Magazine Issues » June 2018


Berling_at_sunsetThe biggest names in the funds industry will be at the FundForum International conference in Berlin on June 11-13. As delegates prepare for the panel discussions, talks and seminars, we ask key figures about the likely hot topics at Europe’s largest conference of its kind.


Where are fund buyers going to find growth in coming years?
Technology. Not necessarily by simple virtue of holding Amazon or Facebook even if they have completely changed, the face of the S&P 500. No, at 200 times price-earnings then markets have priced in a multi-decade re-rating for Bezos. So that’s going to take time to realise, especially if you plug in today’s discount rate. Instead, ‘alternative risk premia’ is broadly banded about but my guess is that strategies, with a superior data process, hold advantage. These will mine, scrape and wash data to extract new patterns, arbitrage them, to find new sources of growth. That is still very hard to forecast but is broadly in line with my observations of Moore’s law. Also, strategies that can benefit from both rising and falling trend markets and micro trends imperceptible to long-only investors. Thus, what looks clearer is any normalisation of rates means the recent super-cycle, of issuance and cap-weighted index volume dictating multiple expansion, looks much less likely to deliver over the next cycle on valuation alone.

What do you expect to be the main topics of discussion at FundForum this year?
As I am proudly involved in curating and moderating content for the APFI in association with FundForum, then firstly I have some idea. I can tell you that we will have a lively mixture of fund buyer solutions, ‘too hot to handle’ debates, mixed with insights around ETFs, innovative fixed income strategies and the ever-pervasive digitalisation of fund management and selection. Transparency, sustainability and diversity won’t be far away. We have been building fund buyer content over recent years and this year looks set to take that ‘buyer focus’ even further. Hold on to your hats!


Is the US facing a recession or not?
The US economy is having one of the longest upswings in history post the World War (third-longest and soon to be second). However, it has also been one of the weakest economic recoveries, with accumulated gross domestic product growth the weakest it has ever been. We are experiencing a bit of a ‘Goldilocks’ type of environment: decent economy, low inflation and low interest rates. And yet, this cannot last forever. We don’t know the tipping point; maybe it’s a shrinking of central bank balance sheets, a pick-up in the unusually low velocity of the money supply, higher wages from a tight labour market, or maybe it’s something else entirely.

What’s next for the UK, Europe and the eurozone?
We don’t know how long this current economic state will continue. The question is not what the economy, interest rates or inflation will do as much as what is represented in stock prices. Stock prices at the moment are representing a good economy, low interest rates and benign inflation. If one or more of these variables disappoint, then the stock market will likely similarly disappoint. The bottom line is that something will break at some point – but what, and when, and to what extent we cannot say. So we don’t try to predict the likelihood of a recession or recovery. We try to understand what could happen. It’s our job to understand the market - to understand all of the possible scenarios and, against that backdrop, to respond to price.


What are the key challenges of capitalising on the growth of the European ETF market?
In the US, the success and adoption of active ETFs is not new. This is mainly due to the maturity of the market and the broadening needs from clients who have adopted ETFs as investment tools on all types of strategies. We think the Active ETF area of the European ETF market will grow significantly in the years to come. Like with any investment innovation, adoption takes time.

Generally speaking, we have observed that sophisticated investors across Europe are on the lookout for proven strategies that can provide diversification benefits in their portfolios. They also want to see innovation across a range of asset classes, although demand for greater innovation in fixed income is particularly noteworthy at this time, whether that be passive, smart beta and/or active capabilities.

What other topics are you looking forward to discussing at this year’s FundForum?

We are looking forward to discussing further how the ETF and asset management industry is evolving. At JP Morgan we continue to build out our suite of Ucits ETFs. Including innovative alternative strategies as well as some of our flagship active capabilities delivered through the ETF wrapper. We also think the fixed income area is growing at an even faster pace than the rest of the ETF market so are looking forward to discussing fixed income ETFs as the killer app!


What will be the main challenges for German wholesale investors over the next couple of years?
Changing regulatory requirements will lead to profound changes and more complex reporting requirements for both selectors and fund managers. Alongside constraints on fund selection, these are two main challenges the market needs to address.

Increasing transparency will not only have an impact on the selection of investment vehicles but concern other aspects affecting the overall cost structure of wholesale selectors.

New standards and best practices will require a reorientation regarding product transparency and, consequently, deeper analysis of a fund’s structure will also become more prevalent.

Finally, the focus on ESG continues. Selectors will need to identify true ESG-investing managers and separate these from investment solutions that are primarily marketed as ESG-aware products.

What other hot topics are you looking forward to debating at FundForum 2018?
The drivers that make ESG continue to drift away from a popular theme for discussions towards becoming obligatory selection criteria - in that context, the approaches to understand how individual fund managers define ESG and implement their philosophy into portfolio construction.

The case for global equities and emerging market equities, in particular different style investing in the emerging markets in a post-QE scenario that is still marked by a low-yield interest rate environment.

Last but not least, the perception and trends associated with a MiFID-aftermath world – what are the new challenges and what are the considerations to meet these newly emerged standards?


What are the new markets that the industry should be focusing on in the coming months and why?
As populations continue to grow older, the need to deliver outperformance throughout the cycle is more important than ever.

From a product angle, two areas we are focusing on are next-generation retirement solutions and the implementation of ESG. In terms of retirement solutions, clients are desperate for innovative and tailored products to battle what has been a lost decade of low rates to ensure sufficient funding in their retirement. The second area we believe is becoming critical to long-term investing is ESG. In 2001, we were the first asset manager in the world to vote against companies at their annual general meetings if they did not produce important data on sustainability issues. Since this time, we have engaged with thousands of companies to promote more sustainable business practices. We are helping our customers understand and choose fund management with integrity, for example, by creating public league tables ranking companies on sustainability issues, such as the Corporate Human Rights Benchmark. The opportunity is clear: better-run companies over time deliver consistently superior returns.

From a regional point of view, developing regions such as Asia, China and even frontier markets are obvious places to put a flag down to capture their fast-growing wealth potential.

Developed markets, too are equally going through a period of much-needed change and digital disruption, and should not be discounted. Though of course, there is a clear need to have local distribution and perhaps manufacturing capability to cater for an ever-growing local demand.


What will be the main challenges for German wholesale investors over the next couple of years?
The low-yield environment is a big challenge for many German investors. The challenge is to create solutions that can close the performance gap. Multi-asset funds have been successful with this task, which can be proven by performance and fund flows. Nevertheless, German investors will have to onboard more risk to comply with the return targets they have based on their historical experience.

What other hot topics are you looking forward to debating at FundForum 2018?
The integration of ESG in multiple investment strategies is a topic that is of interest for us. Especially in the absolute return space, we think there is large potential for further growth for managers through the launch of strategies that integrate ESG criteria in a market-neutral framework, for example in equity long/short.


What do you see as the key opportunities and trends in global distribution in 2018?
The opportunities are considerable, especially in income solutions and packaged products, and global expansion at a reasonable and measured approach is ideal. We in the industry must evaluate each market separately to determine the opportunities, as well as the risks and barriers to entry.

We must be sure that we have a robust enough infrastructure, including product diversity, well-coordinated legal and compliance guidance to assess each region individually, and the ability to assume added markets and growth.

Those who succeed will have done their homework to be sure that they have what each market wants, and are able to package their solutions in investment vehicles that meet the needs of investors.

Clients are telling us they want to do more business with fewer firms that have broad skills and capabilities as well as a large global footprint.

What are the key topical issues you expect to be debated at this year’s FundForum?
Regulation will continue to be at the centre of debate, especially MiFID II’s focus on transparency and its effect on trading and research rules.

Also getting attention will be increased reliance on technology and the advent of in-house packaged products though subadvisors. I’m sure we’ll also spend time discussing the transformative nature of emerging technology as a source of growth and as a tool to enhance investor reach.


How do you expect augmented artificial intelligence and quantum computing will impact the financial services industry in the coming years?
Quantum computers will render some methods of cryptography used in financial services useless. What is more, this encryption-cracking capability could come any time within the next five years, so it is essential to plan for post-quantum security now by selecting encryption methods that are deemed ‘quantum safe’.

As always, with technological threats come opportunities, and the enormous power of quantum computers can be harnessed to gain a massive first-starter advantage in areas such as high-frequency trading and stock option pricing. However, building the algorithms that are optimised for quantum computing power in areas like cryptography, pattern-matching and data sorting will have a major impact on security, fraud detection and data analysis once the power of quantum computing arrives.

True AI will enable funds to absorb vast amounts of data, combine it with self-optimising algorithms and make increasingly accurate predictions about the financial markets. Indeed, there are several hedge funds today that are fully autonomous and make all stock trades using artificial intelligence.

As chatbots improve, robo-advice becomes increasingly accurate and AI outperforms human managers, it will be essential to focus on how humans and machines can best co-exist.

Machines’ lack of human bias could help us find new correlations into vast silos of data, but human intuition, common sense and imagination remain an important balance to AI’s weaknesses.


To what extent is climate change an investment risk?
Climate change is an investment risk because we believe it will have a material impact on the global economy and the long-term sustainability of companies. Last year in the US alone, weather and climate disasters cost an unprecedented $306 billion (€261 billion). At the same time, the cost of clean technology continues to drop at a much faster rate than was previously anticipated – it is now cheaper to build new windfarms than to run existing coal plants in parts of the US.

This is why LGIM welcomed the international Paris Agreement on climate change and has been supportive of climate action through our shareholder votes, company engagement and new investments. The policy signal is clear: the world is embarking on a transition to a low-carbon economy and companies across all sectors must adapt their business models to be resilient in the face of this transition.

What other topics are you looking forward to debating at FundForum?
Our Climate Impact Pledge, which we have implemented because we see the management of climate change as a fundamental part of our fiduciary duty to clients. The pledge represents our commitment to put pressure on some of the world’s largest companies, so their business strategies are more resilient in the face of climate change. This is a problem that affects all sectors, which is why we discussed climate change in a third of the company meetings we held in 2017. While we always aim for constructive dialogue, if we see insufficient progress we will vote against companies through all our funds or, where we can, divest.


What has been the impact of MiFID II research unbundling on fund managers?
There is no question MiFID II’s unbundling has had a disruptive impact on the research business. Fund managers are increasingly focused on price and scrutinising the quality of research.

With portfolio managers and traders under increasing pressure to deliver alpha, there is renewed emphasis on gaining access to in-depth research that is most likely to add to their investment process or challenge their thinking.

As a consequence, we’ve already started to observe a decline in the volume of research being produced, with analysts starting to focus on differentiation rather than the frequency of market updates and analysis. Over time, we believe MiFID II will ensure quality wins out over quantity and the best research available will be in high demand as budgets are tightened.

How have fund managers changed their approach to research post-MiFID II?
It’s evolving. It will take several more quarters for the dust to settle, so many fund managers are still adjusting to the impact of MiFID II. The new rules have become a catalyst for taking a smarter, more targeted approach to research.

For instance, the separation of research and execution costs has driven greater transparency for end-investors. Today, investment managers must justify research expenses to investors in an environment where actively managed funds continue to suffer from downward pressure on fees. This is intended to drive efficiency and therefore value for investors.


What do asset managers need to be successful in the multi-asset space?
Multi-asset is the epitome of our industry’s trend towards delivering outcomes, not components. However, our research shows us that it is not the outcome alone that drives success.
Whether it is launching a single flagship strategy, or positioning a new range for retail flows, there is no single path to success in multi-asset. However, blockbuster multi-asset winners have clustered in four areas.

Firstly, they have created a strategy capable of consistently achieving an outcome (defined by risk, return and critically, fees) that is aligned to either the broad investor universe, or the needs of a key channel e.g. Italian banks.

Secondly, these funds have achieved this outcome through an approach that is equally as desirable and is considered robust by selectors/consultants, appreciating appetite for flexible asset allocation or alternatives, or anxiety about derivatives and leverage in certain cases.

Moreover, laser-focus client communications is a must. This involves clearly articulating the benefits and differentiators of the strategy, with empathy to the individual needs of each client group they are targeting – their story and the benefits for retail investors, as well as the process/people and risks for institutional investors.

Lastly, targeting the key channels for multi-asset demand (e.g. UK pensions, Italian and Spanish banks, German financial adviser networks) and formed relationships with the right partners for access to investors (e.g. key regional distributors, global/local investment consultants).


What are the key challenges to managing risk and return in the world of smart-beta and multi-factor ETFs?
One of the key challenges in the world of indexed factor investing (i.e. smart beta) is to strike the right balance between concentrated factor exposure and risk, which need to be calibrated to the desired investor outcome. With multifactor, you also need to consider how to combine factors, like value and momentum, for example, which can be rather contrary to one another – a simple blend of the two could lead to a portfolio with no significant style factor exposure. A more targeted bottom-up approach allows for a more controlled exposure, thus potentially avoiding undesired risks, such as persistent sector bets, disproportionate single name risks etc.

What other investment topics are you looking forward to debating at this year’s FundForum?

Sustainable investing is definitely front of mind, it’s an area which is evolving quickly, so I look forward to hearing the latest industry developments in the space.

Within our own clients, the conversation is moving away from simply ‘I want ESG’ to focus more on specific issues – be it climate change or governance, for example.

I think what will aid ESG’s move into the mainstream is more engagement and a clearer definition of what qualifies as ESG.

©2018 funds europe