Unlike many in the financial services sector, Europe’s asset managers are hoping to spend more time with politicians, if a reception held at the UK House of Commons last week is any guide.
Of course the buy-side have had enough of regulatory and legislative change to last a lifetime, much like their banking brethren. At an event co-hosted by the European Fund and Asset Management Association (EFAMA) and the UK’s Investment Management Association (IMA) on Tuesday, Christian Dargnat, president of the European lobby group, said over-regulation was the main danger facing his members. Of the six changes to Europe’s UCITS rules in 25 years; four had taken effect in the last five years, he said, voicing the hope that 2014 would see a switch from regulation to supervision.
But Dargnat had other concerns too. According to EFAMA’s own figures, only 10% of EU citizens have ever invested in a fund; 43% of their savings are currently in cash. These figures represent a failure and an opportunity, suggested Dargnat. To put past performance behind them and convince more Europeans to buy their products, he said, asset managers need several kinds of help from politicians. Specifically, Dargnat wanted a slowdown in the pace of reforms, but also (perhaps slightly contradictorily) he called for further steps to be taken toward establishing a level playing field across alternative products from banks and insurers.
Not only that, added James Charrington, executive chairman, Europe, at global asset manager BlackRock, one of four speakers from the industry. Asset managers want to partner with governments both to improve the financial education of (potential) retail investors and to create a framework for tackling the impending pension funding crisis that is growing as quickly as Europe’s population ages. The need is not new, but it is getting more urgent, Charrington insisted. “Without a coherent solution, 30 years of retirement could become a curse rather than a blessing,” he said.
Across Europe, people persistently underestimate the amount they need to save to give themselves a comfortable lifestyle after they stop earning. But Charrington admitted it wasn’t just lack of information that is contributing to insufficient investment levels. Quite the opposite in fact: too much information and too much complexity in the documentation relating to fund products was also to blame, he posited. Not that investors are unsophisticated. Charrington said that, in this information age, most people do know what a good fund looks like. But if it takes too long to work out whether a particular fund ticks all the right boxes, it will have few takers.
But if governments agree to do more to explain to the electorate the need to take greater personal responsibility for their future financial wellbeing (not the easiest sell) and the asset managers agree to make their products easier to understand and compare, there still remain some important gaps on price and performance. The fact that passive investment products are giving actively managed funds a run for their money, performance wise, means that traditional fee structures – and therefore operating costs and models will continue to come under pressure.
Of course it’s never easy to reduce costs, and it seems particularly hard in the area of trading and investment operations. With a greater role for derivatives in investment strategies and a need to identify a broad range of investment opportunities to deliver performance, the ability of the asset manager to access a wider range of instruments and asset classes on a cost-effective basis is critical. But this is easier said than done in a period where OTC derivatives reforms are imposing new requirements on the buy-side, while Basel II and other post-crisis regulatory initiatives are leading to the withdrawal of liquidity and other key services by the sell-side. Over the past five years, the claims of outsourcing have been made with strengthening conviction but the ability of asset managers to significantly reduce costs via this route remains unproven. More radical measures – potentially cutting through the swathes of ‘star’ fund managers – are now being proposed and considered to achieve the 20-25% cuts in overheads that might be necessary.
Representatives of the asset management industry certainly outnumbered MPs on Tuesday night, but I wonder which is the most endangered species in the long run.