How will the events of 2020 shape the way the world looks in 2021? Citywire’s editorial offices around the world are wired into the regional audiences they serve so are ideally placed to answer this question for professional investors
Each segment of our worldwide audience has a distinct character, may have different priorities, and may be facing specific local challenges. But some themes and trends are universal, and sharing and comparing the experiences of different communities around the world can offer valuable insight. Is the registered investment adviser in the US affected by the same forces as the private banker in Asia? How do the changing demands on the UK IFA compare to the evolution of the role of the pan-European fund selector? How different is the situation facing investors in Germany, Italy, Spain or Latin America? What have been the game-changing developments in each major market in terms of M&A, regulation, fund flows and client sentiment? One recurring theme in 2020 has been the way the pandemic has accelerated change, with developments that many of us thought were far-off on the horizon suddenly arriving on the doorstep. Sustainability looms large in the investment world, technology has radically changed the way we interact and the pandemic has completely reshaped the economic backdrop. Adapting to deal with the new challenges that emerged in 2020 is tough, but how that pace of change continues into 2021 will be a key question for investors. Citywire’s international network makes us uniquely placed to assemble this global jigsaw and give you a complete picture. Or, you can just focus on the sections you think are most relevant to you. This is the World of Professional Investors in 2021, through the eyes of Citywire’s editors everywhere.
US
ESG goes mainstream in America
EUROPE
Selectors scramble to refine China and ESG impetus
UK
Wealth Manager:
A forced leap into the future
New Model Adviser®:
A new year brings new challenges for financial advisers
ASIA
From manic markets to the next leg of recovery
AMERICAS
Latin America extends its reach
GERMANY
Traditionally market-shy, Germans are no longer standing stock still
SWITZERLAND
Swiss IAMs team up to tackle regulations
ITALY
As 2020 disappears in the rearview, does 2021 promise an easier ride?
SPAIN
Spain in 2021: bank mergers and a quest for diversification
SOUTH AFRICA
Smaller managers in South Africa may be outperforming, but can they survive?
READ MORE
American fund selectors expect ESG to explode in 2021 against a backdrop of manager mergers and the arrival of personalised portfolios for the mass market
This year has been full of incident for those living in America. Aside from the pandemic, there were civil rights protests, a presidential election, a half-hearted coup and (perhaps most surprisingly of all) a value rally. But for professional investors in the US, 2020 will go down as the year ESG went mainstream.
‘This time it is for real. I don’t think we will look back and say anything was clearer than that this year,’ said Greg Maddox, head of global manager research at the Wells Fargo Investment Institute. As with many of the dominant themes in 2020, the trend was in motion before the year began – ESG funds enjoyed record flows of $21.4bn in 2019 – but interest accelerated amid the outbreak of Covid-19 and ensuing lockdowns. ‘Unquestionably, the pandemic triggered an awareness around social issues, the catalyst being George Floyd,’ said Maddox. ‘That sparked a resurgence in interest around ESG investing as well as an interest in knowing the diversity make-up of asset managers. [2020] will be… ground zero for ESG and diversity in the asset management space in the United States.’ Floyd, a 46-year-old African-American, was killed by a white police officer in Minneapolis, Minnesota, in May. His death sparked nationwide Black Lives Matter protests against police brutality and social inequality, an issue already brought to the fore by Covid-19 disproportionately affecting poor African-Americans through increased exposure to the virus through their work and reduced access to healthcare. The incident led to many asset managers – including BlackRock, Capital Group, and Franklin Templeton – publicly voicing support for the Black Lives Matter movement and committing to improving the racial diversity of their own employees and senior management. Fund buyers made it part of their job to hold those managers and others to account, grilling them on diversity as part of their due diligence processes. Top selectors at Citi Private Bank and Merrill were first out of the gate with such initiatives. Others are following, meaning interest in the issue of diversity and wider ESG investing is likely to grow in 2021. ‘Seeking out diverse managers and strategies is an early trend that will likely grow in importance over the coming years,’ said Kevin McDevitt, director of global manager research at RBC.
Fund flows
Flows into ESG funds highlight just how big a theme ESG has been in 2020. According to Morningstar, 2019’s record ESG inflows had been surpassed in just the first half of 2020. By the end of September, $31bn had gone into such funds. Third quarter ESG flows of $9.8bn represented 10% of all fund flows during the period. With a more ESG-friendly US administration due in January, the trend is likely to dominate 2021, too.
‘Sustainable investing is fast becoming part of the investing mainstream in the United States… [and] we expect the regulatory environment for sustainable investing to improve markedly under the Biden administration,’ wrote Jon Hale, Morningstar’s head of sustainable research, in the aftermath of the election. Away from ESG, in the wider asset management industry, passive funds continued to win market share from active strategies, with the former bringing in $292bn for the year to the end of November, and the latter bleeding $215bn, according to Morningstar Direct. This was reflected in the fund firms with the most flows, with dominant passive players Vanguard ($115bn), iShares ($110bn) and State Street ($35bn) taking the top three spots for flows to the end of November. It was not all bad news for active managers. JP Morgan Asset Management, a predominantly active shop, took fourth spot, with relative newcomer ARK Invest ranking ninth. The firm, founded by Cathie Wood in 2014, is synonymous with ETFs but, unlike most of these vehicles, all ARK strategies are actively managed. The firm had a banner year in 2020, bringing in net $12.4bn and becoming the 80th biggest asset manager (by mutual fund and ETF assets) in the US, up from 178th the year before. This was largely down to the phenomenal success of its flagship ARK Innovation ETF, which was up a staggering 139% for the year to 10 December, thanks to a big stake in Tesla and some Covid-friendly plays including Teladoc Health and Zoom
There is a slight cloud on ARK’s bright horizon, though, as the firm is locked in dispute with minority shareholder Resolute Investment Managers, which took a stake in the business 2016 with the option to buy a controlling share in 2021, an option it now plans to exercise, much to Wood’s chagrin. If ARK does change hands next year, it is unlikely to be the only asset manager to do so. Mergers and acquisition were one of 2020’s biggest stories – both the volume and size of deals – and it is a trend that gatekeepers expect to continue in 2021. ‘Asset management firms continue to look for scale and synergies as profits come under pressure from the growth of low-cost ETFs. I expect to see more of these acquisitions in the coming year,’ said McDevitt. Maddox agreed, but noted that there are two types of deals being done: mergers between two large firms in the hope of creating scale, and strategic acquisitions to add innovative capabilities.
More mergers
Of the former, Maddox said: ‘Those deals are tough. If you have two broken big firms and you put them together, the jury is out on whether it makes one healthy firm.’ Examples of the latter include BlackRock’s $1bn purchase of custom index shop Aperio, and Morgan Stanley buying a similar business in Parametric (as part of its wider Eaton Vance deal). In both cases the buyers gained technology that allows them to run highly personalised portfolios, such as unique ESG and tax-advantaged strategies, for smaller value clients, not just the ultra-high-net-worth. ‘Those deals… are signalling that the business is shifting to mass personalization, and they have acquired the technology backbones they need to mass customise, in a very scalable way, lots of small accounts,’ said Maddox. ‘The democratization of high-end custom portfolio management is coming.’
With a more ESG-friendly US administration due in January, the trend is likely to dominate 2021, too.
Europe’s fund selectors are buoyant over vaccine prospects but realise more rounded approaches to portfolios and professional life are needed
For many fund buyers, lockdown has left them feeling like Al Pacino’s put-upon mob boss Michael Corleone – ‘Just when I thought I was out, they pull me back in.’ As they were beginning to anticipate the comfort of their office chair again, rules tightened in Europe and it was a return to their impromptu work stations and semi-permanent set-ups.
It is not the case universally, as selectors in Switzerland, Spain and Luxembourg, for example, have been able to revert to flexible working. They are, however, still getting their heads around the Tetris-like challenge of ensuring their in-office hours dovetail with members of their team and personal considerations, such as childcare. Others have fully converted to virtual working and are now facing an extended period of meeting managers in the uncanny valley of video calls. Selectors feel an important psychological element of their role has been lost in not being able to look portfolio managers in the eye, as face-to-face interactions can tell you a lot about an asset manager’s culture and working practices. Zoom fatigue has become a concern and has implications for how selectors interact with fund managers and how they attend events. Many welcome the breakout sessions at physical conferences, to either recharge or pick up gossip from idle conversation, so a huge amount of thought is going into how this lost art can be rediscovered, which is no easy feat.
With a large number of those we speak to not expecting a major change in their working conditions soon, what can they do about it? Many have fallen back on big fund houses, safer in the knowledge of deeper due diligence resources, while others are bulking up watch lists without pulling the trigger on new names just yet. The pull of the big players is amplified by consolidation in the industry. Morgan Stanley’s move for Eaton Vance marked the latest in a series of significant deals, which had been kicked off in 2020 by Franklin Templeton’s acquisition of Legg Mason and its octopus-like array of affiliates and subsidiaries.
This has raised some concerns about the outlook for boutique players. While we heard how several struggled to keep the lights on in 2020, selectors have said they have been forced to focus on names they know rather than making exotic additions to their basket of independent operators. A large number of pan-European fund-pickers we have spoken to are shuffling their deck rather than reaching for a new hand, given the circumstances. Where, though, would they go if they had the ability to add without prejudice? There are two overarching topics that come up in fund selector chats – China and ESG. The former is a perennial talking point but one with added interest if the ‘first in, first out’ notion that has been applied to the emerging markets powerhouse holds true.
The growing strength of the Chinese A-shares market and the increasing internationalisation of the country’s bond sector has opened up new avenues for pan-European fund-pickers. However, several selectors we spoke to have said you cannot look for quick wins in the Chinese market, and there needs to be proper emphasis on the idea that China will be a dominant factor over the mid- to long-term, which will drive allocations accordingly.
ESG has seized upon the uncertainty of 2020 to move from a peripheral consideration to point one on many investors’ agendas. The forms it takes are becoming more nuanced as impact strategies and societal bonds have transitioned from fringe benefits to potential hot spots for future-conscious selectors. This is nowhere more evident than among our 40 Under 40 contingent, with a huge swathe of the class of 2020 recognising that their attention and energy has to be adequately applied here. ‘We are not going to be the next generation for long,’ one UK-based selector told us. ‘We need to ensure we are doing the right things for the generations that come after us.’
This has raised some concerns about the outlook for boutique players. While we heard how several struggled to keep the lights on in 2020, selectors have said they have been forced to focus on names they know rather than making exotic additions to their basket of independent operators. A large number of pan-European fund-pickers we have spoken to are shuffling their deck rather than reaching for a new hand, given the circumstances.
Covid-19 has forced UK firms to upgrade outdated technology as the wealth management industry braces itself for a fresh set of challenges in 2021
There is nothing quite like a global pandemic to knock your technological infrastructure into shape. Before Covid-19 ripped apart the world as we know it, UK wealth and fund management firms were routinely derided for their poor technology platforms. Perhaps some of this criticism was a bit harsh and too generalised, but it was clear something needed to be done to get the sector more in tune with a 21st century rhythm.
Firms’ hands were forced by the pandemic. The hint of wonder from bosses as to how effectively their businesses had migrated to this new technological world was striking. In a virtual debate I co-hosted with Citywire chair Lawrence Lever shortly after the UK locked down, Quilter chief executive Paul Feeney best summed it up when he said: ‘We’ve had to jump into 2030 overnight.’ In the debate, the bosses shared how the crisis had changed them as individuals, and they showed a real appreciation for those unsung heroes in their businesses; the cogs that made sure businesses could tick.
The rise in ESG
In theory, the pandemic is seen as a dress rehearsal for a much bigger crisis – climate change, which will be impossible to reverse. This notion led to a dramatic rise in the responsible investor, as money flooded into ESG mandates. Fund firms were quick to recognise the trend, either by launching ESG-focused funds, or giving their ranges complete ESG makeovers. Wealth managers also got in on the act, with Brewin Dolphin forming an ESG alliance with BMO Global Asset Management. One of the biggest success stories in this new investment order was sustainable fund manager Impax Asset Management. The firm’s assets under management jumped by 34% to £20.2bn in the 12 months to the end of September on the back of a £3.5bn net inflow. Its meteoric rise is reflected in the surge in its share price this year, leaving its UK fund rivals in the shade.
This rise prompted Liontrust’s Citywire AAA-team of Anthony Cross and Julian Fosh to lift their Impax stake to above 10%. Ethical funds have peppered the best-sellers leaderboard this year. According to Morningstar, the best-selling active fund was Citywire AAA-rated Mike Fox’s Royal London Sustainable Leaders, which had pulled in a net inflow of £1.2bn up to the end of November. This was closely followed by the Baillie Gifford Positive Change fund, managed by Citywire AAA-rated duo Kate Fox and Lee Qian.
In a Wealth Manager podcast, Fox, who has been managing sustainable strategies for 17 years, outlined how the pandemic had ‘done more for ESG than the previous 10 years’. Baillie Gifford was another clear winner in the crisis, with its bullish stance on technology paying off spectacularly as assets under management shot from £218bn at the start of the year to £282bn at the end of September.
The Scottish fund firm’s European, Pacific and American funds were also among the 10 best-selling funds over the year, putting the group neck and neck with BlackRock in the Pridham fund sales table. A Wealth Manager investigation revealed the firm had made around $16bn from its big bet on electric car maker Tesla in the 12 months to June. While the wealth sector did not have an Impax equivalent in terms of share price appreciation, its rebound from the March lows was strong. However, share prices all remain below the levels they started the year on. Looking into 2021, there are a number of challenges facing wealth managers, and those that mastered technology are likely to have the edge next year. Capgemini underlined how crucial this will be. ‘Wealth firms no longer have the luxury of selecting the timeframe for digital transformation projects,’ the consultancy said. ‘Digital capabilities are now essential for ongoing feasibility.’ One of the threats facing wealth firms is increased competition from tech firms using their huge data resources to launch targeted financial products. The firm’s leading players are committed to the challenge. Brooks Macdonald has struck a tech partnership with SS&C Technologies, while Brewin Dolphin trimmed its dividend to cater for a period of ‘big spending’, with the installation of its new Avaloq back office system accounting for a significant chunk of this.
Fund managers also face a number of structural challenges next year, leaving Moody’s ‘negative’ on the sector’s prospects. The secular trends that had heaped pressure on fund managers such as regulatory oversight of systemic and liquidity risks in the run up to this year could intensify on the back of Covid-19. This fact, combined with continued fee pressure and the rise of exchange-traded funds, which defied the sceptics this year, means organic asset growth and margin pressure are going to be major challenge for fund firms in 2021, especially if it proves to be another year of extreme volatility.
All this points to a fresh wave of consolidation in 2021 on the back of some significant deals this year – which featured Jupiter’s £390m acquisition of Merian – as firms look to build scale. The discounts fund firms find themselves on following the turbulence of 2020 means there are plenty of opportunities for predators to sink their teeth into. ‘Diving rates and cheap capital costs, plus the historically low valuation accorded to asset managers, have only stoked consolidation,’ Moody’s notes. The rise of ESG presents both fund and wealth firms with a huge opportunity, though. While money has poured into the sector, its market share of European assets under management remains small. With firms far more aware of their societal duty in the wake of the pandemic, along with the deluge in investor demand, the push into ESG is likely to accelerate next year. Those offering the best communication and transparency will be the winners in this new investment frontier.
There is nothing quite like a global pandemic to knock your technological infrastructure into shape.
This rise prompted Liontrust’s Citywire AAA-team of Anthony Cross and Julian Fosh to lift their Impax stake to above 10%. Ethical funds have peppered the best-sellers leaderboard this year.
New Model Adviser® editor Will Robins reflects on an unprecedented year and what it means for the UK’s financial advisers
Like Wile E Coyote chasing Road Runner over the edge of a cliff, the UK economy may soon look down, feel the air beneath its feet and fall. How domestic disasters truly affect advisers is often not straightforward. After all, IFAs are largely managing pots of money that have already been accumulated, often over lifetimes, and investing that cash around the globe through a well-diversified portfolio. Just as advisers showed they had successfully trained clients not to panic sell during the March 2020 crash, they will look at recession through a long lens.
When it comes to advice firms, what springs to mind is the outcome for small business owners – a common client constituency. Reading client case studies submitted to New Model Adviser as part of our annual round-ups of Top 100 firms and Top 35 Next Generation Advisers, there were plenty of close shaves. One wonders what will happen to young business owners – tomorrow’s clients perhaps?
The average age of advice clients is on the older side, and there are many reasons for that. Life complexity and accumulated assets are two of them. Even in normal times, it is not uncommon for a planner to be visited by a widow or widower, in the dark about their finances, looking for help for the first time. Obviously, 2020 will see a much heavier toll. Some firms have lost clients they have served for decades. 2021 will present a lot of work in helping those left behind.
At what cost?
The big regulatory gauntlet that has been thrown down in the last few weeks of 2020: the cost of advice. Earlier in December, the FCA published its findings from the retail distribution review and Financial Advice Market Review evaluation. In it, the FCA expressed ‘concern’ that clients are paying for ongoing advice fees ‘they do not need’ and that advisers are clustering their ongoing charges around certain levels. The underlying research detailed client interviews in which the moderator had spelled out the pounds and pence cost of their annual charge as opposed to a percentage. ‘At this point,’ the researchers said, ‘some respondents were visibly shocked.’ Our reporting caused much consternation among planners. They themselves pay the regulator a percentage of their revenues, not to mention more money to fund payouts to clients of failed businesses. They are entitled to wonder whether the regulator could do a better job preventing mis-selling. Conversely, many top-quality financial planning irms have to think about risk and reward when setting their own fees. Planners have learned, though, that the upside of added expenses is high client satisfaction. This editor’s take is that the FCA has simply laid bare the fact UK advice is still a profession of several parts. Businesses can focus on holistic financial planning or one-off advice. Some firms create and manage portfolios in-house, others outsource. Some will invest using 100% active managers, some passive. Almost all of these combinations can be found.
Getting the public, let alone the regulator, to understand what financial planners actually do, and what the difference between firms means, is clearly an urgent issue. Now think about what the FCA’s report sets out to explicitly ask: Why do too few people invest their money? This is important because the nation’s savings must not be destroyed by inflation. It is clear the regulator wants advice to facilitate investment and believes the way to have more of that is by driving down the cost of advice. It will not matter that the FCA is not a price regulator. That attack will ping straight off.
Greener pastures
The other big challenge to UK advisers in 2021 will be ESG. Investing according to environmental, social and governance (ESG) factors, along with almost-but-not-quite synonymous terms ‘impact’, ‘ethical’ and ‘SRI’, has gone from a minority sport to practically a stadium filler in less than a year. Until recently, 21 March 2021 was the day all UK advisers would have to become taxonomists of sustainable investing. This was the date when EU rules known as the Sustainable Finance Disclosure Regulation were to come into force. The rules will no longer come into force as planned; a casualty of the Brexit negotiation deadlock. The UK could align itself with a parallel set of international sustainability standards, those set by the G20’s Task Force on Climate-Related Financial Disclosures (TCFD). And in November, Chancellor Rishi Sunak announced the UK would become ‘the first country in the world to make TCFD-aligned disclosures mandatory’. UK advisers should fully expect ESG to dominate business planning and client conversations in 2021. In editorials, I have suggested firms choose from three approaches. Ethical is where stocks and even countries are excluded on the basis of personal moral belief – suitable only for small tight knit firms. Impact is where investments may or may not screen but aim mainly to promote an outcome rather than avoid for the sake of avoidance – suitable for large firms or outsourcing. And ESG is where asset management companies are required to sign up to sustainable finance standards such as the UN’s Principles for Responsible Investment – suitable for large firms with buying power.
On a more nitty-gritty level, the issue for IFAs will be who to work with and who to rely on when assessing funds. Advisers have several ESG ratings systems to choose from, but none of them agree with one another.
Educated risks
The year 2021 will ask big questions of relatively small firms in terms of operation, efficiency and strategy. Winners will be firms that know a lot about how their business runs and are able to take educated risks. I have not mentioned technology but that is the missing puzzle piece for many advice businesses. We know how 2020 forced firms to up their game when it came to remote working, file sharing and communication. But the entire UK advice market still labours under a dysfunctional tech supply that sees staff forced to rekey basic information and certify documentation using pen and paper. Unlocking back-office efficiency could release substantial efficiencies. Expect a lively debate around the role of fund platforms. While some firms believe their role is to hire and fire platforms, often using several to serve different client segments, others are going all in, allowing a single platform to take care of back-office functions as well. With more platform consolidation on its way, this will be a lively business story to play out in the next 12 months.
Like Wile E Coyote chasing Road Runner over the edge of a cliff, the UK economy may soon look down, feel the air beneath its feet and fall.
Going into 2021, industry experts are urging investors to rethink the role of cash
Work from home. Negative interest rates. Recovery. Safe-haven assets. Sell-off. These are the buzzwords of 2020 in the world of investments. While Covid-19 has not fundamentally changed what wealth and asset managers do day-to-day, they had to adapt to a new normal, an important hurdle to overcome.
Sustainable and ESG investments have grown in leaps and bound this year. The next step for the industry will perhaps be ESG integration in smart beta strategies. While the pandemic has certainly brought a focus to specific UN Sustainable Development Goals, the wealth and asset managers Citywire spoke to have, for the most part, not changed their strategy targeting specific SDGs. Themes like e-commerce, 5G, wellbeing, renewables, electric vehicle manufacturers, artificial intelligence, smart building solutions, e-gaming and tele-medicine are all on the cards. China’s internet sector is another evolving industry – so is its aging population market, which will be larger than the entire population of the US by 2030, experts say. Before 2020 came to an end, both Singapore and Hong Kong upped their sustainability game with new initiatives. The Hong Kong exchange launched its Sustainable and Green Exchange platform featuring 29 products, while the Monetary Authority of Singapore rolled out its Green and Sustainability-Linked Loan Grant Scheme to encourage more banks to introduce sustainability frameworks.
Where to allocate?
Financial markets have somewhat been bipolar, and this is especially evident this year, with the stock market booking its worst decline since the 2008 financial crisis. This saw investors allocate more to cash. Both Deutsche Bank and UOB, for example, doubled their cash holdings by the end of April, while Lombard Odier raised cash holdings slightly, by selling some high yield segments of the fixed income market. Going into 2021, industry experts are urging investors to rethink the role of cash. ‘In 2021, the question is not about “if” one should be putting more money to work – but “how”,’ Tan Min Lan, UBS’s head of Asia Pacific chief investment office, told reporters at a recent press briefing in Singapore.
Asian markets are expected to continue to outperform the US and European markets, thanks to the region’s comparably swift containment of Covid-19 and a robust economic recovery in China. Still, investors should tread cautiously and rebalance their portfolios. Although most of the losses have been recovered since the MSCI Asia Pacific ex Japan index sunk in March, Southeast Asian markets like Singapore, Thailand, Indonesia, and the Philippines are posting double digit losses. It has been better news for North Asian markets like China, Taiwan and South Korea. China is so far the best-performing stock market of 2020, with the CSI 300 Index of A-share stocks up 20%. This has attracted a lot of interest from investors globally. The China equity sector took in $2.5bn in the third quarter, 73.5% more than the previous quarter, where it saw $1.46bn of net inflows.
Like China, India’s growth story is primarily a domestic one as well. The country is one of the hardest-hit Asian economies amid the pandemic, but Indian markets have bounced back. If you compare India with most developing countries, it has been a comparatively higher-valued equity market led by financials. Elsewhere in Korea, the stock market continued to rally with a 10.4% growth in the third quarter. After consecutive outflows in the previous quarters, inflows for Korea open-ended funds reached KRW 500bn ($459m). The bulk of the money went into fixed income, commodity, allocation, and convertible funds. According to data from Morningstar, the top three funds that saw the most inflows amid the pandemic are the JPM Income, Pimco GIS Grade Credit and Allianz China A Shares funds. All three strategies raised more than $4bn year-to-date ending October.
Going into 2021, money managers are recommending high yield over investment grade in the fixed income space. Within equities, exposure to select Hong Kong and Chinese property developers, Taiwanese technology names and select Chinese material and bank stocks. We can expect a reversal in Singapore’s under-performance next year. FTSE Russell’s move to include Chinese government bonds in its world government bond index is expected to drive even more investor interest in the asset class. The ICBC CSOP FTSE Chinese Government Bond Index ETF, for example, has already recorded $6.9bn in inflows. The ETF was launched recently in September.
The return of Chinese ADRs in the A-shares and/or H-shares market is also creating opportunities for investors. They can take advantage of higher volatility to get exposure to these stocks via structure products and mutual funds.
Clearing listed 23 new ETPs this year, bringing its total to 143 as of the end of October. The exchange saw roughly HKD 7.5bn ($967.6m) in new assets flowing into ETFs from late February to mid-April, with most of the buying going into the CSOP FTSE China A50 ETF, iShares FTSE A50 China ETF and ChinaAMC CSI 300 Index ETF, it said. The rotation from growth to value is set to continue into 2021 but the preference of how to play it is quite varied among wealth and asset managers in region.
Amundi prefers North Asia to Southeast Asia, as it expects IT and healthcare to lead the recovery until a vaccine is approved, whereas Citi prefers cyclical stocks and underperforming markets in South Asia and the UK. Credit Suisse is playing the value story via Hong Kong because of its cheaper valuations compared to other Asian markets. Moreover, Hong Kong is expected to benefit from China’s economic recovery. Aberdeen Standard is looking to Europe, Australia and Japan. These countries have heavy allocations to financials, industrials and real estate – sectors that lagged amid the pandemic and would benefit from a catch-up in trade, it said.
Exits and expansions
In the business front, we have had a few exits and expansions this year that could lead to more developments in 2021. The first to make news was Franklin Templeton, which closed six of its credit funds in India due to reduced liquidity. Shortly after, BNP Paribas Wealth Management exited from the Indian wealth market, citing plans to focus on areas that allows it to reach scale. Six bankers who were let go at the time joined Credit Suisse in Mumbai. Elsewhere, Vanguard closed its Hong Kong office and exited from its ETF business in the country.
The firm, which manages six Hong Kong ETFs with an AUM of HKD 3.374bn ($440m), said it will move its regional headquarters to Shanghai. Vanguard is also winding down its operations in Japan. In better news, Vontobel Asset Management has opened an office in Singapore. Both Baring and US hedge fund manager D.E. Shaw Group have announced plans to open offices in the city state in 2021, while Julius Baer is reportedly planning to start a majority-owned joint venture in China. Singapore’s Temasek is currently forming a $55bn asset management group, combining Azalea Investment Management, Fullerton Fund Management, InnoVen Capital and Seatown Holdings International.
There could be more news from Taiwan and Japan next year, following both countries’ move to open its financial markets to foreign fund managers. Japan’s Financial Services Agency and Local Finance Bureaus is set to launch a new office in January 2021, where services will be offered in English. In Taiwan, the Financial Supervisory Commission has selected nine asset managers for preferential treatment. AllianceBernstein, Allianz Global Investors, Schroders, JP Morgan Asset Management, Franklin Templeton, Fidelity, Invesco, NN Investment Partners and Nomura can now seek approval to introduce offshore funds.
BNY Mellon Investment Management has already expanded into the Taiwanese market with a new office in Taipei this year. Aberdeen Standard could launch more funds for Thai investors in 2021, since it has received approval to offer offshore funds directly to domestic investors in the country.
Work from home. Negative interest rates. Recovery. Safe-haven assets. Sell-off. These are the buzzwords of 2020 in the world of investments.
Financial markets have somewhat been bipolar, and this is especially evident this year, with the stock market booking its worst decline since the 2008 financial crisis.
In the business front, we have had a few exits and expansions this year that could lead to more developments in 2021. The first to make news was Franklin Templeton, which closed six of its credit funds in India due to reduced liquidity.
The virtual revolution has brought unexpected benefits for offshore wealth managers
Like many of their global peers, Latin America’s professional investors have had a tough year. Business practices have been forever changed and hard lessons have been learned as a result of the pandemic. However, change can be a good thing for an industry that is often slow to embrace new trends.
To understand how events in 2020 have impacted Latin America’s professional investors, it’s important to consider two perspectives. The first is that of offshore wealth managers, who cater to wealthy Latin American investors from hubs across the region and in the US. These investors are among the region’s biggest consumers of Ucits-compliant mutual funds and ETFs. The second is that of international asset managers, who have been increasingly looking for ways to tap into the wealth of Latin America’s high-net-worth and ultra-high-net-worth investors.
Being grounded opens doors
Travelling to meet clients is a crucial part of any offshore wealth manager’s work life. In Latin America the travel is more of a challenge – a flight from Miami to Montevideo in Uruguay, for example, takes nine hours. The pandemic’s travel restrictions and the subsequent virtual meeting revolution has enabled offshore wealth managers to free up valuable hours, even days, which they can dedicate to growing their business. One rather unexpected result of the move to online meetings is that many offshore wealth managers have gained access to fund managers who were previously off limits as they didn’t have the time to travel for face-to-face meetings but can now join online client and team presentations. As asset managers look likely to continue with virtual meetings even after travel restrictions lift, offshore wealth managers are confident they will have access to a wider array of fund managers than ever before.
Another trend that shows no sign of slowing down among offshore wealth managers is the independence movement.
Many offshore wealth managers took advantage of the pandemic lockdowns to take stock of their careers and launch their own businesses on independent adviser platforms. Large wirehouses including UBS and Morgan Stanley saw waves of resignations. As one platform leader told Citywire Americas: ‘Typically, when someone’s considering leaving their company, they have to operate in secrecy. Now, with people working from home, we do video calls and webinars [with interested parties]. They don’t have someone looking over their shoulder, so they can do that much more freely.’ More offshore wealth managers are expected to make the jump to independence in 2021 as bonuses are paid out. Competition will be fierce among the independent adviser platforms as they attempt to capture the best offshore talent. Elsewhere, some of the biggest stories of the year involved Swiss wealth manager UBS, whose ongoing cost-cutting efforts led to significant changes within its Americas wealth management business.
More than one dozen Miami-based wealth managers left UBS in the second half of the year following a decision to cut ties with Venezuelan clients. A compliance review launched in early 2020 deemed Venezuelan clients too risky to work with due to the country’s continued political instability and ongoing US sanctions. The departing wealth managers have since found refuge for their Venezuelan clients at rival firms. The Swiss firm took its cost-cutting efforts a step further after it was revealed it is to close its US private bank. The original closing date was 1 January 2021 but UBS has been forced to delay the closure due to complications over the transfer of loans booked through the US private bank for international clients to its wealth advisery entity. Most of the group’s US-based private bankers cater to Latin American clients, and UBS has offered them the option to transition to financial adviser roles within its wealth management unit. Still, the closure is expected to have repercussions well into 2021 and lead to more departures from its Latin American wealth management unit.
Demand spurs growth
From the international asset manager perspective, although the Covid-19 crisis forced many to put projects on hold, it did not dampen their desire to expand across Latin America. Over the course of 2020, close to 20 asset managers signed deals with third-party fund marketers to distribute their strategies in Latin America, a figure that jumps to more than 25 when Brazil is included. The move into Latin America has been spurred on by the region’s growing demand for international investment strategies. According to one head of Latin America distribution for a leading European asset manager: ‘The diversification that Latin American investors are pursuing due to the lower interest rates has obviously moved on from the traditional safety-first plays that the US-domiciled accounts have always looked into.’
The pandemic has also accelerated one of the region’s most prominent trends – that of Latin American investors’ growing appetite for alternative, thematic funds and ESG-focused funds. The combination of hard-hit Latin American economies and lower local interest rates means we are likely to see more international asset managers target Latin America as demand for alternative investment solutions continues to soar.
Mexico is currently attracting the attention of asset managers. In early 2019 Mexico’s Afores pension funds, the country’s biggest investors, were granted access to mutual funds for the first time, to the excitement of the global asset management community. But major regulatory change in 2019 and the impact of the 2020 pandemic saw mutual fund adoption slow down drastically. However, as 2020 draws to a close and uncertainty over the market environment begins to dissipate, evidence points to Mexico’s Afores being poised to finally embrace mutual funds in their investment strategies.
‘There has been interest in a bit of everything, especially for Asia, Europe and certain industries. Healthcare has been one theme they have been looking at closely,’ said a representative from Mexico’s pension fund trade body Amafore. One Mexico country head for a prominent US asset manager summed up expectations for the next 12 months: ‘This year has been the year of them understanding what we stand for as active management, and 2021 will be a good year for us.’
Like many of their global peers, Latin America’s professional investors have had a tough year. Business practices have been forever changed and hard lessons have been learned as a result of the pandemic.
More than one dozen Miami-based wealth managers left UBS in the second half of the year following a decision to cut ties with Venezuelan clients. A compliance review launched in early 2020 deemed Venezuelan clients too risky to work with due to the country’s continued political instability and ongoing US sanctions. The departing wealth managers have since found refuge for their Venezuelan clients at rival firms. The Swiss firm took its cost-cutting efforts a step further after it was revealed it is to close its US private bank. The original closing date was 1 January 2021 but UBS has been forced to delay the closure due to complications over the transfer of loans booked through the US private bank for international clients to its wealth advisery entity.
However, as 2020 draws to a close and uncertainty over the market environment begins to dissipate, evidence points to Mexico’s Afores being poised to finally embrace mutual funds in their investment strategies.
A new-found interest in investing is stimulating the German stock market and sowing seeds for a greener future
Strange things are happening in Germany. Its citizens, long sceptical of equities, appear to be warming up to the stock market. The last time this happened with similar enthusiasm, investors lost money when the dotcom bubble burst. Private investors have felt wounded ever since. But attitudes might be changing. According to a study by Barkow Consulting, Germans poured €23.9bn into equities in the first half of 2020 – a new record after the last one in 2007, one year before the global financial crisis.
This is all the more surprising given that 2020 was not only marked by a pandemic-induced sell-off in the spring, but also by the downfall of German payments company Wirecard, which might theoretically have sapped confidence in regulation and the market’s ability to root out fraud. When Wirecard entered the Dax 30 in 2018, the company boasted a market cap of €25bn, more than Deutsche Bank at the time. Well-known fund managers including Tim Albrecht of DWS had been heavily invested in the company. His €4.1bn flagship fund, DWS Deutschland, had a 4.4% stake at the end of May, reduced from 10.86% two months earlier. Wirecard was not the only scandal to shake the German financial world. In early September Frankfurt police raided the offices of Union Investment, one of the biggest asset management firms in Germany. One of its highly respected fund managers is accused of insider trading after, it is understood, several brokerage firms reported suspicious activities to Germany’s financial regulator BaFin. In a recent interview with German newspaper Handelsblatt, Union Investment CEO Joachim Reinke said he was deeply shocked by the incident.
No such thing as bad publicity
Germany’s buoyant investor sentiment seems to have even extended even to this firm, which hasn’t suffered from the scandal when it comes to attracting money. According to Morningstar, Union funds in the year to the end of November have been among the most successful Germany-domiciled funds in terms of inflows. Four of them – UniEuroRenta (€2.169bn), UniFavorit: Aktien (€951.5m), UniNachhaltig Aktien Global (€654.5m) and UniGlobal (€454.4m) – are among the top ten funds with the highest inflows. As the asset management arm of the German cooperative banking system, Union profits from the huge network of branches. Even more importantly, Union customers have been piling into investment fund-based saving plans, which allow them to pay in a fixed monthly sum. By the end of the second quarter, Union Investment managed 5.4 million of these plans. DekaBank, the asset management firm of Germany’s network of savings banks, had 5.5 million investment fund-based savings plans. Three of its investment funds – Deka-DividendenStrategie F(€1.055bn), Zukunftsplan IV (€0.8bn) and Deka-GlobalChampions (€771m) – were among the top 10 funds with the most inflows in the year to the end of November. The dominance of these two firms and the rise of fund-based savings plans stand to continue next year.
Feeling optimistic
German independent wealth managers are also benefiting from the new-found interest in investing. According to an annual survey of the Aschaffenburg University of Applied Sciences, German independent wealth managers increased their assets under management to the end of 2019 year-on-year by 25 per cent on average, to €201m per firm. Bigger firms, with a minimum of €500m assets under management, were more optimistic about the future than smaller firms with less than €150m asset under management, according to the same survey.
It remains to be seen how these firms weather the pandemic. For many years, observers have been predicting an industry consolidation, which has yet to happen. In our Top 50 Wealth Managers list published in September, Andreas Grünewald, head of the association of independent wealth managers in Germany, said that most wealth management firms have coped well with the challenges the pandemic imposed. But he added that some might not survive if a second sell-off comes. Bigger firms, including Lunis Vermögensmanagement, an independent wealth management firm backed by a US private equity investor, will be watching closely as they are poised to make the long-awaited consolidation happen, waiting to snap up acquisition targets.
Early movers
When it comes to digital wealth managers, you could argue that consolidation has already started. In November, Allianz-backed robo adviser Moneyfarm decided to pull out of the German market. In the December issue of Citywire Germany magazine, Christian Schneider Sickert, founder of the digital wealth management company Liqid, said that the online-wealth management industry is ripe for consolidation, and only the big firms will survive. Liqid, which aims to grow its assets under management to €1bn by next spring, falls into that category. What are the forces luring investors to the market despite scandals and selloffs?
Another trend to look out for in 2021 is the ongoing move to ESG-related investments. On 10 March next year, the new EU regulation for sustainability-related disclosures will take effect. The policy will force wealth managers, asset managers and financial advisers to disclose the sustainability profiles of their internal processes and policies, and those for their funds and portfolios. The industry has been preparing for this shift to sustainable investments for years. In 2021, the pace of implementation will speed up. This may bring even more retail investors into the fold, attracted by the industry’s ever greener glow. And they will have put a tough year with a historic selloff behind them.
Germany’s buoyant investor sentiment seems to have even extended even to this firm, which hasn’t suffered from the scandal when it comes to attracting money. According to Morningstar, Union funds in the year to the end of November have been among the most successful Germany-domiciled funds in terms of inflows. Four of them – UniEuroRenta (€2.169bn), UniFavorit: Aktien (€951.5m), UniNachhaltig Aktien Global (€654.5m) and UniGlobal (€454.4m) – are among the top ten funds with the highest inflows.
When it comes to digital wealth managers, you could argue that consolidation has already started. In November, Allianz-backed robo adviser Moneyfarm decided to pull out of the German market. In the December issue of Citywire Germany magazine, Christian Schneider Sickert, founder of the digital wealth management company Liqid, said that the online-wealth management industry is ripe for consolidation, and only the big firms will survive. Liqid, which aims to grow its assets under management to €1bn by next spring, falls into that category.
This year has not only marked the start of a new decade but, for Switzerland’s independent asset managers, it also brought about a new regulatory era. On 1 January 2020, the Financial Institutions Act (FinIA) and the Financial Services Act (FinSA) entered into force, with the aim of strengthening client protection, creating a level playing field for financial institutions and making the country’s regulatory framework more similar to that of the EU.
Some independent asset managers believe the documentation and organisational requirements set out by these regulations will result in new opportunities as the increased level of transparency will boost the reputation of Switzerland’s financial services industry. This will make the country, which already enjoys a stable political and economic environment, even more attractive to foreign clients. As part of the authorisation process, portfolio managers had to notify the Swiss Financial Market Supervisory Authority (Finma) before the end of June saying they were interested in a licence. In July, the watchdog reported that it had received notifications from 1,934 portfolio managers and 272 trustees – 1,208 of the notifications originated from German-speaking Switzerland, 743 from French-speaking Switzerland and 255 from Ticino. Others, however, decided not to go ahead with the process – 121 institutions reported to Finma that they will not be submitting a licence application, since they are either giving up their business or merging.
This decision could be due to the increased cost-pressure that complying with FinIA and FinSA entails, which weighs particularly heavily on smaller institutions. To get guidance and support on how to comply with regulations, some independent asset managers joined platforms. With 220 partners and 5,000 clients worldwide, Aquila is perhaps the best-known one in the country. The partners are linked to the platform through a franchise agreement and a 20% equity participation. Another example is Geneva-based AWAP, which grew from four members in 2014 to 26 in 2020, 17 of which are independent asset managers. Members pay a fee of CHF 245 per month, through which they get access to services including expert meetings, an intranet service and a structured products platform. They can then choose additional services from an a la carte menu, for which they need to pay an extra fee.
One of AWAP’s founders and Mount Invest’s CEO, André Barahona, said most of the independent asset managers that are part of the platform have between CHF 50m and CHF 150m under management. ‘This is because, with the arrival of new regulations, these companies are left with three choices: to grow in size, to merge or to join a platform. Growing can be hard because you need to find the right people and merging is like marrying – you can’t just do it with anyone,’ he said. Barahona expects AWAP to grow further in the coming months as independent asset managers adapt to comply with the regulations and said AWAP’s business model continues to attract attention.
New managers for new clients
Money management is a long-standing tradition in Switzerland, but to achieve long-term success, an effective succession plan is key. In 2020, an increasing number of women were appointed in leading positions. In April, Aquila announced the appointment of Vivien Jain as CEO. In June, it was Tareno’s turn, with Sybille Wyss taking the CEO role, and in November, Zurich-based Avalor Investment announced Carole Müller-Wildi’s appointment as partner. Jamie Vrijhof-Droese, who joined Zurich-based WHVP in 2017 and is a managing partner, said: ‘The first big wave of people becoming independent was in the early 1990s, and these people are now having to think about how to move forward and either hand over the company or close the business. ‘The most important thing is that the transition is not rushed. They need to start thinking about it years before they want to retire. You need to give your partners and clients time to know your successors. ‘I started four years ago. At the beginning I just got to know the business, then I took on some clients. One and a half years ago I was appointed to the management board and gradually the previous generation of partners started reducing their working days.’ Vrijhof-Droese also believes this generational change coincides with the arrival of a new wave of clients. She said: ‘In the coming years there will be a huge transfer of wealth towards women.
‘They no longer rely on their spouse, but make a career for themselves and earn money. Independent asset managers need to make sure they cater to this demographic, as well as to the younger generation if they want to remain relevant.’ ‘Switzerland’s reputation is no longer enough to guarantee the success of a company,’ she said.
Beyond health
Switzerland’s investors seem to regard the ‘stay at home’ warning – designed to encourage people to remain inside to limit the spread of the virus – not just as health advice. The top fund for inflows year-to-date as of the end of October, with CHF 1.6bn, is the UBS (CH) BF Bonds CHF Sustainable strategy, according to Morningstar. The UBS (CH) Bond Fund CHF Corporates follows suit with CHF 988m. In a volatile year like 2020, in which the SMI hit both its highest point at 11,270 and its lowest one at 7,650 over three years, investors looked for shelter in Swiss francs. CHF Bond is the top category for inflows year-to-date, with CHF 6.8bn as of the end of October, followed by CHF Moderate Allocation with CHF 2.2bn. Among the other categories that have attracted the most inflows are Commodities – Precious Metals with CHF 1.3bn inflows year-to-date, and in particular the Pictet CH Precious Metals Fund – Physical Gold, with CHF 761m inflows, and Switzerland Small/Mid Cap Equity, with CHF 1.2bn inflows year to date. The MSCI Switzerland Small Cap Index recorded gross returns of 9.99% year-to-date as of the end of November, compared with the MSCI World Small Cap’s 1.38% and the MSCI Europe’s -5.44%. Talking to Citywire Switzerland, Banque Cantonale Vaudoise’s Swiss equity portfolio managers, Eric Chassot and Sylvain Bornand, said that this segment of the market is more dynamic and diversified than the SMI stocks. With the news of the Pfizer/BioNTech vaccine already being administered in the UK, wealth managers are preparing to increase their exposure to cyclical stocks in the coming months. Thematic funds have also attracted a lot of attention, with healthcare, automation and AI being among the most popular.
On 1 January 2020, the Financial Institutions Act (FinIA) and the Financial Services Act (FinSA) entered into force, with the aim of strengthening client protection, creating a level playing field for financial institutions and making the country’s regulatory framework more similar to that of the EU.
Money management is a long-standing tradition in Switzerland, but to achieve long-term success, an effective succession plan is key. In 2020, an increasing number of women were appointed in leading positions. In April, Aquila announced the appointment of Vivien Jain as CEO. In June, it was Tareno’s turn, with Sybille Wyss taking the CEO role, and in November, Zurich-based Avalor Investment announced Carole Müller-Wildi’s appointment as partner. Jamie Vrijhof-Droese, who joined Zurich-based WHVP in 2017 and is a managing partner, said: ‘The first big wave of people becoming independent was in the early 1990s, and these people are now having to think about how to move forward and either hand over the company or close the business.
Still reeling from a traumatic 2020, professional investors in Italy face further challenges in 2021
Professional investors in Italy have been through an exceptionally challenging year, with more difficulties to come in 2021. The pandemic has driven them to shift to online working much faster than they could have anticipated 12 months ago. This has been a real struggle, especially for private bankers and family offices, who tend to prefer to deal with their clients face to face, sometimes in luxurious restaurants or in one of their meeting rooms in Milan.
During recent months, financial advisers have been among the most digitised of Italy’s investment professionals, now comfortable chatting remotely with clients. Banca Mediolanum, CheBanca (part of Mediobanca Group), Credem, IW Bank and many others are already relying on a solid digital structure to deal with clients within the range of €500,000.
Things changed drastically for private bankers in 2020. The sector in Italy is very old-school, and the pandemic completely reshuffled it, forcing professionals and clients to use new ways to communicate, even when investing with hundreds of thousands of euros. The most important deal is the one between independent firms Consultinvest and Sol&Fin, which are now merging.
What long-term goals do most advisers and advisery firm leaders have for their organisations? By the end of this decade, the industry’s dominant client will have changed from baby boomers to Generation X and millennials, and the industry is almost exclusively structured to serve boomers. In other words, if you have a practice based on boomers, you have a decade before becoming a dinosaur. The future of advisery can be summarised in four concepts: diversity, equity, inclusion and belonging (the experts call it Deib). The more proficient advisers become at Deib, the more they can be open to deep wells of both talent and prospective clients.
Fund selectors
While the pandemic might lead us to think of 2020 as a negative year, for many Italian investors, the last few months have been above expectations. The productivity indices have gone up, suggesting a positive trend, and the markets have benefited from the injection of liquidity by central banks, which helped many asset classes to end the year positively. Investors have also learned to use new digital ways of communication and have become more dynamic in terms of asset allocation. During the course of the year, fund selectors have mainly focused on thematic asset classes and strategies, with special attention to sustainability (ESG) and technology. Investors’ eyes are now on the improvement of healthcare conditions in 2021. Everyone is waiting for the distribution of the Covid-19 vaccines, which might give a boost to markets overall. The general view is that the US and Asia will lead the markets and that, if the central banks continue to be supportive with their fiscal and monetary policies, the next 12 months might offer a breath of fresh air.
Institutional investors
Institutional investors’ asset allocation is moving towards strategies related to performance rather than benchmark. In 2020, this trend saw a reduction in government bonds fixed income (though still high) and a gradual increase of investments in FIAs and real assets. Last but not least, ESG factors have been integrated into institutional investors’ portfolios. There are three primary segments. The first is Casse (compulsory pension scheme for the self-employed), which mainly operates through direct investments. These cover 80% of the €88bn assets, of which Oicr (Ucits in English) and Fias cover 50%.
In the institutional space, investors have seen their assets steadily increase over the years. The latest official data, at the end of 2019, shows €917.36bn worth of assets, an increase of €6bn on the year before.
The second segment is insurances, which mainly operate through indirect investments. Fixed income covers about 70% of assets but this figure is reducing as exposure in mutual funds increases, currently estimated at €87bn (an increase of €12bn since 2018). The third segment is pension funds, which mainly operate through mandates. They are consistently increasing the OICR amount in their portfolio and starting to invest in alternatives (private equity also supporting real economy) by opting for co-investment to achieve bigger assets in which to invest and reduce fees. Diversifying portfolios in 2021 will require improving the risk/return profile, which will be even more challenging than usual.
Fund managers
The Italian fund market has had a difficult 2020, with €3.2bn of outflows in the first eight months of the year contributing to the reduction of overall assets to €531bn from the high of €537bn at the end of 2019. Money market funds continued where they left off in December 2019, with euro-denominated funds shedding €1.2bn. This withdrawal was partially recovered by €255m of flows into US dollar-denominated funds. Net new flows into the country in the second quarter (€4.9bn) were surpassed only by Germany and cross-border giants Ireland and Luxembourg. Excluding money market funds, net outflows of €2.2bn were recorded for the first nine months of 2020. At the end of September, AUM stood at €497.3bn. ESG fund assets grew from €6.1bn in 2016 to €31bn in 2019, and Italy had 221 such funds by the end of 2019, according to Assogestioni. Managers launched 51 new ESG funds last year and conducted marketing and communication campaigns directed at financial advisers at large banking and insurance groups. Half of the managers Cerulli surveyed expect ESG funds in Italy to grow rapidly over the next 12 to 24 months; 45% foresee moderate growth. Italy is the third most-promising country for ESG products, according to respondents.
Professional investors in Italy have been through an exceptionally challenging year, with more difficulties to come in 2021.
Mergers and acquisitions are reshaping the fund business while investors are hungry for real assets: How developments in 2020 will influence what happens in 2021
Where are the ultra-high-net-worth (UHNW) people investing? Spain is still a very bank-based country, and the real estate sector already has a significant weighting. However, clients are increasingly seeking to diversify through investments in the real economy, focusing on factories, start-ups, retail businesses, renewables and venture capital. In recent years, we have seen alternative investments gradually gaining ground with fund investors, especially the larger ones.
UHNW investors are increasingly opting for private equity funds and infrastructure, but we have also been hearing more about thematic investment. Specialised funds in megatrends including population ageing, healthcare, biotechnology and water have become increasingly popular.
Biggest flows in 2020
Among the top 10 best-selling funds this year, up until the end of October, we find strategies from Santander AM, Ibercaja AM, Caixabank AM, Allianz GI and Kutxabank (Santander has four funds in the top 10, while Caixabank has three). The top fund in the list was the Santander Sustainable RF 1 -3 fund, which achieved net flows of €1,274m.
The category with the highest net flows during this period was mixed fixed income, followed by European fixed income and global fixed income. The highest net inflows went into US mid-cap, technology and global equities and healthcare from the equities side, which also stood out in the top 10.
Bank mergers and acquistions
Given the situation of low interest rates and the overcapacity in banking in Spain, the sector has been forced into restructuring to reduce the number of players. This concentration, which began with the financial crisis in 2008, has now been accelerated. Following the agreement between CaixaBank and Bankia to create the largest bank in Spain, others are now in negotiations. A tie-up between Liberbank and Unicaja is still pending approval from the European Central Bank, while a deal between BBVA and Banco Sabadell has been frustrated by a lack of agreement on the purchase price. If these new groups resulting from mergers are added to the other leading firms currently managing mutual funds (Santander, BlackRock and Amundi) and pension funds (Santander, Ibercaja and Kutxabank), that handful of firms would manage €315bn, which represents 53% of these two markets.
Would mergers jeopardize competition?
From the 55 firms in the overcrowded banking map back in 2009, just a dozen could remain. The Bank of Spain’s director, Pablo Hernández de Cos, said in October that he still sees room for mergers without the reduction in the number of players compromising competition. The degree of concentration, which already increased strongly between 2008 and 2012 with the consolidation of the savings bank sector, would now skyrocket. In 2015, the five largest firms in mutual and pension funds controlled 47% of the market. Ten years before, it was not even 40%. More than 80% of Spain’s assets in investment funds are in the hands of managers that are subsidiaries of banking groups. These firms generally charge higher commissions while their products often offer lower returns than those from independent asset managers. More concentration could exacerbate this problem. The impact of mergers is also reflected in private banking, where, for example, bankers have recently left both Bankia and CaixaBank for more niche entities such as Singular Bank.
Fewer agents, more assets
The private banking sector in Spain manages assets of about €520bn while the various agents’ networks manage a total of €51bn. It is expected that during the next three years, small agents will continue to disappear, to be replaced by others advising higher volumes. That means that, out of the current 5,900 agents running €51bn, after the mergers, there will be 5,000 left running €65bn, a 30% increase.
The agent is a vital part of the private banks’ commercial machinery, as it is becoming a more qualified and better-valued role. The increasing status of these agents is, in turn, leading more and more bankers to consider becoming agents. This reduces firms’ fixed costs, which is key in uncertain economic environments. In this complicated context, agents will potentially see more opportunities than challenges. The agent is a good bet for the future, as well as being a central player within the private banking sector. In the current environment of negative rates, it is necessary to have more imagination to create new products and expand the range of investment alternatives.
A resurgence of interest in mergers and acquisitions is on the cards for South Africa
For years, there has been talk of consolidation in South Africa’s asset management industry. And for years, little has happened. In 2020, however, the first significant signs of movement started to appear. Counterpoint’s merger with RECM in March, followed in August by its acquisition of Bridge Fund Managers, highlighted how firms are looking to make deals. The announcement in November that Laurium Capital had agreed to acquire Tantalum Capital reinforced this trend.
Boutiques under the spotlight
So far, activity has been limited to the smaller end of the market. It is boutique managers, which are more likely to be questioned about their sustainability, that are coming together. The decision by Electus Fund Managers to close its doors, which it did at the end of June, showed how the fortunes of smaller managers can change very quickly. The firm had a track record of more than a decade but found itself unable continue when market conditions turned against its investment style.
It is likely that the industry will see more mergers and acquisitions in 2021. Boutique managers looking for the security of scale will continue to explore deals that put them on a firmer business footing.
What will be interesting to see is whether this activity remains limited to this segment of the market or whether larger players will consider merger opportunities as well. This is the trend around the world, with medium-sized firms coming together in order to compete with the scale that the largest managers have established.
A tale of two trends
here is certainly scope for this in South Africa, where the market remains highly fragmented. However, the question is not just whether the economics make sense, but whether there can be a meeting of minds that is so critical for any merger to succeed. In South Africa, the trend of big managers just getting bigger is not playing out in the local market. In fact, the two largest firms – Allan Gray and Coronation – have been experiencing some significant outflows from their biggest unit trusts. Of the three large players, only Ninety One has seen net inflows into its flagship funds over the past year.
Five years ago, Allan Gray and Coronation had a combined market share of 25% in the local collective investment scheme industry, according to statistics from the Association for Savings and Investment South Africa. That has now fallen to 19%. Ninety One’s market share has risen from 8% to 10% over the same period. It is worth noting where significant market share gains have been made. Prescient, for instance, has doubled its market share from 2% to 4% in five years. This is at the management company level, so includes co-branded unit trusts. Boutique Collective Investments has seen similar growth.
Small enough and big enough
The importance of boutiques in the market is clearly growing, and there is no reason to suspect it will stop or slow down. On the contrary, smaller managers continue to outperform in the local equity market in particular due to their wider opportunity set and ability to be nimble in their allocations.
Those traits will become even more valuable if the number of listed companies on the Johannesburg Stock Exchange continues to contract, and the boutique offering will only become more compelling. The challenge for these firms, as Nic Andrew, managing director of Nedgroup Investments, told Citywire in October, will be to remain small enough to keep this advantage but big enough to be successful businesses.
‘There are enormous advantages to having nimbleness and agility,’ said Andrew. ‘But there has always been a balance around being small enough to offer that but large enough to be sustainable. ‘We want flexibility. We want owner-managed firms. We want managers to be able to implement their views. But we don’t want them to be worrying about whether they can survive.’
The announcement in November that Laurium Capital had agreed to acquire Tantalum Capital reinforced this trend.
