Strategic choices for asset management in 2021 - PRODUCT DISTRIBUTION AND GOVERNANCE - CACEIS
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A Funds Europe survey in partnership with CACEIS Strategic choices for asset management in 2021 PRODUCT DISTRIBUTION AND GOVERNANCE
Contents 03 Highlights 04 The crucial next steps 07 Scale and specialisation 09 Private market investments 11 ESG standards 14 Diversity and inclusion 17 Pension fund governance 19 Service outsourcing 20 Digital transition 23 Regulatory drivers 26 Survey methodology
Shifting priorities
WHAT THIS SURVEY REVEALS
Highlights
Uncertainties around the pace and sustainability of economic recovery are at the forefront of
industry concerns as it designs a strategy for growth and innovation after the Covid-19 pandemic.
Decision-makers are also challenged by the continuing pressure of regulatory adaptation, and
the need to redesign technology stacks and communication interfaces to fulfil the digital needs of
the funds industry both for current and future generations.
In this survey, Funds Europe, in partnership with CACEIS, examines where priorities lie for asset
managers in crafting their product strategies and fund governance for a world after Covid-19.
We examine the growing importance of ESG and climate change factors in shaping investment
strategies and investor preferences. We also explore steps to promote diversity and inclusion in the
funds industry. Among the survey’s key findings:
Economic outlook
• 52% of respondents said that uncertainties over the pace of economic recovery present the
greatest risk to their business.
ESG and climate change
• 81% said that they are currently integrating ESG standards into their business practice or that
they have already done so.
• 73% said that ESG standards will become, or have already become, a mandatory component of
fund governance.
Priorities for pension funds
• 54% said low interest rates are the major challenge confronting pension fund boards.
• 64% said pension funds should direct more attention to alternative investments in their search
for yield.
Digital transition and service outsourcing
• 85% said that data management and analytics are the area of digital transition where the funds
industry most needs to focus investment.
• 67% said that cost pressures will be the primary driver for greater outsourcing.
A total of 172 funds professionals participated in the online survey, conducted during February
2021. See survey methodology (page 26) for more information.
The crucial next steps
WHAT ARE THE TOP PRIORITIES IN A WORLD RECOVERING FROM
COVID-19, AND HOW WILL THE FUNDS INDUSTRY MEET THEM?
4
INDUSTRY SURVEY
THE COVID-19 PANDEMIC has on March 12, the FTSE All Share 3.5% of global reserves and
fuelled a period of economic Index dropped more than 0.5% of world GDP. These
and financial uncertainty rarely 10%, its largest single-day fall reserve assets, which are backed
witnessed outside of wartime. since 1987. by a mechanism ensuring
The global economy contracted Central banks and convertibility to currencies,
by close to 3.5% during 2020, governments have stepped in are targeted to help countries
according to IMF research, with massive and timely policy withstand external pressures in
with only China among the interventions to counter a case of a potential tightening of
G20 economies returning precipitous slide in consumer EM financing conditions.
positive economic growth over spending – which plummeted This abundant liquidity has
this period. with lockdown – and to protect driven a strong rebound in
This severe economic collapse jobs and livelihoods for those global equity markets, with the
has, in the IMF’s words, “had unable to continue work. MSCI World climbing 15.90%
acute adverse impacts on Asset purchases by central during 2020 and the MSCI
women, youth, the poor, the banks mollified pressures in Emerging Markets growing by
informally employed, and those bond markets, with the US 18.31%. For the year to March 23,
who work in contact-intensive Federal Reserve launching 2021, the S&P 500 was up more
sectors”. (IMF World Economic a comprehensive lending than 60%.
Update, January 2021, page 1)1 programme to support Despite this huge volatility
Although the pandemic sent households, employers, state in global financial markets,
global equities markets into and local government, and particularly during the first half
sharp decline during March financial markets. of 2020, the European Fund and
2020, a feature of this crisis With these interventions, the Asset Management Association
has been the resilience of the Federal Reserve’s total assets (Efama) reports that investors’
financial services industry in have surged from US$4.1 trillion confidence has strengthened
maintaining business operations on February 1, 2020 to US$7.6 significantly during the second
during this period and the trillion in March 2021, dwarfing half of the year. With positive
positivity of investor sentiment their levels prior to the global vaccine news driving a surge in
in powering a rebound in financial crisis when total assets net sales in Ucits and alternative
global equity markets from on the Fed’s balance sheet stood investment funds (AIFs), this
Q2 onwards. at below US$900 billion (source: has driven European investment
Indeed, the S&P 500 lost more US Federal Reserve).2 fund assets to an all-time high
than 30% of its value in the Multilateral agencies have also during Q4 2020.
initial weeks of the crisis, sliding extended support to emerging “Despite the impact of
from close to 3,400 in February markets (EM). For example, the the pandemic on financial
to below 2,300 on March 23. IMF announced a new US$500 markets in March, net sales
The UK FTSE 100 plummeted billion allocation of special promptly returned to positive
from 7,600 in January to below drawing rights to its members territory, reflecting the
5,000 in late March. Meanwhile, in March 2021, equivalent to attractiveness of Ucits and AIFs
THE RIG HT B AL AN CE – Sustainabil ity wil l pl ay a ke y ro l e in the g lobal econ om ic recover y.
5
INDUSTRY SURVEY
as investment vehicles,” says market indices recovered Q3. In contrast, low yields and
Bernard Delbecque, Efama much of their lost ground by high levels of stress in fixed
senior director for economics
and research. Fig 1: What are the greatest risks for the funds industry in the
During 2020, total net assets next 3 years? (Please select 3 answers)
in Ucits and AIFs grew by
5.7% to €18.8 trillion. An 11.1% Economic recovery
decline in net assets under 52%
management (AuM) for the Regulatory reform
European investment funds 39%
industry during Q1 2020 was Digital transition
cancelled out by strong inflows 36%
during Q2 and Q4. Net sales for Political uncertainty
Ucits reached €466 billion over
36%
the year, up from €392 billion
Green transition
in 2019. Alternative investment
funds also experienced net 31%
inflows during 2020, with net Investment returns
sales rising to €180 billion from 30%
€156 billion during 2019. Post-Covid business organisation
Equity funds were the primary 28%
beneficiary, fuelled by attractive Brexit
entry points as valuations dipped 16%
in February and March 2020,
Fund governance
before the major developed
13%
Asset safety
8%
Global connectivity
“Despite the impact 7%
of the pandemic on
financial markets Other
in March, net sales 4%
promptly returned Inflation
to positive territory, 0%
reflecting the
attractiveness of Creativity
Ucits and AIFs as 0%
investment vehicles.”
BERNARD DELBECQUE,
EFAMA
6
“Consolidation has
been a constant
feature in the
funds industry as
investment houses
income markets triggered net Scale and specialisation have used mergers
redemptions of €82 billion in Q1 Consolidation has been a and acquisitions to
2020 and total net outflows of constant feature in the funds build market share,
€105 billion over the year. industry as investment houses to expand into new
Against this background, the have used mergers and asset classes and to
survey asked respondents to acquisitions to build market extend distribution
nominate the three greatest share, to expand into new reach into new
risks that the asset management asset classes and to extend
locations and investor
industry must confront as it distribution reach into new
segments.”
rebuilds after Covid-19 (fig 1). locations and investor segments.
Uncertainties around the pace Firms may also consider this
and sustainability of economic strategy as they seek to manage
recovery sit at the top of the list, digital transition and adapt to firm’s survival. In contrast,
nominated by more than half of the investment preferences of 39% said they disagreed with
survey respondents. Pressures younger generations. this statement and 20% were
to implement, and to adapt to, With this in mind, the survey agnostic, stating that they
new regulations appear second asked whether, in asset neither agreed nor disagreed.
– an issue discussed later in this management, firms need to be A report from Willis Towers
report. We also focus on the big to survive (fig 2). Watson (WTW), published in
challenges and opportunities This question divided opinion October 2020, indicates that
presented by digital transition in across the respondent group, assets under management for
the asset management industry with 41% agreeing that size is the world’s 20 largest asset
in a later section. important to an investment managers represent just 43%
of industry assets. In total,
Fig 2: How much do you agree with the statement, “In asset the industry’s assets exceed
management, you have to be big to survive”? US$100 trillion.3
However, direction of travel
Strongly agree suggests that the industry is
Agree 7% 11% consolidating over time, with
market share for the largest
Neither agree nor disagree
20 firms rising from 38% in
Disagree 2000 and 29% in 1995. This
Strongly disagree 32% report indicates that 232 asset
30% manager names have dropped
out of its ranking over the past
ten years.4
Roger Urwin, co-founder
20%
of WTW’s Thinking Ahead
Institute, comments: “The
7INDUSTRY SURVEY
investment industry has always
been dynamic, but the pace of Fig 3: Which factors are most likely to drive consolidation in the
asset management industry?
change is speeding up, notably
through consolidation. Rapidly
Cost pressures
advancing technology is also
37%
changing the shape of mandates
Regulatory change
and producing products that
13%
require less governance and
Increased competitive pressure due to fee transparency/commission bans
are more streamlined. This has
led to the growth of passive 12%
Technology innovation and digital exposure
and index tracking [along with
factor-based solutions].” The 12%
report points out that passively The challenge of passive funds such as ETFs
managed assets globally have
8%
grown from US$4.9 trillion in
The difficulty of gaining distribution for investment funds
2015 to US$7.9 trillion in 2019.
8%
Looking at the factors most
likely to drive consolidation in I do not think there will be consolidation
the funds industry (fig 3), the 6%
survey highlights the dominance The need for asset managers to offer specialist investment skills
of cost pressures, which 5%
attracted nearly three times as
many responses as any other
single factor (37%). indicated that companies may its charging structures and
Beyond this, respondents consolidate to make them better procedures for cost disclosure.
positioned to manage regulatory The ongoing transition to fee-
change and to manage the based advisory models (driven
resource cost of technology by the Retail Distribution Review
upgrades and innovation. in the UK and its equivalent in
Regulatory changes (such as some other EU markets) has
“The investment MiFID II – the second Markets in prompted a tighter focus on
industry has always Financial Instruments Directive the costs of investment and
been dynamic, but – in the EU, for example, or the a review of how investment
the pace of change Financial Conduct Authority’s products and investment advice
is speeding up,
Assessment of Value regime are provided to, and paid for
notably through
consolidation. Rapidly in the UK) are driving greater by, retail customers. Among
advancing technology cost transparency across the other factors, this has driven an
is also changing the fund transaction lifecycle and advance in the market for clean
shape of mandates.” forcing the industry to review share classes.
ROGER URWIN, WILLIS
TOWERS WATSON
8“There is a position
for both specialist
boutiques and larger
Private market investments Against this backdrop, this asset management
Investment into private markets Funds Europe survey finds
houses in supporting
investors’ appetite
has surged over the past that specialist investment
for private market
decade, with many institutional boutiques (cited by 37% of products. However,
investors and private wealth respondents) will be the fund managers will
clients responding to a low primary route through which need to pick their
interest rate, low fixed income investors access private market optimal position.”
yield environment by increasing assets (fig 4). This was more
allocations to private markets. than double the percentage
A recent research paper by of those who believed that
PwC predicts that assets under these specialist products will
management in private market be sourced from large asset
strategies are likely to grow management houses. and allowing these to be traded
between US$4.2 trillion and Over time, specialist fund more cheaply and easily in the
US$5.5 trillion in the period to managers may look to new secondary market. When they
2025, boosting aggregate AuM issuance models, particularly are ‘tokenised’, assets can also
in the sector to between US$13.7 tokenised issuance of fund units be ‘fractionalised’ – traded
trillion and US$15.0 trillion. PwC on blockchain (13%). This offers in smaller denominations
forecasts that private markets benefits in terms of improved – thereby reducing the
will represent more than 10% of liquidity, potentially making minimum investment.
global AuM by 2025 in its base- illiquid assets available to a The overarching message
case scenario.5 wider community of investors from these survey results is
that there is a position for both
Fig 4: How will private market products be offered to the specialist boutiques and larger
market? asset management houses in
supporting investors’ appetite
Specialist boutiques will be the main source for private market products.
37% However, fund managers will
These investment areas will remain the domain of institutions/HNWIs need to pick their optimal
24% position. Boutique investment
Large asset managers will offer these skills houses need to target strategies
18% and products where they have
New digital fund vehicles will develop e.g. blockchain market-leading skills and can
13%
deliver outperformance.
Asset managers seeking to
Retail vehicles such as ETFs will develop to include specialist areas
establish scale in the private
8% markets area will need to
identify how they can grow most
effectively, whether through
9INDUSTRY SURVEY
resilient in other areas, bolstered
Fig 5: In private markets, which strategies offer the best growth particularly by huge fiscal and
prospects in the coming 12 months? (weighted mean)
monetary interventions by
governments and central banks.
Real estate
For the real estate sector,
closures and capacity
2.54
restrictions in the retail and
Private credit/debt
hospitality sectors have created
2.25
inevitable challenges. However,
Private equity
new demand has also emerged
2.03
over this period. The logistics
Infrastructure
sector offers opportunities as
1.92 the UK and western European
economies bounce back after
Covid-19, backed by greater
implementation of sales and
acquisition, through building the basis of weighted mean, leaseback strategies. Although
their capability internally, and/or calculated from these survey the commercial office sector
through entering into strategic responses (fig 5). will restructure with the move
partnerships and alliances. The survey finds that, in to out-of-office working,
These choices each shape how respondents’ view, real estate CBRE reports that Grade A
the firm meets its requirement funds will offer the most offices appear to be trading at
for talent, for technology and attractive opportunities for a premium. Data centres are
how it expands its sales pipeline. growth in the coming 12 months another niche sector that has
Intuitively, we anticipate that (weighted-mean score = 2.54). benefited from the rise in home
asset managers may look to Private credit (2.25), private working and the transition
position themselves towards equity (2.03) and infrastructure
either end of this barbell – as (1.92) featured next, ranked in
specialist boutiques or through order of importance.
creating scale. Firms that lack Real estate specialist CBRE
specialisation or scale may observes that 2020 has been “For the real estate
struggle to compete in the a year of convulsive change.
sector, closures in
medium term. For commercial real estate,
retail and hospitality
have created
Respondents were asked to many of the conventional
challenges. However,
rank opportunities in private measures of market activity, new demand has
markets asset classes, rating such as investment turnover also emerged. The
these opportunities from ‘very and leasing demand, contracted logistics sector offers
strong’ (4) to ‘weak’ (1). These sharply during 2020. But values opportunities as
were then listed in order on have remained surprisingly the UK and western
European economies
bounce back after
Covid-19.”
10“Almost a quarter of
a century after the
Kyoto Protocol, the
to digital. (CMRE, 2021 EMEA and to provide ex-ante analysis financial industry’s
Real Estate Market Outlook, of how key value drivers
progress in meeting
commitments to
pages 3-9)6 will perform under different
environmental, social
Preqin, a provider of data investment conditions. and governance
and analysis for alternative principles has
investments, indicates that ESG standards at times been
there was a flight towards Almost a quarter of a century disappointingly slow.”
larger real-estate providers as after the Kyoto Protocol,
the pandemic took hold. Real which established a practical
estate megafunds attracted framework for implementing
75% of the aggregated capital the United Nations Framework
raised in Q2 2020, a rise from Convention on Climate Change,
59% in Q2 2019. In the face the financial industry’s progress guiding governance around
of market volatility generated in meeting commitments to climate-related risks and
by the pandemic, Preqin finds environmental, social and opportunities, strategy, risk
that there has been strong governance principles has at management and the use of
correlation between AuM times been disappointingly slow. metrics and targets. Established
growth and the brand strength But climate change is by the Financial Stability Board
of leading private markets fund moving to the forefront of the in December 2015, with more
managers, with the market regulatory and policy agenda than 30 global members, its
share of strongly branded in Europe. In the UK, this recommendations apply to
names increasing substantially will be prominent as the UK a broad range of financial
over this period.7 government hosts the COP26 organisations, including
This may be reinforced UN Climate Change Summit institutional investors, asset
by the ability of larger asset in Glasgow – and may be used management companies and
management groups to by the country’s policymakers banks. Its aim is to encourage
apply technology to deliver to reinforce its appeal as an voluntary, climate-related
competitive advantage. In investment destination after financial disclosures that are
private credit strategies, for Brexit. Across the Atlantic, the useful to investors, lenders
example, analytics and AI are Biden administration has shown and insurance underwriters in
being applied to profile potential initial signals that it intends to understanding material climate-
borrowers and evaluate credit reintegrate the US into global related risks.
risk. In private equity, the ability environmental policy initiatives. The TCFD is explicit about
to apply alternative data sets, The Task Force on the key role to be played by
to manage big data and to Climate-related Financial beneficial owners and fund
apply advances in analytics is Disclosures (TCFD) has set out managers in promoting this
enhancing opportunities for recommendations for helping initiative. It states: “Large asset
some managers to identify value businesses to disclose climate- owners and asset managers
in private equity transactions related financial information, sit at the top of the investment
11INDUSTRY SURVEY
SUSTAINABLE FINANCE DISCLOSURE REGULATION (SFDR)
SFDR requires fund managers to publish a statement on their website
chain and, therefore, have regarding the steps they are taking to assess the ‘principal adverse
an important role to play in impacts’ of their investment policies from a sustainability perspective
influencing the organisations (the ‘PAI Statement’).
in which they invest to The PAI Statement should include both quantitative and qualitative
provide better climate-related evidence. Fund managers should publish quantitative data on 14 key
financial disclosures”.8 indicators (nine relating to environmental impact, five relating to social
As a component of the factors) for assessing adverse sustainability impacts across a range of
European Commission’s ESG factors.
Sustainable Finance Action
Plan, the Sustainable Finance Under the qualitative disclosure, fund managers will be expected
Disclosure Regulation (SFDR) to provide:
requires fund managers, • A description of policies to identify and prioritise principal adverse
financial advisers, and some sustainability impact.
other categories of regulated • Information on the fund manager’s engagement policies and steps
firms with activities in the EU to designed to mitigate the effect of any adverse impact identified above.
disclose information to investors • Reference to international standards, including responsible
on the ESG implications of their business code of conduct, international standards for due diligence
investment strategies (see and reporting and, where appropriate, the degree to which the
box, right) fund manager’s approach is aligned with the objectives of the
European regulators published Paris Agreement.
their final report on the draft At the time of writing, national regulators have proposed that
regulatory technical standards the reporting requirements outlined in the regulatory technical
(RTS) for SFDR on February 4, standards (RTS) will apply from January 1, 2022. In practice, this will
2021. EU member states were mean that managers will file their disclosure in 2023 for the 2022
required to implement key reference period.
In addition, fund managers must make product-level disclosures
on their websites and in fund documentation for ESG-focused funds
(‘Article 8’ and ‘Article 9’ funds). This will include:
• Details of what environmental or social characteristic is promoted
by the fund and which sustainability indicators are used to evaluate
“Large asset owners whether these objectives are met.
and asset managers
• Details of the investment strategy used to deliver these objectives.
sit at the top of the
investment chain • Details of the asset allocation of the fund and specific additional
and therefore have details dependent on this asset allocation.
an important role to • Whether product-specific information is available online and whether
play in influencing investors can access it.
the organisations in • Whether a specific index has been designated as a reference
which they invest.” benchmark and its alignment with each of the environmental or social
characteristics promoted by the fund.
THE TASK FORCE ON
CLIMATE-RELATED
FINANCIAL DISCLOSURES
12provisions of the regulation (i.e.
Level 1) by March 10, requiring Fig 6: As policymakers extend legislation to promote ESG
standards, how will this affect your business?
financial institutions to provide
reporting on their sustainability
activities at both legal entity We have already started the change process
(i.e. company) and product 69%
levels. However, some Level 2 It will not affect our business
provisions have been delayed 16%
subject to consultation on the We have already implemented necessary changes
draft RTS. 13%
The UK has elected not to Other
follow the SFDR or the EU’s 2%
taxonomy on ESG funds.
Consequently, any firms
intending to market their ESG
funds in the UK and EU will need Fig 7: How important will ESG standards become in fund
to comply with more than one governance?
set of disclosure requirements.
When we asked survey They will become mandatory
respondents how their business 51%
will be affected as policymakers They are already mandatory
extend legislation around ESG, 22%
almost 70% say that they have They are highly desirable
started the change process of 18%
integrating ESG standards into They are just another guideline
their investment strategies. A
8%
further 13% said that they have
They will not have a major impact
already implemented necessary
changes under this ESG agenda 1%
(fig 6).
From fig 7, the majority (51%)
of respondents believe that ESG investment process, but will not social investing, green bonds
standards will be (or already be mandated by policymakers or and impact investing strategies
are) a mandatory component financial authorities. Only 1% said (fig 8). Impact investing
of investment fund governance. that ESG standards will have no strategies are targeted to
This substantially outweighs impact on fund governance. generate a positive, measurable
the 18% of respondents that These trends, in respondents’ social and environmental impact
believe that ESG standards opinion, will translate into a in addition to generating a
are ‘highly desirable’ in the significant rise in demand for financial return.
13INDUSTRY SURVEY
Social investment, wider community. principles? And where will
according to the European But how well does the efforts to promote diversity
Commission, is largely about funds industry embrace these be focused?
investing in people. It refers to
investment policies designed
Fig 8: How do you assess growth prospects in the following
to strengthen people’s skills strategies? (weighted mean)
and capacities and to support
them in participating fully in
employment and social life. This Social investing
may include investment in key
2.01
policy areas such as education, Green bonds
healthcare and childcare,
1.97
assistance with job searches
Impact investing
and with rehabilitation.9
1.95
Green bonds are debt
Sustainable investing
instruments issued to fund
1.65
projects that promote a positive
environmental or climate
impact. The first green bond,
the European Investment Bank’s
(EIB’s) Climate Awareness Bond, Fig 9: Where will be funds industry focus measures to improve
was issued on the Luxembourg diversity and inclusion? (weighted mean)
Stock Exchange in 2007.
Currently, the EIB is the world’s
largest issuer of green bonds. Age
3.08
Diversity and inclusion Cognitive
Diversity, inclusion and equality 2.86
are the foundation stones Social background
of an environment where 2.77
individual differences and the Education
contributions of all participants 2.76
are recognised and valued. In
Ethnicity
the workplace, these principles
help to ensure each employee 2.23
can apply their experience, Gender
knowledge and skills for the 1.95
benefit of the organisation
and its customers, staff and
14“With three-
quarters of FTSE 100
companies failing
to report the ethnic which concluded that women set of measures designed to
make-up of their are outnumbered 16 to one encourage more balanced
boards, investors
in executive roles in AIM UK representation across the
are now calling on
companies to take 50 companies.10 industry (60%).
decisive action.” There is also a lack of racial In February 2021, the
diversity in UK boardrooms: only Investment Association (IA)
ANDREW NINIAN, three out of 324 directorship in the UK announced that it
INVESTMENT positions in AIM UK 50 boards plans to issue warnings to
ASSOCIATION
are held by directors who FTSE 350 companies that
are black.11 fail to deliver improvements
Looking at the steps that in boardroom diversity. This
the industry may take to will include ‘amber’ warnings
On the second of these encourage diversity (fig 10), issued to firms that fall short of
questions, respondents told 30% of respondents to this required standards on ethnic
us that measures to address Funds Europe survey agreed and gender diversity and more
age discrimination will be most that the funds industry ought severe ‘red’ warnings for firms
prominent (fig 9). to set targets for improved that demonstrate deeper
Policies to improve cognitive representation, with 9% fundamental shortcomings in
diversity across the organisation saying these targets should this area.12
were ranked by respondents be mandatory. This builds on the
in second place, representing In contrast, a majority of recommendations of the Parker
steps to include employees respondents said that this is best Review, published in 2017, which
with diverse perspectives and achieved through a balanced mapped out targets for directors
methods of problem-solving
and processing information. Fig 10: How should the funds industry encourage diversity?
Measures to address lack of
opportunity linked to social
background (2.77) or education Encourage better representation generally
background (2.76) featured 60%
in third and fourth positions Set industry targets
respectively in the ranking order. 21%
Alexandra Altinger, CEO of J Set mandatory targets
O Hambro, noted recently that 9%
UK firms may pay a financial Encourage positive discrimination
price for lack of boardroom 8%
diversity. She was commenting
Do nothing
on the findings of a recent
2%
report by professional services
group Company Matters,
15INDUSTRY SURVEY
on company boards from ethnic 14% of fund managers were have laws in place regarding
minority backgrounds. women, according to data and disclosure on diversity policy
In the first Parker report, from analytics specialist Morningstar. that apply to investment firms –
2017, the Review made a series However, at the end of 2019, notably Finland, France, Norway,
of recommendations and set a this figure remained unchanged Sweden and the UK.
target for all FTSE 100 boards to at 14%. There had been little However, Canada, Denmark,
have at least one director from measurable improvement in Germany, Italy, Spain and the US
an ethnic minority background addressing this inequality of still do not have disclosure laws
by 2021 – ‘One by 2021’. gender representation in money on diversity policy.15
A new Parker Review report management teams.14 In May 2020, the Investment
published on February 5, 2020 According to its February 2021 Association issued a diversity
found that 37% of FTSE 100 Diversity, Equity and Inclusion and inclusion statement,
companies surveyed (31 out of survey, Morningstar finds that indicating that it aims to create
83 companies) do not have any only five of the 11 markets in a diverse and inclusive UK
ethnic minority representation which the survey was conducted investment industry at all levels,
on their boards. Representation
on FTSE 350 firms was even
Fig 11: What are your major concerns at pension board level?
worse, with 59% of companies Please select your top 3
(150 out of 256) having no ethnic
minority representation. Low interest rates
Andrew Ninian, the IA’s director 54%
for stewardship and corporate Risk management
governance, observed that the 46%
UK’s boardrooms need to reflect Understanding ESG and climate change risks
the diversity of modern-day 45%
Britain. “With three-quarters of Investment returns
FTSE 100 companies failing to
43%
report the ethnic make-up of
Good governance
their boards in last year’s AGM
season, investors are now calling 41%
on companies to take decisive Supervisor requirements and/or legislation
action to meet the Parker 29%
Review targets,” he says. “Those
Affordability of pension
who fail to do so this year will
27%
find themselves increasingly
under investors’ spotlight.”13 Outsourcing
The funds industry also has 15%
work to do in addressing gender
diversity. At the end of 2000,
16“Successful
businesses create an
environment where
people want to work,
Fig 12: How much do you agree with the statement, “Pension where they feel
funds should pay more attention to alternative investments in challenged, able to
their search for yield”? use their talents, and
valued.”
Strongly agree
THE INVESTMENT
Agree 1% ASSOCIATION
7% 19%
Neither agree nor disagree
Disagree
Strongly disagree
28%
traditionally held fixed income
instruments as a key component
45% of their asset allocations,
providing the diversification
and stable cash flows required
to match their obligations to
retirees. But when bond yields
including within the Association’s Pension fund governance are close to historic lows and
own employment structure. When asked to identify the equity returns are highly volatile,
“Successful businesses create major challenges confronting this presents challenges for
an environment where people pension funds boards in the pension funds in satisfying their
want to work, where they feel current investment climate, return expectations, meeting
challenged, able to use their 54% pointed to the current funding levels and safeguarding
talents, and valued,” it says.16 low interest rate environment the cash flows required to
This will include steps to as their top priority (fig 11). meet obligations to scheme
attract, develop and retain talent More generally, almost half members.17
from a wider pool – recognising highlighted a broad focus on risk Given the magnitude of
that minority groups and management (46%), including fiscal and monetary stimulus
women are under-represented investment risk management, that leading economies have
in the industry, especially in regulatory risk and asset experienced during the past 12
senior positions. It also aims to servicing risk. In the context months – and in the longer term
promote a change in corporate of the preceding discussion, since the 2008 financial crisis –
culture, taking action to address it is significant that 45% of investment boards remain wary
the gender pay gap along with respondents highlight ESG and of inflationary pressures and
practical guidance to promote climate change risk in their top watchful regarding the potential
ethnic diversity and LGBT three priorities. formation of asset price bubbles
representation. Pension funds have in equity, commodity and
17INDUSTRY SURVEY
real estate markets. they have exercised voting taking in terms of engagement
Reacting to this set of rights) have been fulfilled. on assets we govern on their
challenges, almost two-thirds However, a March 2021 behalf. Yet we are in a position
of respondents said that study by Dalriada Trustees where we are receiving
alternative investments provide and Minerva Analytics found insufficient information from the
an attractive option for pension that only one-third of asset asset management community.
funds in the current investment managers surveyed were able We are seeing managers
climate (of which 19% said they or willing to respond effectively marketing funds for their ESG
agreed strongly). In contrast, just to information requests from credentials, but they are failing
8% of respondents said they pension funds regarding how to provide clear evidence of the
disagreed with this statement they engage with investee actions being taken.”18
(fig 12). companies. Out of 43 asset The UK’s minister for pensions
Recent evidence suggests managers analysed in this and financial inclusion, Guy
that pension boards must study, nearly 30% provided no Opperman, said recently that
give careful consideration to information at all and 40% of it is “totally unacceptable” that
governance and engagement managers said there was no fund managers are ”unable
considerations associated with information to report. or unwilling” to respond to
their investments. In the UK, David Fogarty, director of information requests from
trustees of defined benefit, Dalriada Trustees, commented: pension funds.
defined contribution and hybrid “As trustees, we need to show Faced with these challenges,
schemes are required by law to to members what action we are Funds Europe asked
compile annual Implementation
Statements which detail how Fig 13: How much do you agree with the statement, “The
their engagement policies as custodian is the ideal party to act as a governance partner for
shareholders (including how pension funds with independent reporting”?
Strongly agree
Agree 1% 7%
14%
Neither agree nor disagree
“We are seeing Disagree
managers marketing
funds for their ESG Strongly disagree
credentials, but they
are failing to provide 39%
clear evidence of the 39%
actions being taken.”
DAVID FOGARTY,
DALRIADA TRUSTEES
18respondents, “Is a pension fund
custodian the ideal party to Fig 14: What will be the primary drivers for greater outsourcing?
(Please select 3)
act as governance partner in
assisting the pension fund with Cost
independent reporting?” The
67%
balance of opinion (fig 13) was in
Ability to offer greater operational resilience
support of this statement, with
47%
46% saying that they agreed
Ability to invest in technology
and 7% agreeing strongly.
41%
This substantially outweighs
Ability to offer specialised skills
the 15% who disagreed with
the statement. 34%
Significantly, however, a Non-core activity
sizeable percentage (39%) were 33%
agnostic about this proposal,
Regulatory pressure
with no strong opinion for
26%
or against.
Ability to access new markets
Service outsourcing 19%
Building on this theme, the Risk management
survey asked respondents to 18%
identify which factors will be the
Ability to deliver better connectivity
primary drivers of outsourcing
14%
across the asset management
industry (fig 14). Other
The response was 2%
unequivocal. Cost pressures will
be the dominant factor (67%).
Companies will aim to reduce outsourcing services that they respondents tell us (fig 15), will
their headcount, technology currently manage in-house take place for middle-office
and maintenance expenditure (47%). Perhaps unsurprisingly, services (46%). While asset
– and more generally to respondent firms will look to managers typically wish to retain
translate fixed into variable cost outsourcing partnerships to key functions in-house that feed
through outsourcing. strengthen their technology their competitive advantage,
Survey results indicate that, capability and to access they may be willing to outsource
in the wake of the pandemic, specialist skills that are not ‘non-core’ support functions to a
companies are also seeking currently available internally. specialist third-party provider.
to establish a higher level The strongest acceleration One example may be
of operational resilience by in service outsourcing, for investment firms still
19INDUSTRY SURVEY
business resilience. Even
Fig 15: Which areas will see most growth in outsourcing from
before the pandemic, this
asset managers? (Please select 3)
asset management group has
Middle office been working to establish an
46%
infrastructure for ‘unhindered
Transfer agency
flexible working’, helping teams
to cross-fertilise ideas within
40%
the company and for portfolio
Technology
managers, analysts and traders
39%
to achieve the same working
Distribution support
experience, whether working in
31%
the office, at home, or from a
ManCos or ACDs disaster-recovery site.
31% But where does the industry
Trade execution need to focus its attention
to realise most gain from its
30%
investment in digital transition
Collateral management
(fig 16)?
27%
The need to invest in data
Risk management management and analytics
24% is the most pressing issue
Securities lending
identified by respondents
(85%). This is a wide-ranging
15%
category that embraces many
FX management
priorities highlighted in this
13% report. Additionally, respondents
Other prioritised efforts to move
4% to real-time (or near-real-
time) investment operations
and reporting (75%) and a
meeting their transfer agency renewal and innovation. need to improve connectivity
requirements in-house to between participants (66%).
outsource this to an external Digital transition Improvements in cyber security
specialist, either on a modular According to Schroders’ (64%) ranked fourth in this list.
basis or as part of a bundled group chief executive, Peter The ability to manage large
package from their asset Harrison, technology has been data volumes and high data
servicing partner(s). The survey at the heart of his company’s velocity is fundamental to a
finds that buy-side firms may response to Covid-19, facilitating wide array of functions in the
also outsource to meet their collaboration across business asset management industry
requirements for technology units and safeguarding – as an input to factor-based
20management – the ability to
Fig 16: The impact of Covid-19 has accelerated digital transition. accommodate data variety – is
Where does the industry need to focus investment?
(Please select your top 3 answers) also becoming increasingly
important. Investment teams
are drawing insights from a
Improved data management and analytics
wide range of alternative and
85% unstructured data sets to inform
Real-time investment operations and reporting
their investment strategies.
75% Beyond the investment decision,
Better connectivity between market participants this expertise may be important,
66% for example, when applying
Improvements in cyber security ESG screening to assets held in
64% portfolio or received as collateral
Other in secured finance transactions.
10%
In the ‘Other’ category,
respondents highlighted
the importance of effective
channels to support digital
Fig 17: Which areas of digital transition are your highest engagement with customers. In
priorities? (weighted mean) the context of remote working,
a number of respondents
Investment research
prioritised standardisation of
2.74
market practice around digital
Fund distribution
document signatures.
2.24 Several respondents also
AML/KYC
highlighted the potential
2.10
Investor communication
2.05
Operations (including transfer agency) “The UK’s minister
2.00
for pensions and
financial inclusion,
Reporting
Guy Opperman, said
1.87 recently that it is
‘totally unacceptable’
that fund managers
and quantitative investment for its product development and
are ‘unable or
unwilling’ to respond
strategies, for example, or for distribution strategy.
to information
conducting analysis of customer Another fundamental requests from
buying preferences as a driver requirement in effective data pension funds.”
21“The ability to INDUSTRY SURVEY
accommodate data
variety is becoming
increasingly including custody services. distribution – including
important. When asked which areas digital transmission of fund
Investment teams
of digital transition are most subscription/redemption
are drawing insights
important to respondents’ instructions, the ability to bring
from a wide range
of alternative and firms, the survey finds that the greater automation to anti-
unstructured data highest priority is in digitalisation money-laundering/know-your-
sets to inform their of investment research (fig client (AML/KYC) verification
strategies.” 17). Asset management firms and improved automation of fee
are seeking access to new and commission payments.
data sources to support their Alongside the sales
investment decision-making, component of the distribution
including alternative data sets to function, key parties to the
benefits offered by blockchain support alpha generation and to fund transaction may require
in supporting centralised enable their ESG strategies. a wider range of services
record-keeping, reconciliation Second in the rankings is including managing distributor
and safekeeping across the the need to improve digital agreements, rebate calculation
investment value chain, transformation in fund and processing, support
with compliance reporting,
communicating data on
Fig 18: Which areas of the industry are likely to see tighter
regulation in the next 3 years?
distributor sales, and access to
product information and fund
ESG and climate change documentation through a single
79%
point of access.
MiFID III
Many of these tasks have
traditionally been manual
47%
AIFMD II
40%
Ucits VI
39%
“The distribution
Operational resilience and distribution
36% support functions
Capital requirements
are benefiting
from investments
27%
to improve digital
Capital Markets Union engagement,
15% improving STP
Other
rates and lowering
operational risk, as
1%
well as delivering
a better client
experience to the
22
investor.”and resource-intensive. The
distribution and distribution
support functions are now
benefiting from investments
to improve digital engagement,
improving STP rates and
lowering operational risk, as
well as delivering a better
client experience to the
investor. This is vital to improve
cost-efficiency and to meet
the investment objectives of
younger generations.
Regulatory drivers
We have reflected at multiple
points in this report on the
challenges and opportunities
posed by regulatory adaptation
as a driver for change in the
funds industry.
To identify where this change The European Commission and affordable investment
agenda will have most impact, released a consultation paper products.
the survey asked the question, in March 2020 soliciting public More broadly, the Commission
“Which areas of the funds feedback on MiFID II and has put forward for public
industry are likely to see tighter MiFIR (the Markets in Financial consultation the possibility of
regulation during the coming Instruments Regulation). The
three years?” first part of this consultation
Given the huge drive across paper addressed questions on
asset management and asset the overall functioning of MiFID “Among the priority
owner organisations to meet II and MiFIR, while the second issues were proposals
their ESG targets, it is perhaps section addressed a range of to phase out paper-
unsurprising that ESG and priority and non-priority issues based investor
climate change featured at the raised by the Commission. information, along
top of the list, attracting over Among the ‘priority’ issues were with ongoing steps
30% more responses than any proposals to phase out paper-
to provide access
other answer (fig 18). based investor information,
for retail clients
to a wider choice
Respondents also highlighted along with ongoing steps to
of transparent
the likelihood of potential provide access for retail clients and affordable
reform to the MiFID directive. to a wider choice of transparent investment products.”
23INDUSTRY SURVEY
creating an EU consolidated
tape, an electronic data stream
providing real-time exchange
data (e.g. price, trade volumes)
which is not limited to equity
instruments. It is also reviewing
plans to promote further
unbundling of research and
execution services and to
deepen research coverage of
the SME sector.
To preserve standards of
investor protection, while
maximising flexibility available
to investors, the Commission
has also sought feedback on
the creation of a category of
‘semi-professional clients’
lying between the existing
categories of retail or
professional investor. The aim
is to make it easier for high-
net-worth and sophisticated may lead to the creation of a to clarify AIFMD rules on
investors, which may not tailor-made investor-protection depositary services and
currently fall within the regime for these ‘semi- depositary obligation. The
professional investor category, professional’ clients.19 Commission recognises the
to participate in the capital The European Commission need to address a short supply
markets. Ultimately, this has also launched a review of depositary provision in certain
process regarding a potential markets, particularly where
successor to the Alternative there is a concentration of
Investment Fund Manager depositary services in smaller
Directive (AIFMD). This, among EU markets.
other considerations, will More generally, the European
“The Commission assess the competitiveness Commission continues to
has sought feedback of the AIF industry in Europe, explore steps to align AIFM
on the creation of a the effectiveness of the AIFM and Ucits Directives, including
category of ‘semi- passport, and whether there is (i) potential for a single EU
professional clients’ justification to extend the AIFM rulebook for Ucits and AIFM
lying between the licence to a wider category of regulatory frameworks; and (ii)
existing categories of fund managers.20 potential for a single licence for
retail or professional This also includes plans AIF and Ucits managers. fe
investor.”
24Sources
1 – https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-
economic-outlook-update.
2 – https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
3 – https://www.thinkingaheadinstitute.org/research-papers/the-worlds-largest-asset-
managers-2020/ .
4 – https://www.thinkingaheadinstitute.org/news/article/global-asset-manager-aum-
tops-us100-trillion-for-the-first-time/ .
5 – https://www.pwc.com/gx/en/news-room/press-releases/2021/prime-time-private-
markets.html.
6 – https://www.cbre.co.uk/research-and-reports/2021-EMEA-Real-Estate-Market-
Outlook
7 – https://www.preqin.com/insights/research/blogs/capital-concentrates-but-private-
real-estate-gps-see-opportunity
8 – Task Force on Climate-related Financial Disclosures, “Final Report: Recommendations
of the Task Force on Climate-related Financial Disclosures”, June 2017, page iii, https://
assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf .
9 – https://ec.europa.eu/social/main.jsp?catId=1044 .
10 – https://www.funds-europe.com/news/report-shows-glaring-lack-of-diversity-in-
uk-boardrooms.
11 – ibid.
12 – Investors step up pressure to increase ethnic diversity on boards | Press Releases |
The Investment Association (theia.org) .
13 – Investors step up pressure to increase ethnic diversity on boards | Press Releases |
The Investment Association (theia.org).
14 – https://www.morningstar.co.uk/uk/news/210150/diversity-best-practices-in-the-
asset-management.aspx .
15 – https://www.morningstar.co.uk/uk/news/210150/diversity-best-practices-in-the-
asset-management.aspx .
16 – https://www.theia.org/campaigns/diversity-and-inclusion.
17 – At time of writing, German ten-year government bonds are yielding -0.37%, UK ten-
year gilt yields are 0.74% and US ten-year Treasury bonds offer yields of 1.62% (accurate
March 25, 2021, source: Trading Economics)
18 – “Unacceptable”: Pension trustees left in dark on voting issues (funds-europe.com)) .
19 – https://www.linkedin.com/pulse/paving-way-mifid-iiimifir-ii-ec-consultation-paper-
revisal-lachgar/
20 – https://www2.deloitte.com/lu/en/pages/risk/articles/aifmd-ii-european-
commission-kicks-review-process-consultation.html .
25Survey methodology
A total of 172 fund professionals participated in the survey, conducted
online during February 2021.
Looking at the occupational breakdown of respondents, 30% indicated
that they work in fund administration or asset servicing. A further 19%
indicated that they work in fund manufacture.
In total, 17% of the respondents identified themselves as working in
fund distribution, with platform services (8%) and market infrastructure
(7%) the other key categories.
The balance of respondents (‘Other’) includes respondents working in
legal services, software vendors, trade associations and private banks.
Most respondents are based in the major fund domiciles of
Luxembourg (20%), France (17%), the UK (15%) and Ireland (10%).
Any commentary in this report relating to survey results, or wider
analysis of the industry, is that of Funds Europe and does not necessarily
reflect the views of CACEIS.
26funds europe
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