by Jake Moeller.
The thirteenth annual Lipper Alpha Expert Forum was held in London on November 8, 2018 and maintained its reputation as one of the European mutual fund industry’s premier thought-leadership events.
We welcomed some of the preeminent fund industry executives in Europe to share their views on key developments and challenges facing the industry today.
Once again we partnered with the Chartered Institute of Securities and Investment–the leading professional investment body in the U.K.–as our co-hosts, and a full house in the Thomson Reuters Auditorium ensured a lively debate.
Lipper’s Jake Moeller moderated the morning’s first panel session and welcomed Martin Davis, Head of Europe, Aegon Asset Management & CEO, Kames Capital; Eoin Murray, Head of Investment, Hermes Investment Management; and Keith Skeoch, Co-CEO of Standard Life Aberdeen Plc.
The panel noted that there had been a substantial change in the environment for fund groups in the last twelve months. Mr. Murray noted that “2018 had been a much more challenging year from an investment perspective after 2017 being characterised by strong returns and low volatility.” Mr. Davis reflected on global politics becoming more difficult to ignore, causing “direct changes to the expectations of investors’ appetite to risk and products.”
Mr. Skeoch similarly noted that recently active fund managers had valued “highly concentrated” assets such as those in the U.S. and the growth style at the expense of “disciplined long-term processes.” A subsequent change to this could “impact product design into 2019/20″ he said.
Ten years on from the Lehman’s crises, the panel noted that the governance and regulatory regime was much stricter, it wasn’t according to Mr. Skeoch “a quick fix for the restoration of trust.” Mr. Davis called for a more holistic approach to regulation in an “environment of increasing vertical integration” of firms noting “that the end customer may not understand the purpose of differing (inter-departmental) regulation.”
As three predominantly active houses, all the panellists spoke in favour of active funds management but noted the disruption the increasing trend in passive investing has caused. Mr. Murray noted that the “passive trend was here to stay” and added that there was a potential “peak passive number but we’re not there yet.”
Mr. Davis agreed that the trend for passive funds had left active fund groups competing for a “smaller slice of the pie” stating that there were “too many active fund managers, with little product differentiation.”
Mr. Skeoch was circumspect on the framing of the current debate. He noted the potential for a changing tail-wind to support active funds over the longer term. He stated that active firms need to examine their propositions more broadly: He said: “What’s the role we play? Which part of the risk/ return spectrum do we want to operate in?” and warned that firms would be doing their clients a disservice if they “simply focused on price.”
The panellist all agreed on the merits of ESG and the cultural shift in investment processes and firm thinking. All three firms have a strong pedigree on ESG investing. Mr. Murray noted that these issues were “critical to our core beliefs at Hermes.” He also recognised that improving issues such as workplace diversity were a work in progress but limited by low turnover at the top of the firm.
Mr. Davis warned that there were many firms “jumping on the bandwagon” for whom ESG criteria were more of a marketing consideration. Mr. Skeoch noted that on the gender pay gap, his firm “needed to get better” and that “it wasn’t just about gender.” He highlighted that his company was a “recent signatory to the Government initiative on race” and was becoming increasingly “proactive and disciplined on the way we look at hiring, promotion and succession planning.”
Detlef Glow, Head of Lipper EMEA Research, outlined key patterns of flows into mutual funds in 2018. He noted that after a record year of flows in 2017 and the industry surpassing the €10 trillion assets under management milestone, the environment in 2018 had been substantially more difficult for fund groups with net flows of only €50 billion to the end of Q3 2018.
Mr. Glow noted the relative popularity of global equity funds which have collected over €20 billion of net inflows, reflecting investor appetite for regional diversification. He also noted that flows and AUM are both dominated by passive vehicles with active funds actually suffering net outflows for the year to Q3.
Mr. Glow also noted that of the top ten firms in Europe for flows to Q3 2018, seven of them did not actually have ETFs in their product suite
Detlef Glow moderated the panel session with MJ Lytle–CEO, Tabula Investment Management; Hector McNeil–co-CEO and founder, HANetf; and Andrew Walsh–Head of UKI Passive & ETF Specialist Sales, UBS Asset Management.
The panel examined whether ETFs had become the product of choice for European investors, how new ETF promoters might succeed in the crowded provider environment, the lack of innovation in smart-beta space and the potential growth of active ETFs
Mr. McNeil encouraged the audience to re-evaluate their perceptions of ETFs, arguing they should be considered a wrapper rather than an asset class and compared them to a digital product where a mutual fund was analogue.
Mr. Walsh recognised the benefit that the passive industry had brought to active investors arguing that from five years ago, the ETF industry “had shaken out index huggers and forced the prices of active funds down.”
Mr. Lytle said it was harder to assess the trends that were driving the long-term growth of ETFs arguing that it was more about the value of the wrapper: “ You can launch an ETF and sell it on to a broker” he said, concluding this reduced the regulatory burdens of such things as AML and KYC requirements for a fund firm.
Mr. Lytle also argued that there would be substantial growth in active ETFs in the near future, especially in bond products. Mr. McNeil concluded on a very buoyant point: “In ten years time, all product launches will be ETFs.”
The final session saw Jake Moeller, Head of Lipper U.K. and Ireland Research, moderate the popular macroeconomic outlook session with Shamik Dhar–Chief Economist, BNY Mellon; Andrew Milligan–Global Head of Strategy, Standard Life Wealth; and Patrick Armstrong–CIO, Plurimi Investment Management.
Discussions of the tightening interest rate environment, central bank activity, and liquidity dominated the panel with some discussion on where we are in the cycle. Mr. Dhar noted that “2017 was the story of global synchronised growth but that 2018 has been a much more idiosyncratic story.” He also painted a picture of slowing growth into 2019: “The U.S. could drop to 2.5% growth range, China coming down from 6.5% to 6%, the Euro area 1.5% and overall global growth of 3% -3.5%.” he said.
Andrew Milligan stated that the markets had priced in a lot of bad news: “If we saw some decent profits growth into 2019, we could see financial markets rally quite nicely even against a slowing growth backdrop.” He noted a point of caution on geopolitical issues: “Markets can cope with tariffs and Brexit,” he stated “but there could be a complete recasting of the U.S./ China relationship.” He also mentioned Italy as another “potential geopolitical headwind.”
Mr. Armstrong had a divergent view on the potential risk of inflation which Mr. Dhar had described as the “dog that didn’t bark.” Armstrong viewed the potential for employment capacity in the U.S. to have a more significant effect than expected: “The biggest issue businesses in the U.S. face today is not being able to fill job openings – the Phillips curve has been incredibly flat but I believe is beginning to steepen now.”
In conclusion Mr. Armstrong stated that he was “short U.S. bonds and equities” and taking risk where “people were scared: We own Italian bonds and we’re short bunds.” Mr. Dhah believed there was still value in both selected bonds and equities. He added that investors could also consider “hedges such as buying volatility on dips.”
Mr. Milligan suggested holding “higher levels of cash in 2019 but put it to work in buying a mix of global equities and as long as interest rates rise slowly buy into real yields in fixed income markets.”
All the sessions experienced a high level of audience engagement, with lively questions and debate contributing to the success of the event. The three hours of Continuing Professional Development credit allocated to the event by CISI were well earned.
A live “Twitter Wall” proved popular during the event, with considerable activity posted via #LAEF18.
Lipper is very proud to have assembled such accomplished panellists to this forum. Our considerable gratitude is extended for their generosity and thought leadership. It is vital to the industry that their experience and knowledge be shared.
We look forward to welcoming you all back in 2019!
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