The third annual Lipper – European Fund Selectors Forum was held at the Thomson Reuters Auditorium, Canary Wharf on July 11, 2017.
Mutual fund research and selection is a crucial component of the investment and financial planning value chain. It is also a field increasingly under scrutiny by regulators, the press, and investors themselves.
George Littlejohn – Director at CISI, welcomes members. Photo: Thomson Reuters.
In this environment, Lipper was again pleased to host a highly relevant forum that considered the challenges faced by the fund selection industry in 2017 and beyond. We were again proud to collaborate with the Chartered Institute of Securities and Investment (CISI).
An audience of around 140-drawn from private wealth, IFAs, mutual fund managers, fund gatekeepers, platform providers, investors and journalists participated in an informative and entertaining three-hour session of panels and presentations bringing together some of the industry’s most respected fund-selection practitioners in the U.K.
Presentation 1: fund flow-patterns in Europe
Lipper’s Head of EMEA Research, Detlef Glow, outlined current investor appetite by examining trends in pan-European fund flows. He revealed that the mutual fund market in general is in, good health with a milestone of over €10 trillion of total assets under management in Europe being reached in Q1 2017. He also noted that 2017 is on track to be a bumper year for European net sales, with the figure to the end of May 2017 of some €300 billion already surpassing the entire amount for 2016.
Head of Lipper EMEA Research, Detlef Glow outlines European Fund AUM. Photo: Thomson Reuters.
General trend towards risk aversion
Mr. Glow revealed an ongoing trend of risk aversion among European investors, with the most popular asset classes in 2017 being bond and money market funds, which have had nearly €200 billion of net inflows for the year to date. U.S.equities funds, with net outflows of over €5 billion, has fared most poorly to the end of May 2017.
Passive investments remain popular in Europe
ETFs and tracker funds which now constitute a total of 12% of the entire pan-European funds asset base, have continued to see strong net inflows of nearly 20% of the total fund flows year to date. That is double the ten-year average of annual total passive flows.
Fund concentration in U.K. is marked
Jake Moeller, Head of Lipper U.K. and Ireland Research, also highlighted the fund concentration in the U.K.; the £1.2 trillion fund market, despite consisting of some 3,800 mutual funds, holds nearly 50% of its assets in only around 170 funds.
Panel 1: The “Art and Science” of fund selection
Jake Moeller presided over the first panel session, with panellists Victoria Hasler from Square Mile Research, Mona Shah from Rathbones, and Dr Nisha Long from Citywire.
Consistency a major criterion for fund selectors
Dr. Long emphasised the importance of consistent medium-term risk-adjusted performance, but she emphasised that it is important to monitor this on a rolling monthly basis to seek aberrations. Ms. Hasler referred to “confidence of outcome,” where Square Mile seeks to select fund managers who consistently stick to their defined style. Ms.Shah similarly showed a preference for consistent style bias, pointing out that “underperformance doesn’t always reflect lack of skill”, and referring also to strength in governance and resourcing.
The Art & Science of Fund Selection (L-R) Jake Moeller, Dr Nisha Long, Mona Shah and Victoria Hasler. Photo: Thomson Reuters.
Fund concentration mitigated by boutiques
On fund concentration in the U.K., the panel recognised that it is not unusual for approved or buy lists to have commonality. Dr. Long believes that large funds must be judged on their ability to add alpha rather than on popularity alone.
Ms Hasler emphasised the opportunities that exist in the boutique fund space to differentiate, while Ms. Shah also pointed out that many good fund managers may be off radar in standard screening processes.
Closet trackers may not be a major concern
Closet trackers and ETFs were discussed in some detail. All panellists recognised that growth in passive investing will keep active fund managers “on their toes.” Ms. Shah believes that the popularity of passive investing will weed out “closet trackers” who will not be able to hide as fee transparency increases. She also reminded investors of the importance of understanding complex ETF activities such as securities lending. Ms. Hasler pointed out the importance of large scale for ETFs in contrast to active funds.
Panel 2: portfolio construction and the macro environment
Founding editor of Investment Week, Lawrence Gosling moderated Peter Elston, Chief Investment Officer of Seneca Investment Management; James Klempster, Investment Director of Momentum; and David Coombs , Investment Manager at Rathbones.
Avoiding the herd is a popular strategy
On portfolio construction, Mr. Coombs observed that key to risk control is to constantly trying to anticipate “what can go wrong” and to avoid herd consensus by not absorbing too many “expert” opinions. Mr. Klempster highlighted the importance of outcome-based investing but similarly stressed avoiding “a weighted average of consensus.” Mr. Elston highlighted Seneca’s preference to seek fund opportunities in global equities while avoiding exposure to emerging markets.
Portfolio Construction (L-R): Lawrence Gosling, David Coombs, James Klempster, Peter Eslton. Photo: Thomson Reuters.
Risk and liquidity need to be carefully considered
Some areas of contention arose for this interesting panel around the examination of income, liquidity, and the price of risk, with all three panellists referring to lessons learned from the global financial crisis. Mr Coombs stated that income-generating assets not correctly priced off gilts could lead to false conclusions about liquidity.
Insurance may be prudent
Mr. Klempster also referred to a potentially complacent market (measured by a low VIX), the need for puts, and concerns of “lobster pot” investments.
Mr. Elston, citing current bond yields, pointed out that assets with low volatility still carry a risk of loss and that he prefers seeking yield from REITs and alternative sectors such as infrastructure.
Panel 3: future trends in fund selection
Mr. Gosling also moderated the final panel, which examin future trends in fund selection, with Albert Reiter- founder and CEO of e-fundresearch.com Data GmbH and investRFP.com; Rob Sanders, co-founder, DOOR Ventures; and Andrew MacFarlane, Investment Director, FUNDHOUSE.
Technology is a facilitator rather than pure disrupter
The view of this panel was that—far from being made redundant—the future of the fund selection industry is assured but with changes as to how it is conducted. Mr. Reiter argued that standardisation of the inputs into decision making processes is key. Efficiency and time savings made by standard approaches to fund research methodology will allow fund selectors more time to make improved qualitative decisions.
Future Trends in Fund Selection: (L-R) Albert Reiter, Andrew MacFarlane, Lawrence Gosling, Rob Sanders. Photo: Thomson Reuters.
Fund ratings can have a different model
Andrew MacFarlane outlined how FUNDHOUSE is disrupting the traditional fund-rating model with a unique approach to fees and how moving away from a “pay to play” model increases the perceived objectivity of fund ratings generally.
Fund managers also benefit from new systems
Mr. Sanders confirmed that DOOR is not seeking to be disruptive to the fund selection industry, rather to create a more efficient market for time-consuming due-diligence and research documentation. He outlined that fund groups as well as fund selectors were being swamped with time-consuming and non-standard requests for information and that groups such as DOOR will be key to providing better quality and more consistent information to the markets.
An audience engaged
Audience participation at the third annual Fund Selectors Forum was exceptionally high, with some particularly passionate points of view being raised throughout the event. At the start of the Forum audience members were encouraged to engage this event via social media, and #LipperFSF17 garnered considerable commentary.
Audience participation was live and via a Twitter Feed.
The Forum was also attended by a number of trade journalists and some of the output can be found here.
The issues raised in this year’s Fund Selectors Forum will no doubt continue to be discussed. Since 2017 looks to be a material year for fund selectors from both a regulatory and market perspective, Lipper and the CISI have demonstrated the importance of facilitating such crucial debates.
We look forward to welcoming you again next year.
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This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
