This year’s Association of the Luxembourg Fund Industry (ALFI) conference in London had a forward-looking approach and panels focused on structural shifts and disruption. During the welcome address, Denise Voss, chair of ALFI, said that the asset management industry has a great future ahead but it will be a rough road and not smooth sailing. When describing the state of the asset management industry in terms of growth under pressure in a volatile environment, from the perspective of the Luxembourg fund centre, Voss indicated that there are signs we are moving in a positive direction continue.
She commented: “Last year, we saw 105 billion euro of net new money into Luxembourg funds, which was actually 45 percent of all net new money into European funds in 2018 so that is quite positive.”
Voss also explained that at the end of March, Luxembourg reached a new record of assets under management, which stood at €4,350 billion. She said: “Exchange-traded funds (ETF) assets under management in Luxembourg increased by 56 percent in 2018, and that is starting to become a significant figure.”
“Alternative investment funds in Luxembourg continue to experience robust growth as in the rest of Europe including a 17 percent increase in private equity funds asset under management in 2018. So, Luxembourg and European fund centre seem to be holding a steady course.”
The ALFI chair noted that last years markets were “swinging up and down as much as they did during the global financial crisis 10 years ago”. Voss commented: “Severe swings create uncertainty for businesses, economic growth and for investors. Investors, in particular, do not like volatility, they can lose confidence.”
“Volatility these days is often driven by geopolitical factors such as major trade disputes which we are in the middle of, currently. Geopolitical factors will continue to be a challenge for the asset management industry but some challenging trends though are opportunities.”
During the CEO panel discussion, speakers discussed how the asset management industry should respond to a world of disruptions by technology and politics.
The panellists noted that value for money is being questioned as never before, customers’ willingness to buy products through digital channels is increasing, investors are more and more focused on the non-financial returns, the asset management industry`s stewardship over investment decisions is continually being challenged, and in addition, there is significant pressure on fee and margin levels.
Michael Ferguson, wealth and asset management leader, EY Luxembourg, highlighted: “We simply have not moved on or evolved at the same pace as other sectors whether its travel, transport, entertainment or healthcare. We are primarily operating within the same old frameworks of the 1940s act and the UCITS directive of 1985. We must now question many of the things that we have lived with for years, such as is the concept of the fund outdated? Should we be moving with the help of technology to personalised accounts, should outcomes rather than financial performance be the key driver? What are the new alliances that we need to consider to achieve these outcomes? Can machines replace fund managers?”
He asked: “And how will all of this new world be regulated? Or is that the point, is over and outdated regulation is holding us back?”
One panellist noted that a lot of the changes around regulation have come from the UK or from Luxembourg but have a habit of spreading across the world.
The panellist cited: “Therefore, you cannot look at your UK business in isolation; the whole wad is interconnected so you have to make sure that what you take today will stand up to scrutiny on a global basis.”
During the panel, Jonathan Willcocks, global head of distribution M&G Investments, explained: “Since 2008, something changed fundamentally for all of us in the industry, not only are people questioning volatility post-2008, at the same time, deposit rates collapsed from 4 or 5 percent to half a percent or zero.”
“Historically, we as an industry have engaged with investors, the difference this time around is that the collapse with the deposit rates has meant that savers have come into the industry in a way that they have never done before. In addition to this, historically, people who engaged with us as an industry had an appetite for risk, and most savers have zero or very low tolerance to risk because essentially it is a replacement and a substitute for cash. The issue for most asset managers who don’t have balance sheets is that when we use products or solutions, we essentially give people access to return and risk combined. The trick we have to learn, is how to match the banks’ issue today right across Europe.”
In terms of technology for the asset management industry, one speaker pointed out that if you look across the whole value chain, there is still a vast amount of inefficiency that digitisation tools and engagement can help with.
The panellist said: “There is still a huge amount of advice and financial services that it is about consolidating people’s information from various places across life companies, asset managers, banks, and so on—in a digital world, that is ludacris.”
The panel also discussed environmental, social and governance (ESG), and according to James Broderick, Impact Investing advocate and activist, initiatives and the broad understanding of ESG will not leave the agenda of financial services firms anytime soon.
Broderick explained that the millennial preference for ESG-oriented investing is well known and established, and that backstop is not going to go away.
He encouraged the audience not to think of ESG as “the latest trend but a pivot into a permanent state”.
He also highlighted that we are questioning some of the things we have lived with for years and that at the conference there was talk about technology replacing fund managers.
Willcocks added: “Looking as to where we go next, the reality is that I think we are at a stage where it is not just about the risk-adjusted returns but what your investments do to society and how it makes the world a better place.”
“Measurability for ESG is very important but I think within five years we won’t be talking about ESG as a debate it will be a given.”
“The question is how do we differentiate ourselves either as an industry or as asset managers. Therefore, the world then becomes focused on impact investing and the impact you make on the climate, on society and on the world.”
ESG was also a hot topic in the panel entitled, ‘The Luxembourg sustainable finance toolkit’, and during this panel, one speaker outlined that we [the industry] adapt our criteria based on the trends in the market.
The speaker explained: “For ESG, it doesn’t really matter what type of asset class you invest in but how you apply certain ESG principals in the investing process.”
Another panellist argued that there is a lack of understanding around ESG and highlighted the importance of defining a common language of what a sustainable investment is and what falls under that.
The speaker continued: “ESG used to be a niche but is becoming mainstream but some still do not quite understand the meaning behind it.”
