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Investment Management

What is the future of fund distribution and wealth management?

Robert Jenkins

27 Apr 2017

From L-R: Evan Ratnow, Jim Peters, Nathan Tidd, Raymond Joseph

Passive funds continue to generate inflows, but will rising interest rates and even Twitter shift the momentum back towards active funds? The Lipper Alpha Forum considered this and other threats and opportunities impacting professional buyers and the wealth management industry.

The balance between actively and passively managed funds, the popularity of social values investing and the problems with short-termism were among the topics discussed at the Lipper Alpha Forum in New York recently.

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The over-arching theme of navigating industry changes in product and distribution allowed our distinguished panel to debate the trends and best practices they’ve been seeing across the asset management landscape.

As well as top-level discussion, the session was notable for some of the interesting results generated by instant audience polling.

From L-R: Evan Ratnow, Jim Peters, Nathan Tidd, Raymond Joseph

The panelists were:

  • Jim Peters, Director, Head of Equity Due Diligence, Merrill Lynch Wealth Management
  • Nathan Tidd, President, Windfactor Investment Research
  • Raymond Joseph, Managing Director, Head of Portfolio Management and Model Solutions, UBS Financial Services

The session was moderated by Evan Ratnow, Director and Third Party Fixed Income Strategy Head, Citi Private Bank.

Here are some of the highlights from the session.

Active or passive funds?

The audience poll and panel agreed that there is a place for both.

Passive continues to generate market buzz and attract inflows, with Jim Peters highlighting that over US$189 billion has moved into passive funds in the last two months alone.

This is the highest for any two month period since ETFs were introduced in 1993.

However, the panel highlighted an uptick and possible swing back to active fund management.

While there is an assumption of bias in active management, there’s also an increasing realization that bias exists in passive management as well, especially since ETFs are synced to indices.

Perhaps more significant is what is happening with interest rates.

Since they were raised in December in the United States for the first time in several years, investors are looking to bonds for income and stocks for capital appreciation.

“There’s a return to fundamental investing,” Jim Peters noted, adding that in 2016, 20% of large capital growth managers have outperformed the market. In the first two months of this year, 57% of large capital growth managers outperformed.

Peters also suggested that the current political environment plays a role in the re-emergence of active management. ETFs don’t read Tweets but Twitter messages can move markets, he noted.

Nathan Tidd said new tools and technology are coming on the market to help active mangers show results and value, differentiate their strategies and justify their fees.

“We’re helping them see first what others see eventually.”

From L-R: Evan Ratnow, Jim Peters, Nathan Tidd, Raymond Joseph

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For fixed income, most panelists were in the camp of active over passive.

As Evan Ratnow put it: “Active works well in the bond space. Putting an ETF up against my bond fund is like sending a 1st grader to fight with a 6th grader.”

Raymond Joseph said his firm uses both active and passive strategies to beat the benchmarks, and they were very intentional about when to pull each lever.

He added: “The market cycle matters. Asset class matters. As does the fund manager’s skill. When returns get tough, we look at fees, and will spend more for a high performer.”

Social values investing — where are those funds headed?

All agreed there is a growing appetite from clients who want to invest based on their personal values. Jim Peters noted those types of funds are up 14% at his firm, since the end of 2015.

The problem is that there is currently no agreed industry standard or definition of what constitutes a genuine Environmental, Social and Governance (ESG) or Socially Responsible Investing (SRI) fund.

However, the future looks bright for social values investing, particularly as Millennials are more able to invest as their incomes grow.

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How big is thematic investing?

Jim Peters said his firm’s Global Wealth & Investment Management CIO, Chris Hyzy, believes factor based investing is the future of funds.

All four panelists and the audience poll predicted a continuing interest in thematic investing, particularly infrastructure in the current economic and political climate.

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Additionally, smart beta has emerged as an investing trend.

The panel also agreed that clients still like and expect stylebox options, with many currently looking at Value and Growth funds.

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Short term vs long term investing?

The panel all agreed that the emphasis on short term gains continues to increase, and none thought that was a good thing.

Nathan Tidd said: “One of the biggest failures of the tools industry — the one I work in is providing information to fund managers about how the fund is positioned today.”

One solution is to “provide more predictive information about how the fund is positioned for the future.”

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Jim Peters noted that “executives get hammered if their company’s earnings are off by a penny in quarterly earnings calls,” he added. All panelists favored a longer-term approach, and compensation that rewarded it.

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