Mark McFee, Director EMEA Insights, Broadridge Financial Solutions.
The first few months of 2019 may have been marked by a resumption of frothy stock markets and falling bond yields, but Europe’s retail investors have been reluctant to commit new money to funds. With the market tumult of 2018 still fresh in their minds, and concerns about global economic-growth prospects lingering, this is perhaps unsurprising. Even a sudden resumption of central-bank dovishness has yet to fuel a resurgence in new fund investments, at least at headline level.
Scratch the surface and it’s clear that one asset class has nevertheless been edging back into favour in 2019 after a spell in the deepfreeze last year: fixed income. But whether this is a good-news story or not depends on your perspective.
Clearly, for asset managers with a presence in this arena, net new subscriptions will come as a relief. The slump in demand for bond funds seen last year was in part predicated on expectations of tighter monetary policy – expectations that are now looking unlikely to be met any time soon.
How much of this demand is a long-term play is a moot point. With yields on the descent (and prices rising), there is likely to be a lot of hot money chasing short-term growth, as we saw while yields were still near record lows in 2017.
Alternatively (or additionally), demand for the perceived security of fixed income may be symptomatic of a flight to safety and a vote of no-confidence in the growth outlook.
Factor in a loss of appetite for equities, a worrying bout of redemption's from mixed asset funds – for several years the backbone of Europe’s fund sales – and passive funds continuing to beat active counterparts into submission, and the picture looks far from pleasing for the region’s asset managers (unless you are a provider of trackers, of course!).
They say a problem shared is a problem halved, and asset managers can at least find some relief in knowing that they are not the only industry stakeholders with challenges on their hands. Better still, there are potential exit routes from the current gloom that aren’t entirely dependent on market developments. Focusing on third-party retail fund distribution, Broadridge sees the following challenges and potential responses for industry participants:
Retail investors
• Stormclouds: Mass-retail fund investors continue to suffer from the perennial issue of poor financial literacy, and remain cautious after 2018. This has been compounded by side-effects of stricter distribution regulation resulting in the so-called advice gap ¬– whereby clients with smaller investment pots cannot find investment advisers who will serve them – at least in the UK market. Whether this plays out in the more bank-dominated continental distribution landscape following Mifid 2’s introduction remains to be seen.
• Sunshine: The gradual emergence of robo-advisers may help to bridge the void. Although even the biggest brands in this arena are reliant on powerful backers with deep pockets, and are struggling to turn a profit, their funky marketing and simple messages may see them develop a greater role as educators of the retail contingent, and attract potential first-time investors to step onto the first rung on the investment ladder.
Distributors
• Stormclouds: Fund selectors face increasing pressure on margins and time available to serve clients as the compliance burden mounts – including the first wave of ex-post cost disclosures.
• Sunshine: Many are adapting to survive, switching from an advisory to a discretionary focus, and channelling client money into outsourced model portfolios as opposed to a broader spread of funds. In some cases, distributors are going even further, developing their own fund ranges and/or portfolios, and opting for vertical integration in order to take control of the value chain, which in turn is bad news for…
Asset managers
• Stormclouds: With control of distribution shifting away from asset managers, and growing uptake of passive funds sapping the demand for actively managed products, the outlook seems gloomiest for this cohort’s prospects.
• Sunshine: Even here, there are glimmers of light. First, flat net flows can hide significant gross business. Yes, that means firms are winning business away from competitors rather than growing the overall size of the industry pie, but at an individual group level, that is a worthwhile goal.
Second, while the received wisdom may be that distributors are choosing to work with fewer asset managers, our fund-selector research suggests otherwise, with most channels reporting a static or even growing number of asset-manager partners. This is particularly true of private banks, for whom the need to prove a differentiated discretionary offering is acute.
And third, acting to boost brand awareness among end-investors has never been so important. On the one hand, this makes fund selectors’ lives much easier, as investors approach them with present ideas of a manager or fund that they would like to invest in. On the other hand, it can also provide a vehicle to spreading knowledge and understanding of funds, thus helping to boost demand for investment.
While the asset-management climate looks set to remain stormy for some time yet, winning and retaining business will be tougher than it has been for several years, but far from impossible.
Clearly articulated brand values are one step, but need to be complemented by tangible USPs, such as high-conviction active strategies, a fully-fledged ESG range, or eye-catching pricing propositions that are better aligned with investor interests.
Though easier said than done, differentiation is crucial. Asset managers with bold, well-defined visions should expect brighter days ahead.