an important role to play but they will be redesigned, and the lines between active and passive blurred. As many as 82% of investors consider thematic ETFs to be active strategies, according to one of our recent surveys.
This is a good example of how the lines will be blurred between active and passive, particularly amid disruption and increased volatility. This is the end of the financial repression we have seen. There is clearly an important role for asset allocation products and services.
Next, sustainability will become a core process in our industry. We’re moving from a stage in which the most important element of sustainability was mainly about new products, to an environment in which sustainability is going to be a core process. It’s about data, it’s about regulation, and it’s about control.
Then technology will redesign distribution. It won’t be as impactful as some think, but we’re going to support the evolution of the digital client journey and it will have quite a big impact on us. There are also the usual cost pressures coming from regulation and technology.
Lastly, human capital needs will evolve in our industry. The importance of selecting the right portfolio managers will always be there, but it’s changing. As an industry, we need to be more present in the tech space and hire people from different backgrounds. It’s a challenge because we are not a natural employer for tech-savvy people. That will be part of the challenge ahead.
Pinto – There have been some structural changes over the last five to seven years. The current macroeconomic environment will impact our industry and clients’ return expectations.
From a client standpoint, the industry as a whole has to be careful about the risk of greenwashing. Regulation will continue to strengthen and we need to keep improving the way we provide information to clients to ensure they make the right investment choice.
From an asset class standpoint, thematic investing has been popular among clients, and it will probably stay for a while.
The third area is private assets. We have seen a rise of expected higher returns for institutional clients and the early stages of democratisation of private assets towards private clients.
Regulation has helped, with the Eltif [European Long-Term Investment Fund] in the EU and the LTAF [Long-Term Asset Fund] in the UK representing an evolution of private-assets vehicles.
The quality of products and services offered to clients is also very important – there’s growing demand from clients for digital, to receive the appropriate data and information in the right format as quickly as possible.
A further point is around consolidation of the industry. Ten years ago, at the Funds Europe France CEO panel, we talked about the reinforcement of the regulation and about greater price pressure. The average profitability of the industry is not far off where it was ten to 15 years ago, meaning the industry has been able to adapt because of a greater product mix and an adjustable cost base.
We are now in a world where rates are increasing and there’s an inflationary environment. We see an increased demand for fixed income products. We know that in the short term, there is demand for private assets and we also see some demand in the longer term, but probably not as much as we had expected. We may live in a world where for the next two-three years, for clients, expected returns will be lower than they were pre-crisis. We have to keep close to clients and explain to them what to expect when the cost of borrowing is much higher.
Has the industry’s development been impeded over the last decade, and is that likely to continue?Pierri – Our industry is about how much we gather from clients in terms of assets and how much assets are going up or down because of market movements.
Growth from asset-gathering – net new cash, or new cash as a percentage of assets – has grown at about 3-4% per year over the last decade, a bit lower than the previous decade but still pretty decent. That has to do with the fact that there has been growth in wealth across the world.
Market performance has added another 3-4%, but margin pressure has reduced growth somewhat. But we have been able to offset that through a decent re-look at the way we organise and implement digitalisation. Going forward, growth from performance is probably going to be lower than we have experienced in the past.
That doesn’t mean growth from client demand won’t be there. Some of the fundamental trends are still in place. The need for managed savings is now going to be even more significant. There are going to be significant opportunities to keep growing – but with higher volatility.
Pinto – Very importantly, the need for savings and investment is there, and the move from DB [defined benefit] to DC [defined contribution] pension funds over the last 15 years in the UK is a very telling example of this trend.
Within that asset pool, our industry has improved because it has created more trust with clients by managing assets more professionally.
After the Lehman Brothers collapse, the percentage of assets managed by third-party asset managers declined versus the amount of money that was not delegated and was instead managed internally by investors. That illustrated a lack of trust in the industry.
That’s when more regulations were implemented – MiFID, Priips and more recently, in the ESG space with SFDR. Those regulations helped us recreate trust, and we have seen the percentage of delegated assets increase massively over the past ten to 15 years, which has fuelled growth.
There are fundamental reasons why people need to save money, and it’s the responsibility of the industry to remain a reliable, trusted partner to savers and investors.
French asset managers are among the leaders of ESG. Do you feel the war in Ukraine and the energy crisis is impacting the industry’s ability to aid in the net-zero transition?
Pinto – In the short term, yes. There’s a return to traditional energy sources because we have to heat European households. If you examine the fundamental and structural evolution of this, Europe has clearly understood the need for energy independence, and investments in that respect are accelerating.
Europe is quite advanced on its journey. If you look at four sectors – electricity, buildings, industry and transport – in all but transport, half the energy supply comes from clean energy sources. It’s more than 60% for electricity, over 50% for buildings and industry, but unfortunately, we are below 10% on transport. It’s a good indication of where the effort needs to be intensified.
There has been a shock: Russia was providing between 20% and 30% of energy to those sectors, and when you cut that source, it has an impact on prices.
There are early indicators of how Germany is investing. Clients are still expecting us to help them in their net-zero transition, and dialogue with clients in Europe and Asia is very much happening. The US is slightly different, but in Europe and Asia, they are certainly interested in how to reach net zero and they expect asset managers to help them in this journey
Pierri – It’s very clear that we got into this crisis with a huge dependency on traditional energy sources. The growth model for Europe has been cheap energy, particularly for Germany. This is a fantastic opportunity, and Europe will play a role in – for instance – green hydrogen. But over the last decade, this topic has become paramount for Asian investors.
Over the last year, the ESG factor lens has not helped investment performance because of the rise in energy prices and everything that comes along with that. Interest rate rises have also put pressure on long-duration growth stocks supporting the transition. Everyone is now debating how we reconcile the duty to generate returns for clients in an environment where the ESG factor has been challenged.
No one ever said this would be a linear journey. There are moments when ESG underperforms – but that’s just the nature of financial markets. Risk-adjusted returns that will incorporate all investment processes, including ESG factors, will outperform the rest. As an industry, I don’t think we have ever said ESG would always outperform on each and every time horizon, and this is exactly the moment where we need to stick to our long-term conviction.
There is now a consensus that there should be $3.5 trillion additional investment every year to support the net-zero roadmap, and this will need to support the transition of a number of companies from ‘brown’ to ‘green’.
Regulation also supports the transition. Even if you take a pure capital allocation view, you will see capital flowing out of industries and companies not supporting the transition, to companies that are either providing solutions for the transition or supporting it.
We all know that capital will move asset prices, so that’s a long-term reason why we are sticking to our conviction on the fact that ESG will play an important role in driving risk-adjusted returns for clients in the long term.
Pinto – In the US, it has been interesting to see how the ESG debate has turned into political considerations.
In Asia, there is a willingness from investors to further address ESG considerations, but there are also concerns about the impact on financial performance.
Pierri – Indeed, it’s different depending on where you go. Some also have a different interpretation of what ESG means. Regulatory frameworks differ as well.
How do you feel French asset management has done, as a brand, internationally, within Europe and also further afield?
Pierri – Slightly less than 30% of our business comes from France, so we are a French asset manager, but we are very global in nature. France is one of the largest markets in terms of invested assets and this cultural aspect of saving is an important one. The overall ecosystem has created a condition for French asset managers to be much more global than some in other countries.
Pinto – France is an undeniable major European centre with a strong global footprint. The French asset management industry it can play a bigger role outside France and
export more products. Today, as an asset management player, we generate more revenues out of the US than out of Europe.
We are in a country where the industry is extremely dynamic. There were a few more than 600 to 650 asset managers in France before the Covid crisis. In 2022, the latest count was above 700 asset managers. Given there are still companies being created, this is a positive sign for the French asset management industry.
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