Insights from the conference trail

In my last article about attending a recent flurry of conferences, I shared my observations about the relationship side of our business. In this follow up piece, I dig into what is arguably of more interest to some of you – the industry trends that were top of mind during these events.

ESG is still everywhere

For better or worse, the investor dialogue and regulatory news keep sustainability at the top of many peoples’ agenda. Europe remains the epicentre of regulatory dialogue with the Sustainable Finance Disclosure Regulation (SFDR) continuing to evolve. After a painful start, it’s trending in the right direction with the possibility of an SFDR 2.0. The newest points of anxiety relate to the Corporate Sustainability Due Diligence Directive (CS3D) in terms of the role of asset managers and banks and its potential reach. Also, investor sentiment on ESG is even broader than before as the naysayers find their voices. If you don’t have an ESG story framed, that becomes your ESG story, and you may lose allocations.

Democratisation of investing

The primary focus across the conference circuit is facilitating greater access to a wide range of investors into private markets and illiquid assets. There is also a more general theme of greater participation, especially in Europe with the newly released Retail Investment Strategy (EU RIS). Pass through proxy voting is getting more interest as investors proactively seek to influence companies through active stewardship on matters including ESG and executive pay. However, a cohort of investors is also questioning the use of a manager if they must make these decisions themselves. This one has a lot of roads to run and is worth watching.

Are funds bought or are they sold?

There is ongoing debate about whether MiFID inducement bans result in an advice gap and less participation or whether they are a huge conflict of interest which increases the costs of participation remains strong. The industry remains focused on “growing the pie” rather than merely fighting over the same fixed addressable market increasingly cost focused. Decisions on captive, open or guided distribution architecture are crucial, and the roll of platforms are increasingly important. The unsolved question makes the proliferation of fund products now a focus at regulators. This and the laser focus on undue costs and providing “value” suggests funds are manufactured to be “sold”. The wider focus on investor costs and acting in best interests expressed in the U.K. Consumer Duty and the EU Retail Investment Strategy, as well as recent publications from the Central Bank of Ireland on undue costs and fees, will keep the concept of “value” high on agenda for the foreseeable.

Funds & Systemic risk

Another perennial debate which continues to get a lot of attention is the contribution of funds to systemic risk. Just last week IOSCO & FSB tag teamed to bring out yet more consultation on the topic from a macro prudential perspective. Recently, I’ve participated in a number of conference panels and webinars that have asked, “Are funds systemically risky?” While the industry believes the academic theory and empirical evidence shows that open ended funds have successfully met their liquidity promises, that dilution effects are not material, and that liquidity management tools have generally worked; regulators still believe the case is far from closed. Asset managers are being tarred with the same brush as other so called “Non-Bank Financial Intermediaries” (NBFI) such as pension funds and insurers who don’t have the same risk profile as open-ended funds.

There are idiosyncratic and specific issues with funds and banks that industry suggest are not systemic, such as the dysfunction observed in the U.S. Treasury’s market. The use of liquidity management tools (LMT) should be seen as a positive feature not a flaw of open-ended funds.

However macro prudential regulation and the issue of funds as a source of systemic risk will remain. A focus on leverage, liquidity, valuation of illiquid assets, dilution effects from redemption runs and more vigorous stress testing will remain and must be once more be addressed by managers.

The next big thing

The cryptocurrency and digital assets hype has receded a bit, although the regulatory environment remains vibrant: the SEC’s has rule making and sanctions of Binance and Coinbase and ESMA level (MiCA and DLT Pilot Regime). However, industry has moved onto the next big thing – AI. Europe is at the vanguard of regulation in this space with its AI Act. But there remains so much chat of AI for big data solution as well as theories about how ChatGTP will either enhance or eliminate certain jobs. AI is a real force and how and when it is deployed at scale within asset management will be fascinating to watch.

Distribution strategy is as important as investment strategy

With shorter business cycles, volatility spiking and asset allocations likely to be more of a moveable feast than during the last 20 years, confidence in your product set and knowing you desired target market are critical. Getting distribution right either on a targeted basis or reaching the widest possible addressable market is a key decision. It’s often as much of a factor in growth, profitability, and success as investment returns. ?

Killian Lonergan Andrew Dillon Sinead McIntosh Holly Gardner, CFA Janet Du Chenne Bevin Wallace BBH Investor Services

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