Funds facing “obsolescence”?

“Is technology accelerating the move towards mutual fund obsolescence?” was the provocative question which animated the opening debate on the final day of the conference. This proposition featured in a recent report from the consultancy Oliver Wyman. The thesis is that IT will enable asset managers to interact directly with end investors, making funds cheaper and easier to customise.

Converting savers to investors

While persuasive on the face of it, there is the barrier that “the average retail investor in the EU has quite low levels of financial literacy,” said Guillaume Prache, managing director of BetterFinance which represents Europe’s users of financial services. For him the challenge remains moving the broad mass of Europeans from being savers (who are making real terms losses with their holdings in bank accounts and guaranteed return life insurance policies) to becoming investors. 
He underlined how only 8% of household assets are currently held in funds, suggesting that it is unlikely that there is much latent demand for a shift to even more sophisticated ways of investing. As well, there is the structural change in how pensions providers are operating, with the move to defined contribution policies. “This is putting more investment risk on the shoulders of people and this will drive more investment flows to funds,” he added.

Creating funds that solve challenges

“For us it’s about how you create mass scale portfolios for the right outcomes for end investors,” said Stephen Cohen, head of EMEA iShares & Wealth business and Index Investments for BlackRock. This requires technology to be used to create different vehicles in different “wrappers”. Often tax efficiency is a driver of this innovation in the US. “One should not underestimate the difficultly of managing overall portfolio construction as well as product suitability management,” he said
“The big thing happening here in Europe, is that you are shifting from a world where wealth managers offer a broad suite of mutual funds, to one where they are thinking more fundamentally about portfolio construction, and using technology to manage that,” Mr Cohen added. He sees this move having been catalysed by Mifid II which has “changed the game in many respects for how wealth managers think about the role of the advisor.”

Enabling investor activism

Another dimension is that funds are increasingly being asked to be activist ESG investors, seeking to influence the strategy of the businesses and projects they support. “The pooling of assets enhances funds’ ability to make impact investments,” said Peter Preisler, managing director, Head of Marketing and Business Development, Europe & Africa Oaktree Capital Management. “If the voting rights on the investments are spread widely between numerous investors, they maybe have less opportunity to follow these questions closely,” he said.

Covid recovery and ESG opportunity

With inflation returning and interest rates set to remain on the floor for the foreseeable future, the need to generate returns is greater than ever. Cohen sees an opportunity from the coming “biggest fiscal stimulus since World War Two and a green revolution that needs to be funded.” The challenge is to give the retail investor exposure to these growth trends when many of these projects will be judged by regulators to be alternative assets, particularly infrastructure, private equity, and debt.

ELTIF the answer?

The panel pointed to how this can be achieved. Despite its poor take-up since it was introduced in 2015, Mr Cohen sees the European Long Term Investment Fund (ELTIF) as a “vehicle for retail investors to safely invest in alternatives.” It might help that the ELTIF is currently being reviewed by the European Commission. 
Mr Prache broadly agreed but has concerns that the ELTIF “risks becoming a fund of funds-of-funds”, in other words a relatively expensive option. Cost remains a major part of this discussion he believes. “It's not only a question of investment strategy, but also about the distribution processes. These are much more costly in Europe than in the US,” he said.

Comfort from transparency

“We have to find ways as an industry to ensure enough transparency so that people comfortable with investing in these asset classes,” said Mr Preisler. The panel agreed, saying that providing sufficient, well managed data is central to this. There was also consensus that a public-private partnership is required, with governments and regulators working to encourage and enable investor access to these projects.
Concerted industry action on ESG was called for. “We risk having a very fragmented approach if we insist on all having our own little tweaks to what makes a sustainable investment,” said Mr Preisler. Again, data and analytics were seen as unlocking the potential of what Mr Cohen said was “absolutely the biggest trend”.

ESG investing is not charity

Mr Prache had sympathy for what the asset management industry is trying to achieve: “not only are you expected to be experts in finance, but now also in green energy, greenhouse gas emissions etc. I hope the taxonomy will provide clear, safe advice.” Yet he warned that the industry shouldn’t make the mistake of believing investors are backing sustainable assets purely out of altruism. “I hear people say investors don't mind if they get lower returns when they invest in ESG, but this is very dangerous talk,” he said. “Investing is for many people about avoiding old age poverty by providing for their retirement,” he said.