ALFI EAM conference 2017 – THE place to be for international Asset Managers
The first edition of the ALFI European Asset Management (EAM) Conference took place in Luxembourg on March 21 and 22, 2017. The 600 participants from 25 countries very quickly recognised the event as THE place to be for international Asset Managers who wish to stay abreast of the most pressing issues currently facing the industry.
Conference video report
Denise Voss, ALFI Chairman
Brexit presents a problem for UK-based managers who passport their products across the EU27, and many are engaging with industry experts about how best to ensure continuity during this highly uncertain period. “The uncertainty around Brexit is driving change, and UK firms will need to assess where they locate their European business post-Brexit,” said Denise Voss, chairman of ALFI (photo on the left).
The Commission de Surveillance du Secteur Financier (CSSF), the financial services regulator in Luxembourg, said it expects firms to have substance in the country in order to keep their passporting rights. “Within the EU regulatory framework, there is requirement for substance and letterbox entities are unacceptable. At the CSSF, we are mindful that entities authorised and supervised in Luxembourg are fully compliant with their substance obligations. EU rules do allow firms to delegate activities, but if organisations do this, there must be clear monitoring and risk oversight,” said Jean-Marc Goy, counsel of international affairs at the CSSF.
Steven Maijoor, ESMA
Nonetheless, some believe certain jurisdictions are having a regulatory race to the bottom to attract market share, and this has been slapped down by the European Securities and Markets Authority (ESMA).
“It is important for countries to make themselves look attractive for UK market participants but we cannot have a situation where there is regulatory and supervisory competition, as this could undermine cross-border standards and rules. This is an issue the ESMA board fully recognises,” said Steven Maijoor, Chair of ESMA (photo on the right).
What is the role of the Luxembourg financial sector in the context of Brexit?
Nearly all stakeholders in asset management are trying to identify ways in which to appeal to millennials, which applies to anyone born after 1980. Millennials may have a sophisticated grasp of technological innovation, but the industry is mindful that many young people lack such competency around financial literacy.
Danny Dolan, managing director at China Post Global, acknowledged that young people had insufficient information on critical issues concerning personal finance including mortgages, pensions and savings. He added it was critical the industry lobbied governments to bring about better education on such matters.
Others agreed. “Financial education is now part of the curriculum and increasingly so in the UK. If an individual buys a car, the dealership will provide a lot of information in a booklet, for example. Asset managers should do the same as many at present do not really put education tools on their websites,” said Amin Rajan, CEO at Create Research.
Is there a need for greater financial literacy?
This absence of financial knowledge is indicative in millennials’ return expectations. Courtney Waterman, head of EMEA marketing at Schroders, highlighted millennials typically had return expectations of 10.2% per annum compared to 8.4% for investors aged over 36. Given the current low interest rates, such return prospects look unrealistic. Fortunately, research by Schroders also found millennials to be very eager to learn about investing with 92% stating they wanted to better understand investments, compared to 75% of older investors.
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Millennials and institutional investors are taking a keener interest in ESG
Even with limited disposable income, millennials are quite ethical about what they invest in. A number of studies have indicated that young people want their fund managers to incorporate environmental, social and governance (ESG) issues into their strategies.
Research by Schroders, found millennials were more likely to stick with a company which employed ESG, and would actively pull capital out of organisations whose ESG is found wanting. While some investors question the correlation between ESG and performance, 72% of allocators surveyed by Morgan Stanley felt companies with good ESG records can achieve higher profitability and are better long-term investments.
It is not just millennials taking a keener interest in ESG, but also institutional investors. “Asset management is becoming more equipped with ESG, and many institutional investors already make it a requirement for any capital allocation,” said Paul Carr, CEO and Conducting Officer at East Capital.
Major consequences for the asset management community globally
Fin-tech – whether it is robo-advisors or Blockchain – is going to have major consequences for the asset management community globally. Panellists recognised such technologies will have a positive impact in bringing about operational efficiencies to the funds’ industry, but also by enabling managers to attract younger, more technologically astute investors.
“Robo-advice is evolving and addressing the issue around a lack of advice in parts of the market. Younger, tech savvy investors are enthusiastic adopters of robo-advice. We have seen young people in China increasingly buy funds through WeChat,” said Dolan. A report by Citi highlighted that robo-advisers – despite managing zero assets in 2012 – had grown to $14 billion by 2014, and the bank expected this to reach $5 trillion in a decade.
However, there is still a strong belief that maintaining a human overlay in the fund selection process is critical. “I recognise that robo-advice is very important but it is also important to have human interaction once an investor has gone through the automated set-piece. There is a difference between actually making an investment and going through the questionnaire process,” commented Jeremy Soutter, global head of product development and management at Standard Life Investments (photo on the left).
Artificial Intelligence (AI) and machine learning also featured heavily, and there is obvious concern among stakeholders about what this technology means for back and middle office processes and jobs. The last eight years has seen a major increase in operational, legal and compliance roles at financial institutions, but it is precisely these professions that are vulnerable to AI. “One of the most crucial things the industry needs to do is to focus on human jobs at risk from AI, and identify ways in which we can incorporate them into the industry still,” said Voss.
Active managers are facing some chastening times. Passive funds are winning market share as investors seek low cost returns.
“Liquidity has been pumped into the markets by Central Banks and this has led to asset values being overinflated leading to disconnect between valuations and fundamentals. This is putting active managers in a tricky space as the normal rules of investing no longer apply,” said Rajan.
What do clients want from their asset managers?
The surging equity rally – amplified by expected increased infrastructure spending and a focused growth agenda in the US – has also assisted passive products, but markets are cyclical and active managers should not be disregarded. “The world is cyclical. In 1978, people predicted the death of equities yet beginning in 1981 marked the longest equity bull market recorded,” added Rajan. As such, many acknowledge the key to successful return generation is to create balanced portfolios comprising active, passive and alternatives.
Flexibility is key to the long-term success
The Luxembourg funds industry recognises clients are changing the way they allocate, whether that is through new technology, or a more principled approach to investing.
The industry is now tailoring to these needs, and progress is beginning to be made. This is all occurring against a backdrop of regulation and geopolitical change, which the asset management industry is approaching pragmatically and intelligently.