A matter of trust
Aviva Investors’ CEO Euan Munro discusses what the asset management industry can do to demonstrate its societal and economic value.
While the banking sector bore the brunt of public and political wrath in the aftermath of the global financial crisis, the asset management industry now finds itself under the microscope.
The UK Financial Conduct Authority (FCA) launched a thematic review into the industry in November 2015 to “understand whether competition is working effectively to enable investors to get value for money when purchasing asset management services”.
Questions over whether asset managers offer value for money were being asked long before the FCA announced its review. But is there genuinely something wrong at the heart of the industry or is it just doing a poor job of demonstrating value?
The asset management industry finds itself under significant scrutiny: is it doing enough to demonstrate its societal and economic purpose?
Euan Munro: The point I would make is that regulators or politicians are really following rather than leading the public mood. The public feel they have been let down by the financial sector broadly: banking has been through its own trauma and some unpleasant revelations emerged, such as the Libor scandal. That tarnished the whole industry so people are looking at asset management to see if there is something fundamentally wrong.
I don’t actually think there is, but at the same time it is imperative we can prove our value to society and what we do to support economic growth and development. That is something we have not done a good enough job of and something we have to get better at.
The FCA review is looking closely at whether asset managers offer value for money. Where are improvements needed?
The value for money issue is critical. There is no doubt that as we moved from a high interest-rate world to a zero interest-rate world, relatively simple styles of passive investing where you own chunks of the market have all done well. Straightforward market exposure – or beta – has been a powerful driver of returns over the past 15-20 years.
However, I believe we’re at an inflection point because interest rates cannot keep going down. The factors or low-cost styles of investing that led to success and appear to offer value for money are not going to be able to deliver the same results over the next 10-15 years.
My fear is that customers in these low-cost strategies, largely because they delivered in the past, are going to be disappointed. True value for money, I believe, will be found in high quality active solutions and also high quality illiquid assets. You can’t do that for nothing: any focus on value for money can’t only be about the fee; it has to look at the fee in the context of the expected outcome.
If simple strategies aren’t likely to deliver the same results as before, can we expect a wave of new product innovation or should asset managers focus more on improving existing propositions?
Fundamentally we need less products and propositions, but they need to be of better quality. Our role as fund managers is to deliver a small number of client needs – to generate a decent return or level of income; or beat inflation or liabilities. Clearly there is an element of innovation that is required in terms of idea generation, but primarily we should be identifying innovators in the real economy and backing them with capital.
If returns, as you say, will be less predictable, presumably portfolio construction will assume greater value?
Asset management is a twin-task business: it’s about generating ideas to deliver positive returns and putting them into portfolios that are robust in a range of market scenarios. The Holy Grail is the delivery of good returns with low volatility. That is why portfolio construction will increasingly be at the heart of what is necessary to meet client expectations.
You mentioned earlier the importance of illiquid assets: should they be part of all investors’ portfolios or just institutional clients who can live with the illiquidity?
One key challenge in the industry is how to give retail investors appropriate access to illiquid assets. These assets will almost certainly be an important area of return generation in future. I think a lot of individual investors would really get a sense of the value of fund management if they were investing in assets such as wind farms, tidal energy projects, bridges and hospitals. The nature of these investments is that you are helping to build useful infrastructure, but very often retail investors are kept out of these markets because the assets are by their nature long-term and illiquid. We haven’t yet been able to develop the right fund structures and need innovation to give people that exposure.
In Europe, Jean-Claude Juncker [European Commission President] has talked about the development of 10-year funds where people subscribe for the entire period. That potentially could be the solution: if we could set up mutual funds with a defined long-term maturity, people might be able to invest more in illiquid assets.
Could investments in areas such as infrastructure help asset managers redefine their societal purpose, particularly in the post-Brexit environment?
Potentially. I’m proud of the investments we have made in solar panels, windfarms, biomass, energy centres and hospitals, where the societal value is clear. Even with liquid assets, the thoughtful allocation of capital to industry in the UK and beyond also has a clear benefit. We definitely have an opportunity to play a part in the post-Brexit world, but I’d argue we have always been involved in activities that have social and economic value. We maybe just haven’t got the message across.
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