European Fund and Asset Management Association Efama will host its 2022 Investment Management Forum on Thursday and Friday in Brussels. Director-general Tanguy Van de Werve spoke to Investment Officer about prospects for the industry, sustainable finance as the new normal, persistent pressure on costs, and the need for financial education.
After a record 2021, this year has proven to be a lot more challenging for the fund industry, although the sector continued to grow and there have been no liquidity problems, Van de Werve said. And the debate between active and passive management is about much more than generating alpha.
“2021 was the best year ever for the fund sector,” Van de Werve said, ”but due to high energy prices, Covid, the food crisis and the Ukraine crisis, 2022 will be a more difficult year. Looking at the funds sector, and excluding mandates, AuMs will be quite a bit lower than at the end of 2021, mainly due to market depreciation. As revenues of the sector largely depend on assets under management, the profitability of the sector will obviously also come under pressure.”
Efama’s top executive said fund managers have generally coped well with outflows and there have been very few liquidity problems, with the exception of some specific Russia funds that were frozen some time ago.
Passive and active ‘can coexist’
The well-known SFDR regulations have been a big challenge for asset managers, as there has been a lack of clarity on the classification criteria of Article 8 and 9 funds, according to Van de Werve.
“At Efama, we feel there have been three major developments this year. Firstly, the adoption of the new Eltif regulation, which incorporates increased flexibility and different asset classes. Eltif 2.0 will provide many new opportunities and give retail investors more access to private assets. Secondly, the SFDR regulation. Thirdly, the growth of ETFs and passive funds. This trend will continue, in our view. However, we emphasise that at Efama we do not see active and passive management in opposition, they can coexist.”
Three quarters of active managers have again underperformed passive funds this year, according to a recent Morningstar study recently published by Investment Officer, but Van de Werve is nuanced about this finding.
“Instead of measuring the performance of active funds against passive funds, I think you should measure the performance of active funds against cash deposits. If you look at performance before fees, you get a very different picture. A majority of actively managed funds then outperform their passive counterparts. The impact of total fees clearly has an impact on the performance. It is a building block approach. Performance is not always synonymous with alpha generation, it can also stand for low volatility, income generation, impact, inflation hedging and so on. It all depends on the investor’s investment horizon and objectives.”
Pressure on costs set to continue
Van de Werve thinks numerous asset managers will streamline and rationalise their offerings, especially after a challenging year like 2022. “However, I believe the number of funds and compartments will continue to increase due to the large number of ESG funds that continue to be launched. The demand for such funds remains significant.”
That brings us to the Total Expense Ratio, where Van de Werve notes that the TER of equity funds has fallen over the past eight to ten years. “Pressure on expenses is likely to continue increasing due to a combination of market forces, including the correction in the financial markets, which makes people examine these expenses more critically. Competition is significantly increasing, and regulators have taken note of this.”
Van de Werve also argued that you have to measure the TER against the quality of advice. “Comparing the TER of an actively managed fund against that of an ETF can be misleading, because then you start comparing advice with an execution-only product.”
‘ESG is becoming the new normal’
Recent years have seen the launch of numerous funds investing in green equities, clean technology, green and social bonds, and impact funds, and 2022 was no exception. This increases the risk of greenwashing, of which DWS was a woeful example.
“Again, I have to be nuanced. What we hear from our members is that demand for ESG products continues to grow, from both institutional and retail investors. This trend will not go away, partly because of climate change. ESG is rapidly becoming the new normal, which also represents a learning curve for the fund industry.”
‘Unintentional greenwashing’ as risk
Van de Werve also recognises that reclassifications for ESG funds are taking place.
“Article 9 funds were in some cases reclassified as Article 8 funds, as a result of guidance from the European Commission and Esma. When the criteria become stricter, asset managers start reclassifying their products. This is perfectly normal and shows that the industry is doing its utmost to comply with regulations. Deliberate greenwashing is something that a lot of asset management CEOs are very wary of. Unintentional greenwashing is a bigger risk in my opinion.
“The differences between products need to be explained very clearly so that investors do not mistakenly think their fund has a certain impact, and they do not end up being disappointed. This is why the role of distributors and advisers is so important for the end investor. they have to explain clearly what the E, S and G stand for.”
Focus on offering solutions
Finally, Van de Werve gave some thoughts on consolidation in the Belgian market. “That has been going on for a while. But there will always be a place for smaller and boutique asset managers. The sub-advisory model is useful in that respect. A vibrant asset management ecosystem is characterised by a number of players of varying sizes, each with their own characteristics, products and investment strategies. That is not specifically Belgian.”
Good advice is paramount, along with responsiveness to clients’ expectations, he said. Offering solutions versus products is essential. Digitalisation and technology will be a gamechanger. New products, players, services and processes will emerge.
“The pension gap in the EU is ever increasing, and the need for financial education and services is also growing. Therefore, our sector still has a promising future,” he concluded.