Some predict technology will undermine the rationale behind the investment fund. Others see it driving greater sophistication, and a narrowing of the gap between the asset manager and the wealth manager. Yet the message is clear: although Luxembourg can congratulate itself on recording €5trn assets, it must be sufficiently agile to adapt.
‘As technology continues to improve and reduce costs [it will accelerate] the mutual fund’s path towards obsolescence,’ a report from the consultancy Oliver Wyman has forecast. They see technology enabling ‘asset managers to serve the retail space without intermediation,’ with funds becoming customisable, thematic, and more tax efficient. This analysis sees public markets of equities and bonds being affected first, with private markets and alternatives following.
‘On the contrary it could be the opening of a golden era for mutual funds,’ said Guillaume Prache, Managing Director of the advocacy group of financial services users BetterFinance when asked about this report at the ALFI European Asset Management Conference last month. Yes technology will enable portfolios to be customised, but there remains the barrier that ‘the average retail investor in the EU has quite low levels of financial literacy.’
He noted just 8% of European household savings are in funds, a figure he believes will rise as on-going low interest rates and the return of inflation eat away at attractiveness of bank accounts and guaranteed-return life insurance policies. Moreover, the pensions sector is ‘putting more investment risk on the shoulders of people and this will drive more investment flows to funds.’
Change for wealth managers
‘I think you’re going to see a broadening out of the types of vehicles that are used,’ said Stephen Cohen (pictured), Head of EMEA iShares & Wealth business and Index Investments at BlackRock, commenting on how he saw the impact of technology. He sees a move away from advisors picking from a range of mutual funds, to a situation of wealth managers being more involved in portfolio construction. He also sees greater competition between products ‘in the same way we’ve seen ETFs bring competition to mutual funds.’ So rather than the death of the fund as such, technology will ‘expand the range of vehicles that are going to be needed to manage a portfolio,’ both in terms of the asset classes and the structure of the fund.
Funds have a major opportunity to engage with a new dynamic fuelled by ‘the biggest fiscal stimulus since World War II and green revolution that needs to be funded,’ said Cohen. For him the question is how all types of investor can access these trends, which will often be articulated through private markets and alternative assets.
Three paths to retail alternatives
He sees three routes. The European Long Term Investment Fund (ELTIF) – which is currently being revamped by the EU – is a ‘vehicle for investors to safely invest the right way in alternatives.’ Secondly, he sees the need to ensure clients understand what is in their portfolio by being able to access sufficient data. Finally he believes the industry needs to work with governments and regulators to facilitate investor access to these projects.
‘There needs to be public intervention and, for example, tax incentives/disincentives or regulations,’ argued Prache, amplifying the latter point. However on the first point he has concerns. ‘We are fans of the ELTIF, but it risks becoming a fund of funds-of-funds,’ he said of this vehicle which has found little investor interest since its launch over five years ago. ‘And it’s not only a question of investment strategy. It’s also the question of the distribution processes, which are much more costly in Europe than in the US,’ he added.
Tricky ESG path
On ESG, Cohen appreciates the growth and potential but is concerned that investors can tend to take an individualistic approach, which runs ‘the risk that we end up with a very fragmented industry, whereby it actually makes it impossible for investors to navigate.’ Data and analytics offer the best path forward he said.
Prache understands the challenge for the asset management industry and retail distributors. ‘Not only are you asked to be experts in finance, but now also in energy efficiency, greenhouse gas emissions and the rest. I hope the taxonomy with provide clear, safe advice.’ Yet he said it would be a risk to leave the responsibility for these choices to the end investor.