Product development during market volatility and a climate crisis

Product development, market volatility, market, volatility, climate crisis, Alfi, Asset Management Conference, sustainable, investing gaps, technology, regulation, challengesPanellists at Alfi’s Asset Management Conference discussed sustainable investing gaps, technology disruption trends and regulation challenges, as Laraib Shahid reports.

The Association of the Luxembourg Fund Industry (Alfi) made the future of fund products a central topic of discussion at its Asset Management Conference in the Grand Duchy.

Alfi’s Noel Fessey, an independent non-executive director, moderated a panel discussion between Patrick A Huber, head of the product strategy and shelf evolution at UBS Asset Management, and Sandy Welthagen, global head of product development at Ninety One.

Innovation and creation of products during tough times

During the post-pandemic phase, where supply shock and geopolitical crisis headlines dominate, Fessey said that inflation is likely to remain 4% higher, and that this may affect product development.

He expected that product development teams would trim their product ranges because it feels like they are in “some kind of winter”.

Huber disagreed, however, stating that the environment is still positive, and innovation is critical to keep the industry going in times such as these. Even if product development occasionally slows down, he said, "we are preparing for the next wave".

Welthagen added that the market has moved into a "new regime". Wants and needs are changing as demands are becoming more varied and people are looking for more customisation.

Demographics influence these needs, and there will be some rebalancing, focus and mergers in products this year. However, buckets will not come off the shelf entirely.

What new ideas are coming in?

The panellists identified five to seven "interesting" trends globally, stating that products increasingly combine such trends – for example, sustainable investing and technology disruption.

Socioeconomic change is another exciting field to look at, according to Huber. An additional area that demands attention, he said, and which UBS if looking to grow, is thematic sustainable investing space.

Welthagen agreed with Huber, stating that Ninety One focuses on sustainability across the range, from thematic to transition. She said alternatives are another big area, and the firm wants to expand and grow its private markets business.

Articles 9, 8 and 6

Sustainability had been integrated into strategies for many years, noted Huber, but it was still challenging to comply with Article 9 of the Sustainable Finance Disclosure Regulation (SFDR). An Article 9 fund has sustainable investment, or a reduction in carbon emissions, as its objective.

Welthagen added that it took time for companies to articulate, measure and display environmental, social and governance (ESG) aspects in a client-friendly manner, as required by the SFDR.

Given the circumstances, there will still be Article 6 products for the next few years – that is, funds that do not integrate any kind of sustainability into the investment process – as some investors are not concerned, or Articles 8 and 9 do not meet their investment objectives. (Article 8 funds have some ESG criteria but are less strict that Article 9.)

"During the post-pandemic phase, where supply shock and geopolitical crisis headlines dominate, Fessey said that inflation is likely to remain 4% higher, and that this may affect product development."

Welthagen emphasised that exclusions could lead to multiple emerging markets, countries and companies being shut out, thereby hindering the success of the transition. Therefore, more products will likely sit in the Article 8 space than Article 9, as the latter is a “tough” category. Huber added that institutional investors predominantly ask about the product category, and Article 8 is “in demand”.

However, keeping track of constantly evolving regulations and understanding where to position themselves competitively while also understanding the market is challenging. Additionally, data is a significant challenge, with only 10% of larger companies understanding their own footprint.

Welthagen agreed that the disclosure regime only applies to Europe, which restricts companies to a limited dataset, making it challenging for global managers. Without a simple, easily understood number, there is a risk of greenwashing. However, the limitations of data hinder the production of such numbers, which investors demand.

Funds in fashion

Fessey asked if themes such as biodiversity, carbon neutrality, changing lifestyles, water and waste innovation would last. Huber and Welthagen agreed that these themes were driven by demand and were currently “fashionable”.

Huber suggested that these themes were “not built to last for more than seven to ten years”. Although they are currently popular, the likes of global equity, alpha funds and beta funds are evergreens.

Welthagen noted that the thematic fund had been around for ten to 15 years with variations and that trends and focus evolve over time. This evolution was significant from an innovation perspective, she said. Thus, the current themes may not last, but the innovation that they bring to the industry will continue to influence future trends.

AIFMD and Eltifs

The proposed text of AIFMD II, the Alternative Investment Fund Managers Directive, was published by the European Parliament's Committee on Economic and Monetary Affairs (ECON) in February. AIFMD II aims to address historical gaps in the market that prevented the marketing of products across borders.

The question now is whether it will create more opportunities for fund managers, according to Welthagen. The new regulations will make it easier for managers to offer fund products, particularly those launched in Luxembourg and sold across borders.

"An additional area that demands attention and which UBS if looking to grow, is thematic sustainable investing space."

Huber emphasised the importance of proximity to the credit loan in making credible asset manager credit loan opportunities under the proposed regime. He said his teams have been running direct credit books for the past 25 years.

Regarding the changes to European Long-Term Investment Funds (Eltifs), Huber views Eltif 2.0 – which came into force on April 9 – as a significant development, as it changes the allowed proportions of liquid assets versus real assets.

The new regulations allow for “45% of liquid assets to be mixed into the product”, said Huber, which significantly improves liquidity. However, he acknowledged that the idea of retail investors being stuck in illiquid assets is widespread.

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