When interest rates rise, private equity tends to lose some of its momentum. In the investment world as elsewhere, there’s often no better way to see oneself than through the eyes of your competition. Mutual fund and ETF purveyor MFS’s global and Luxembourg heads sat down with Investment Officer recently to discuss their view of the role of traditional mutual funds.
“The bigger secular challenges the industry has faced over the last several years is the move to passive products, cheap, passive products relative to what it is that we do, as well as the move to alternatives in private markets,” said MFS CEO Mike Roberge.
Roberge was in Luxembourg recently to meet with finance minister Gilles Roth, hold European client meetings and celebrate the 100th anniversary of MFS’s 1924 launch of the world’s first mutual fund.
Luxembourg active ETFs
According to Michael Derwael, the head of MFS Luxembourg, Roth emphasised the importance of the Luxembourg financial sector, in part because it employs a significant part of the population.
Roth discussed his effort to make Luxembourg a player in the active ETF space. “It’s something we’re keeping an eye on, because we are moving in that space in the US,” said Derwael.
Beyond that, “the other thing, which I think is interesting to us, he wants to really favour and continue pushing forwards Luxembourg in terms of sustainable finance,” he said
Part of the DNA
“Sustainable finance is really part of what MFS does,” said Derwael. “It’s part of the DNA – that’s what we’ve been doing for 100 years in some way or form.”
“We don’t offer ESG-specific products,” explained Roberge via email. “We approach ESG factors as data that can be integrated into our overall research process from a standpoint of materiality.”
MFS has a small operation in Luxembourg, with about 20 staff in a small Kirchberg office which is the management company for what MFS calls “offshore funds”, by which they mean non-US based clients. “When we try to meet the needs of clients that are not US-based, the Luxembourg ones will be the ones we will push forwards.»
One of the office’s major roles is to interact with regulators, ensuring that “business people don’t get concerned about that.” He added: “we always say if you think you’re close to the line, you’re probably already over the line.”
Not at all concerned
Roberge commented on what he saw as a trend for “certain investment managers to try and penetrate retail markets around the world … to offer private assets in those markets.”
While conceding that the private market offer “clearly has implication for our business, to the extent that our clients are allocating away from the types of products that we offer,” Roberge struck an unworried pose.
“We are not at all concerned about a big penetration of private assets into our client base, just because our history has proven to us that clients really like value daily liquidity, and all of our products are offered with daily liquidity,” Roberge said.
Role of central banks
Roberge takes umbrage at the suggestion that this was because traditional mutual fund investments could no longer offer the kinds of return investors expect.
“I think it was more related to central banks running super low interest rate policy, and investors needing to make return somewhere else,” he said.
For a typical European client, he explained, “when cash yields were zero to negative” most portfolios had “no return associated with it.”
Less impetus for alternatives
“What you began to see is investors look to alternative asset classes as a way to make additional return,” said Roberge. “We see less pressure on that now, given that there is yield back in the fixed income markets.”
Roberge is conscious of the world’s geopolitical climate, saying it creates additional risk. “That’s hard to quantify, per se, but I think it does speak to needing higher risk premiums in certain markets, to compensate for those types of risk.”
Reflecting on his company’s actions in 1924, Roberge said it had “sprouted a multi-trillion dollar industry that has gone global, that has allowed hundreds of millions of people to save for financial security.” He explained that from an asset management perspective, “we allocate our client’s money to companies that we think most efficiently put that capital to work, thereby promoting economic growth around the world.”
He said he didn’t seek to criticise the passive industry, “But if you’re investing in a passive product, you’re investing in every company in the benchmark, and it’s not democratised in terms of how capital gets allocated.”
Further reading on Investment Officer Luxembourg:
- Luxembourg holds 54.6% share in cross-border funds
- European investors continue to pump money into sustainable funds
- ETFs growing twice as fast as Ucits funds, PwC study shows