On the past weekend (Sunday, 7th of June), the FT published a “warning” from Fidelity International boss Anne Richards, that the asset management industry will struggle to provide enough capital to fix the solvency problems public businesses face as economies emerge from lockdown.
The fund management executive, whose investment company oversees £305bn in client assets, said many businesses would need an injection of capital to offset the high levels of debt they had accumulated during the crisis, which has left whole industries unable to operate.
While some of the recapitalisations will come from investment funds such as Fidelity, Ms. Richards’ suggested a solution to the problem could also be to tap retail shareholders for capital.
The industry’s ability to stabilise has never been more critical. There is a growing recognition that this time, the recovery will demand more change by market participants.
Investment firms will discover that finding investors in new demographic segments or geographical areas is the most effective path for asset growth. Meanwhile, Investors are adjusting their portfolio allocation in search of total returns. In the retail market, this adjustment includes an expansion towards alternative investments.
Designing for capital growth
Succeeding in asset management was once relatively straightforward, matching sources of structural wealth creation and growing retirement and liability needs, with sources of capital appreciation, income, and yield.
The cumulative effect of fee pressure, a shift to passive investments, and concentration of success in gathering assets are driving many firms to continue to take bolder actions to find growth, operate efficiently, and engage customers.
We believe many investment managers will now cross boundaries and leave their comfort zones. Some managers can look to extend their footprint in specialist private market strategies. Others can continue to focus on actively managed products and to become increasingly selective in their areas of focus.
The bottom line is that we anticipate that in 2 to 3 years, the solutions offered by asset managers and private banks will look substantially different from how they look today.
Many investment managers are crossing traditional industry boundaries to develop new products and reimagine others. Change is being seen across different product categories, from mutual funds and ETFs to alternatives. These new funds are a significant departure from funds defined by investment market capitalisation, growth or value orientation, and geographic region. The new approach seems to resonate with most investor goals and emotions.
What is needed to win here goes well beyond new packaging and a catchy marketing slogan. Leading firms will have to resonate culturally, and to deliver through newly developed channels, building appeal to new investor segments, either geographically, demographically, or both.
Leading firms that take this approach will likely have exceptional insights into their customers’ evolving needs and personal circumstances. They may also have the ability to develop new products that are tailored to realise the benefits of both regulatory-driven changes and from market opportunities.
Structuring as a competitive advantage
While performance remains one of the essential factors when investors choose a manager, the ease of accessing and keeping track of their investments is increasingly important. As a result, distribution is becoming just as critical to a manager's success as performance and will be approached with renewed vigour.
Many asset managers realise that the well-known and widespread fund structures are, in many cases, neither suitable, not efficient due to various limitations, including high set-up costs, limiting regulatory restrictions, and very narrow distribution access.
An alternative that overcomes such limitations, and which has become popular in Switzerland in the last decade, is structured products called Actively Managed Certificates (AMCs).
“While structured products account for only 1% of the $700tn derivatives market, structured products still outsize the total ETF market ($5.3tn) and more than double the total hedge fund market ($2.9tn).”
– Bloomberg Professional Service
AMCs are no newcomers to the structured products’ market and have followed a strong growth trajectory in the last couple of years. In contrast to their fund counterparts, AMCs are set up within a few weeks with only minor issue costs for the asset manager and offer ongoing cost advantages due to their efficient administration. Besides, these certificates are issued with an ISIN number, making them transferable securities which may be booked at various custodians.
AMCs have also become more popular because of the types of assets investors are willing to incorporate into them. Exchange-traded funds and strategy indices, for example, are finding their way into products. More sophisticated investors are also bridging asset classes by structuring hybrid products that include underlying from different asset classes, such as private equity and securitised investments.
Among the broadening range of underlying components are also green investments, the so-called Environment, Social and Governance (ESG) securities that are among the fastest-growing asset classes in today’s markets. These are proving attractive not only to retail investors, who want to put their money where their eco-friendly beliefs are, but also institutional investors, who are capitalising on growing corporate awareness of the risks of climate change and pollution.
Like everything else today, AMCs are also benefiting from technology. Banks and traders had been slow to adopt the securities because they require many calculations and modelling to get it right. But the arrival of new technologies for contract representation, lifecycle management as well as new pricing techniques has provided the tools and processing power to structure the most complex of products.
If your firm is considering adding alternative products and strategies to its offering, we would be happy to demonstrate our structuring capabilities, experience, and financial products’ distribution expertise. Contact us at email@example.com