1

HOW CAN INVESTMENT MANAGERS TURN CHALLENGE INTO OPPORTUNITY? A snapshot of the key conversations that took place in Berlin at FundForum International 2017.

2

Finding returns as active gets more active: Responding to geopolitics, regulation, and diversification 2.0

Rising inflation – is it on its way? ........................................... PAGE 05

Re-thinking how to predict risk ................................................ PAGE 08

Managing risks and creating opportunities

in the MENA region and globally ............................................. PAGE 11

Beyond the headlines: uncovering the

opportunities in global fund flows .......................................... PAGE 13

Resetting the model in light of MiFID II ................................ PAGE 15

The growth of ETFs, Smart Beta, & Machine Learning: Transforming outcomes and costs in investment management

The future of index investing ................................................... PAGE 18

An introduction to factor investing ........................................ PAGE 20

Digitalisation of Asset Management:Strategies to drive scale and efficiency across the value chain

Asian innovation in financial

services is leapfrogging the west ............................................ PAGE 22

Driven by data ................................................................................. PAGE 25

Why transparency is the word at the centre of a global

governance revolution ................................................................. PAGE 26

Where’s the playbook for digital transformation? ............ PAGE 27

CONTENTS

3

WELCOMEYet again, it was great to see FundForum International 2017 becoming the three-day hub for 1400 of the world’s most successful, innovative and dynamic leaders in the global investment management community.

With larger numbers than ever jetting in from North America, Asia, Australia, Latam, MENA and of course Europe, CEOs, CIOs, PMs and business heads from the mega heavy-weight houses met with ambitious boutiques, disruptors and the Who’s Who of European fund buyers and distributors.

Our creative programme of knowledge leadership and transformative ideas drove

thousands of face-to-face conversations at the top level. Leaders came to do deals, build partnerships and get inspired by influencers from around the world.

In this eBook, we’ve provided a snapshot of some of the key conversations that took place on the ground in Berlin. From geopolitical risk and regulation, to ETFs and digitisation, here were the main conversations that are dominating the asset management conversation right now.

We’d love to hear your thoughts on the event, this eBook, or the big conversations. Until next year in Berlin!

JENNY ADAMS

EDITOR-IN-CHIEF,FUNDFORUM INTERNATIONAL

4

FINDING RETURNS AS ACTIVE GETS MORE ACTIVE: RESPONDING TO GEOPOLITICS, REGULATION, AND DIVERSIFICATION 2.0

5

RISING INFLATION - IS IT ON ITS WAY?

Rising inflation is the biggest near-term challenge we are facing.

That’s according to Dr Pippa Malmgren, Founder of DRPM Group and adviser to governments, who pulled no punches when she set out her view on the world at Monday morning’s first FundForum session in Berlin.

Global debt is a massive problem, and there are only four ways to solve it, she explained.

Option 1 was an Argentine “never going to pay it back approach”; option 2 was the Greek “I’ll pay it back later, but less”; option 3 was UK-style austerity; and option 4, the most likely, was through inflation.

Inflation in developed economies was looming on the horizon, she argued, despite the prevailing view of central banks.

You only had to listen to the conversation at street level, which was dominated by the rising cost of living.

Investors, then, need to carefully reconsider their investing strategies.

So where were the assembled panel – which featured some of the biggest players in active and passive investing – going to put their money?

People aged 70 now are as healthy as 50 year olds two decades ago. You will see entitlements change and evolve, and working careers change. That’s the way you get out of the debt.

6

FINDING YIELD

Jim McCaughan, Chief Executive Officer at Principal Global Investors, was quick off the bat to say that he agreed with Pippa – but only in part.

We were in a time of radical change, he agreed, and it was through this lens that investment decisions should be made.

But his lens wasn’t one of rising inflation, but rather one of diversification from traditional investments.

“The majority of the stuff we do now is stuff we didn’t do 10 or 15 years ago,” explained Jim.

“The closed system of liquid large cap is a futile place to be focussing on if you are an asset manager,” he stated, adding that they were gradually deploying funds into other areas, away from what used to be the heartland of the investment management industry.

That included investing in expanded capital markets – private debt, emerging markets, and high yield.

“Multi-asset outcome-orientated investments now dominate the retail and retirement market in the United States,” he said, “and it’s coming to the rest of the world.”

Michael O’Sullivan, CIO, International Wealth Management Division at Credit Suisse, felt that fx was particularly interesting:

“It’s the only asset class where markets are expressing view on politics,” he said, adding that they were long yen against the dollar as a regional safe haven in Asia.

Real estate was also an asset classes they had been active in this year.

Nick Samouilhan, Co-Fund Manager at AIMS Target Income Fund and Senior Multi-asset Fund Manager at Aviva Investors, argued that now was the time to switch yield generation into more growth-orientated income assets.

“What that means for us is a heavy tilt towards emerging market risk, whether equities, fx or debt,” he explained.

Frank Engels, Member of the Board of Managing

Directors at Union Investment Privatfonds, agreed with Pippa that inflation would rear its ugly head.

They sought protection through alternative risk premium strategies: “very liquid derivative-based strategies that have an absolute return character.”

They also looked to Europe, he added, which was “completely undervalued” relative to other regions.

“Political developments in Europe have seen it fighting back populism,” he explained. “This makes it an investable area again, and it’s valued at attractive levels.”

Eric Wiegand, Director of ETF Strategy EMEA and APAC at Deutsche Asset Management explained that, from the passive side, it was a move away from single bond selection to portfolio selection or market selection.

HOW WILL INFLATION PLAY OUT?

Tackling Pippa’s opening remarks, Jim disagreed with her analysis of inflation. Whilst he agreed that there was inflation in the developing world, he disagreed that this was the case in the developed world.

There would be social and demographic change that would allow governments to deal with their debt. Retirement, for instance, would become more of a process:

“People aged 70 now are as healthy as 50 year olds two decades ago. You will see entitlements change and evolve, and working careers change,” he said. “That’s the way you get out of the debt.

“I think inflation will be much more subdued. Technology and demographics are great deflationary impacts in the developed world.

“Persistent low interest rates are the central problem for retirement investing looking forward,” he added.

Michael agreed that we weren’t going to have an inflation scare in the developed world.

But what we had to worry about was growing credit risk, citing Italy and China as obvious examples.

But Pippa countered that an inflationary move from 1% to 2.5% would be materially very important to asset

7

managers, and that even a little inflation could create a big outcome.

THE EUROZONE

Switching topics, Pippa wanted to know how, with the Brexit referendum done and dusted, the French President installed and the UK election over, the Eurozone would now play out?

The “untalked about” issue, said Jim, was that the withdrawal of the UK would lead to a more unpredictable Eurozone – because the UK was historically aligned with Germany.

However, it now felt like a softer Brexit, he said, thanks to the recent UK election.

Michael said that the political volatility was – for the moment – confined to the anglosphere.

Whilst the arrival of Macron was positive, he hoped this

wouldn’t lead to “a zeal for the unification of everything.” The intermediate step was to finish the building project that is the Euro, he concluded.

Nick felt that it was now a crème brulee Brexit: it would look harder than it was. “Behind the scenes we will carry on like before,” he said.

“For the Eurozone, Brexit is a fantastic thing, because on many occasions the UK has been the one arguing against further integration. Now that the UK is no longer part of those discussions, they could forge ahead,” he argued.

Frank agreed, but warned that the fate of the Eurozone is now being decided in Rome.

“If the Italian election goes wrong, we should fasten our seatbelts,” he cautioned.

But Europe was still a good place to invest, argued Eric, and that wouldn’t change anytime soon.

WATCH INTERVIEW WITH:

PIPPA MALMGREN , FOUNDER, DRPM GROUP

PLAY VIDEO

Pippa Malmgren, Founder at DRPM group, deep-dives into how Mexico is the new China, Britain will be fine post-Brexit, digital borders in China, opportunities in data and more.

8

RE-THINKING HOW TO PREDICT RISK

We have to think about risk differently, that much is clear.

After all, as panellist Dr John Hulsman, President & Co-Founder John C. Hulsman Enterprises, explained at Monday’s FundForum Berlin, even the most seasoned experts had got it all wrong – from Brexit to Trump and everything in-between.

It’s clear that macroeconomic analysis is no longer enough. But what are the options?

EAVESDROPPING ON SOCIAL MEDIA

We heard from Jean Pierre Kloppers, whose company, BrandsEye, gathers opinion data through advanced sentiment analytics.

In other words, they analyse social media conversations to get a feel for the prevailing sentiment on any given subject.

And it works – BrandsEye correctly predicted Trump’s win.

“How people feel today influences what they do tomorrow,” explains Kloppers. “What we have been doing is measuring how people feel.”

“How people feel is what is now driving events,” he explained.

And he gave us an example. Two months before the US election, BrandsEye began to pick up both a pro-Trump and an anti-Clinton sentiment.

If you’re shocked by the Italian referendum, by the Dutch referendum, by Brexit, and by Trump, I would humbly suggest you need to revisit your view of the world.

9

“So we looked at the swing states, and predicted a Trump win.

“We got nine out of the 11 state predictions correct. It surprised us as much as anyone else. It showed us that social media had accurately reflected what happened in the vote.”

WILL IT REPLACE POLLS?

Polling has been getting it very wrong in recent years, but Kloppers doesn’t feel that polling is redundant just yet, though there are major advantages to the sentiment analysis.

“I don’t see this replacing polling, but it’s a critical source of data.

“The whole Trump thing happened in two weeks, and polls can’t react fast enough. Plus, the samples are too small,” he said. “No polling can cover the whole country.”

Kloppers asserts that what social media does is give emotion behind the facts.

In February, the company tracked how Americans felt about the US immigration ban and that famous wall. Only between 1% and 9% were supportive of the policy. While this might seem astronomically low, it revealed something very interesting.

“What it revealed was not that people didn’t support the wall anymore, but an underlying emotion that support for Trump was rapidly diminishing,” explained Kloppers. “We could see that he was losing support and that has played out.

“What social media does is it adds colour – and it’s a much faster way of getting opinions.”

THE RISK PROFESSIONALS

But what was the view of those in the business of predicting risk?

Hulsman can’t understand how so many geo-political risk analysts still have a job, when their predictions were so wrong.

“If you’re shocked by the Italian referendum, by the Dutch referendum, by Brexit, and by Trump, I would

humbly suggest you need to revisit your view of the world,” he stated.

But the issue wasn’t with the macroeconomic analysis per se, it was that risk analysts didn’t hang out with people that disagreed with them. They lived in an elitist bubble, which constantly confirmed their bias.

“You have to have rigour and humility, we called Brexit, we called the Dutch vote, we said 30% for Trump and we got laughed at,” he said.

“These things can be discerned if you talk to people you might not agree with, it’s socially difficult, but you have to do it.”

ARE BEHAVIOURAL ECONOMICS STILL RELEVANT?

Peter Brooks is Head of Behavioural Finance at Barclays, and put the conversation in the context of the world of finance.

“Behavioural economics gives you the ability to look at individuals. When you’re looking at social media these interactions that we all have are a potential source of data.

“But I don’t think they solve the problem. They can be used in a sensible way to help you understand some of the dynamics that are happening, but there is no grand central theory of behavioural economics that is going to say right this is the end result. There’s no one way of thinking about psychology that universally applies to everyone.

“At best, it might give you a data source and an edge. If you can provide that little bit of understanding you can make quite a big difference, but you’re going to be wrong on occasions as well.

The last word fell to Kloppers, whose platform could find a natural home in the financial sector.

“A lot of our work is trying to understand the customer journey – what affects customer satisfaction or dissatisfaction, and how we understand the reasons and the underlying business factors that influence those,” he explained.

And there were exciting developments in their work in the financial sector.

10

We’re data experts and we want to put that data in the hands of fund experts where the data will become very valuable.

For instance, they were building a fund tracker that could track how customers perceived the individual companies in a fund.

“If we can understand that, it gives the fund an indication of possible share price movements based on experiences their customers are having.

“We’re data experts and we want to put that data in the hands of fund experts where the data will become very valuable,” he said.

One of the most valuable aspects was access to the longer-term view, he said, ending with a note of caution.

“One of the most interesting things to track is long-term sentient shift, and that’s what catches most executives completely off guard.”

11

ARTICLE SPONSORED BY:

MANAGING RISKS AND CREATING OPPORTUNITIES IN THE MENA REGION AND GLOBALLY

2016 has demonstrated the resilience of the global economy. Global GDP growth at 3.0 and 3.5%, at its highest, since 2011. For 2017, we have seen more stable markets so far and expect a cyclical upturn in major economies for the rest of the year. The Fed , having seen strong growth in the US market, has started to raise rates, which should over the longer term lead to a healthier market with proper regards to cost of capital.

But there is still uncertainty going forward. Developed economies still need to push ahead with structural reforms, raise productivity and achieve higher growth, to put the global economy on a firmer footing. However, political will needed to undertake these structural reforms may not be present in the economies that need them the most.

Based on Boston Consulting Group’s research, the asset management industry has experienced growth in AUM of about 40 percent in the past decade from US$52 trillion in 2007 to US$71.4 trillion in 2015. But growth in 2015 has essentially remained flat, rising just 1%, after growing 8% in 2014. The bright spots remain in developing market, where demographics growth, growth potential and rising middle class provide the impetus for greater momentum.

Against this backdrop, developing economies continue to provide the growth momentum. Today, developing

markets accounts for 40% of global GDP. By 2050, this figure will rise to represent 60%, with Asia and Africa being important growth engines .

Closer to home, Abu Dhabi is strategically located in the centre of a fast growing Middle East and African region, which will account for more than 50% of the world’s population growth from now till 2050. There are huge opportunities to be tapped, greater demand for more infrastructure and financial services to address the needs of the rising middle class in the region. How do we play our part, to identify opportunities and channel the resources, innovation and investments to this region and the other emerging markets?

A well-developed financial system improves the efficiency of financing decisions, bringing about optimal allocation of resources from those that have them, to those that can make use of them to generate returns, and directing assets to higher growth areas in an economy that ultimately lead to a higher growing economy.

A sound and robust financial services sector is not only an engine of growth, but supports growth more widely among the different sectors of the real economy. It brings about efficient allocation of capital, spread risks, enables innovation to support consumption, growth, and production in the real economy.

12

To facilitate the flow of investments, ADGM launched a comprehensive suite of funds and REITs regime that saw the fastest pace of new funds creation in the region in ADGM in 2016 and the momentum continues into 2017. Local and international fund managers can establish fund structures deploying an extensive suite of corporate vehicles, limited partnerships, trust vehicles, including Sharia-compliant funds. At the same time, start-up and boutique fund managers can efficiently stablish within ADGM.

There has been a growing realization among asset managers and asset services firms such as custodian banks that more have to be done to be aligned with the technologically-charged investment environment and changing investor priorities and behavior. Asset managers and technology providers increasingly see each other as potentially attractive partners. In January, BNP Paribas Securities Services took a minority stake in a RegTech start-up. Schroders working to kick-start its digital transformation, e-fund reporting firm Kneip appointed former Skype executive to drive their digital push. Many FinTech firms have begun tailoring their analytical tools and approaches to the asset management sector, and many investment firms have begun approaching FinTech to access needed digital expertise quickly and effectively.

Robo-advisers are transforming the asset management industry. PwC has indicated that blockchain can potentially lead the next wave of digitization in asset management. Santander in its Fintech 2.0 report envisaged that banks could save as much as $15 – 20 billion annually by eliminating central authorities and bypassing slow, expensive payment networks, which augurs well for Blockchain adoption.

We are in a new investment climate, which requires a greater need to take calculated risks; but asset managers need to do so in the knowledge that they have the backing of their regulator, so that they can work in harmony to the greater good of their investors, acting as responsible guardians of the wealth, but

promoting sufficient liquidity to prevent the system from becoming moribund. The solution lies in the right approach to technology and regulation.

Since March 2016, ADGM has developed both a regulatory as well as growth strategy to foster and nurture FinTech advancement and to establish an inclusive FinTech ecosystem in Abu Dhabi so as to serve the needs of our economy and the wide MENA region well into the future.

ADGM launched the first FinTech regulatory framework to support activities and growth and, and created the first regulatory sandbox, known as Regulatory Laboratory, in November 2016 in the region. We adopt a customised approach, tailor and apply the rules and regulations to address possible risks, as opposed to subjecting innovators to the whole suite of requirements from day one.

Recently, ADGM also signed MOUs with Singapore, a key FinTech hub, in creating the first FinTech bridge for the region. It helps our respective Fintech players to gain greater access to markets, capital and regulatory recognition. It also provides a platform for us to work with Singapore in working on joint FinTech initiatives.

Financial centres have a role to play in the advancement of the global investment industry and the generation of FDI. As an IFC, ADGM will continue to play its part in attracting business opportunities and investments to Abu Dhabi and the UAE economy, invest in the opportunities in the region, and innovate to stay globally competitive and relevant.

ARTICLE BY:

STEVE BARNETT, HEAD OF FINANCIAL CENTRE DEVELOPMENT AT ABU DHABI GLOBAL MARKET (ADGM)

13

BEYOND THE HEADLINES: UNCOVERING THE OPPORTUNITIES IN GLOBAL FUND FLOWS

On the surface, the barometer for today’s global fund management industry is far from set fair: in every year post crisis, net inflows have failed to reach 2007 levels; investors have failed to demonstrate prolonged confidence; and downward fee pressures continue to mount.

But despite these storm clouds, there is reason for optimism. Only measuring net flows, fails to recognise the velocity of money within the industry. Global 2016 net inflows totalled a positive but meagre €0.5T. But summing the funds that had net positive inflow in

ARTICLE SPONSORED BY:

Rank Manager Active Passive Total

1 Vanguard 1,400 2,766 4,166

2 BlackRock 770 1,458 2,227

3 Fidelity 1,943 277 2,220

4 Capital Int 1,372 - 1,372

5 JPMorgan AM 889 13 901

6 State Street 125 585 711

7 T Rowe Price 660 31 691

8 Fr Templeton 535 0 536

9 Invesco 358 124 482

10 PIMCO 423 8 431

Source: Broadridge Global Market Intelligence

Source: Broadridge Global Market Intelligence

Figure 1: Top 10 Global Mutual Fund and ETF managers

Figure 2: Global long dated AUM, the switch from active to passive

2016, gives a record total of €6T. To put this €6T into perspective, it is almost equal to the total fund assets of the two industry giants of BlackRock AND Vanguard combined. Or put another way, almost a fifth of the fund industry’s assets changed hands in 2016.

This churn of money between funds represents significant opportunity (and on the flip side threat) to asset managers. So what puts managers on the right side of this churn?

Data from Broadridge’s Global Market Intelligence platform, which has tracked 80,000 ETF and mutual funds globally for more than a decade, points to three key factors.

Firstly, and unsurprising to most: the great switch from actively managed mutual funds to passive mutual funds and ETFs has continued at an unrelenting pace. There has been a great structural change in the industry: with less than 10% of fund managed on a passive basis a decade ago, compared to over 20% today. To achieve this fundamental shift, ETFs have expanded at an incredible average growth rate of 17% per annum over the past decade, with index mutual funds also posting double digit growth, and on the flip side active funds lagging at just 2%.

Global AUM€16.8T €32.8T

Organic Growth CAGR

ETFs 17%

Index MFs 10%

Active MFs 2%

Total 3%

2007 2017

92%

5%3%

79%

10%

11%

Mutual Fund and ETF assets by €B Mar 17

14

Secondly, the rise of mixed assets funds has been notable. With uncharacteristic correlation between asset classes, yields remaining stubbornly at all-time lows, and general investor confidence ebbing, mixed assets seem to answer investors’ question of ‘what should I do with my money?’. Devolving the investment decision to the new wave of mixed asset funds that promise stability, diversification and dynamic asset allocation has had great appeal. Demand for these mixed asset products really took off from 2010, with assets growing from €1.2T in 2010 to €3.1T in 2017 with net inflows of almost €1T over the period.

And thirdly, despite the drive to passive, there are bright spots to be found in the actively managed fund market. Whilst the mediocre, benchmark huggers of the active world have struggled, managers with a clear value proposition, a strong investment story, and an outcome that resonates with investors have managed to attract strong inflows. In the past year alone in the actively managed space, 261 active funds have seen inflows

of over €1B. An enduring theme in the active space is income, which plays out across asset classes - with bond income funds showing enduring strength and dividend and equity income funds remaining a bright spot in the active equity outflow bloodbath.

Managers who nimbly adapt to play to these three factors will be well positioned to take advantage of the opportunities presented by the changing investment landscape. For a deeper dive into stories behind the headlines please talk to us at global@broadridge.com or visit http://go.broadridge1.com/GDI.

ARTICLE BY:

STEPHANIE CLARKE, SENIOR VICE PRESIDENT, GLOBAL MARKET INTELLIGENCE, MUTUAL FUND & RETIREMENT SOLUTIONS AT BROADRIDGE FINANCIAL SOLUTIONS

 

Secondly,   the   rise   of   mixed   assets   funds   has   been   notable.   With   uncharacteristic   correlation  between  asset  classes,  yields  remaining  stubbornly  at  all-­‐time  lows,  and  general  investor  confidence  ebbing,  mixed   assets   seem   to   answer   investors’   question   of   ‘what   should   I   do  with  my  money?’.    Devolving   the   investment   decision   to   the   new   wave   of   mixed   asset   funds   that   promise   stability,  diversification  and  dynamic   asset   allocation  has  had  great   appeal.    Demand   for   these  mixed  asset  products  really  took  off  from  2010,  with  assets  growing  from  €1.2T  in  2010  to  €3.1T  in  2017  with  net  inflows  of  almost  €1T  over  the  period.  

   

-­‐

0.5  

1.0  

1.5  

2.0  

2.5  

3.0  

3.5  

2010 2011 2012 2013 2014 2015 2016 2017

Mixed  assets  -­‐ Assets  and  Cumulative  flows  €B

Assets Cumulative  net  inflows

Figure  3:  The  rise  of  the  Mixed  Assets

Source: Broadridge  Global  Market  Intelligence

Figure 3: The rise of the Mixed Assets

Source: Broadridge Global Market Intelligence

Mixed assets - assets and cumulative flows €B

15

RESETTING THE MODEL IN LIGHT OF MIFID II

The Markets in Financial Instruments Directive II (MiFID II) is about to become very real for the asset management industry, and many of those who attended FundForum in Berlin are in the final stages of readying their compliance processes.

At the top of the list of concerns for the asset management industry is the inducement ban under MiFID II. Many banks and insurers – who dominate distribution in the EU – are likely to limit the number of fund managers they work with.

Jamie Hammond, head of the EMEA client group at AllianceBernstein, said distributors would be reticent about answering questions as to why they are giving more business to certain managers over others, especially if the rebates are different.

There is already precedent around inducement bans. The UK introduced the Retail Distribution Review (RDR), which banned inducements, leading to a sharp drop in ordinary investors paying for professional advice.

“The RDR left a significant advice gap. A lot of people are not getting great counselling about who to invest in,” said Alexander Schindler of Union Asset Management Holding.

Rules such as RDR and MiFID II are generally forcing end clients to invest in cheaper products, such as passive funds.

Regulators including the UK’s Financial Conduct Authority (FCA) have made their displeasure about active management costs known, demanding an

The RDR left a significant advice gap. A lot of people are not getting great counselling about who to invest in.

16

explanation why fees have not fallen. Many in the industry saw this as a not too veiled sign the regulator wanted more cash to flow into passives.

Robo-advice has also been one of the big winners from bans on inducement and recent comments from the FCA. Robo-advice tools dominated a number of sessions at Fund Forum, and the asset class is clearly growing. While nobody at Fund Forum is kidding themselves that active managers are flying, there is nervousness that a market correction could expose passive fund investors to significant losses.

Euan Munro, chief executive officer at Aviva Investors, told attendees that investors were increasingly moving into cheap index funds. It is clearly difficult to predict how an active manager will perform in a downturn, but it is pretty obvious what will happen to an equity index tracking product if markets go south.

WATCH FULL DISCUSSION:

PANEL,RESETTING THE MODEL IN LIGHT OF MIFID II

PLAY VIDEO

But what else was discussed at Fund Forum? Many feel that target market rules will lead to reform of sales and marketing at asset managers. The regulators want fund managers to dig deep and identify who the target client is for their products to prevent people being sold investments that do not align with their risk profile.

Distributors will of course need to send client data to the managers so they can confirm whether products are being sold to the right people. In other words, managers are going to stop adopting a one size fits all approach to sales, and start selling products that are more customised to the target market. This is likely to add to complexity, but it could actually result in more net sales if managers become more sophisticated at identifying buying trends in their target market and manufacturing products based on those changes.

Julie Patterson, Head of Asset Management, Regulatory Change at KPMG UK led a panel discussion about the implications of MiFID II with some of Europe’s top investment leaders at FundForum International.

17

THE GROWTH OF ETFS, SMART BETA & MACHINE LEARNING: TRANSFORMING OUTCOMES AND COSTS IN INVESTMENT MANAGEMENT

18

THE FUTURE OF INDEX INVESTING

Although still a relatively small part of the investment universe, there is no doubt that exchange traded funds (ETFs) are changing the nature of how portfolios are managed.

Mark Wiedman, Senior Managing Director, Global Head of iShares and Index Investments at BlackRock told FundForum about the trends that were worth noting.

“Exchange traded funds aren’t particularly interesting,” he suggested. “What is interesting is how clients are using them in portfolios.

“It’s used as an investment vehicle,” explained Mark. “It’s an investment tool that offers an index exposure, and it’s low cost.

“It’s a security, it’s a way to trade. You’ve taken this bundle and put it up on the exchange, where it offers price transparency and secondary liquidity – you don’t need to go through a bank balance sheet.”

“ETFs are exploding the concept of active versus passive,” he said. “All portfolios are active, and in fact, the people who use ETFs are active managers.”

VALUE PROPOSITIONS ARE CHANGING

So what impact did ETFs have on the value proposition that wealth managers could offer to clients?

“Choice is important,” stated Philip Watson, Managing Director, Global Head of Investment Lab at Citi Private Bank.

“ETFs are building blocks - they facilitate, they provide a choice for clients to express particular exposures. Fundamentally, they are about expanding our value proposition,” he said.

According to Jan-Marc Fergg, CFA, Global Head of Wealth Products, Services & Insights at HSBC Retail Banking & Wealth Management, clients were becoming less interested in the products themselves.

“Clients are moving away from a product by product, feature by feature discussion and instead focussing on what their objectives are. They are less interested in understanding the engineering of a product; they are interested in the outcome of investing in it.

ETFs are exploring the concept of active versus passive. All portfolios are active, and in fact, the people who use ETFs are active managers.

19

“What’s also important is how we serve them,” he added. “Digital support, online, and robotype advisors is where we are heading.”

Mark Le Lievre, Head of Content Management, Investment Products and Services (IPS) at UBS Wealth Management concurred, added that the nature of the business is changing.

“A key part of our value proposition lies in the use of technology to drive targeted, appropriate, customized advice to specific clients,” he explained.

“And both active and index-driven products are key to that,” he said.

WHAT DO THEY WANT FROM ASSET MANAGERS?

To conclude the session, all three put forward some ideas on what they now expected from their asset managers.

Mark’s number one request was to be brought into the fold early on. By brainstorming on products, he argued, they could bring their assets to bear on new funds.

Jan-Marc added two further requests;collaboration and fair value.

“The closer you are to us the better. You need to understand the needs of our clients,” he said. “Price is also important, and should reflect the product.”

Philip felt that there was a significant appetite for more niche and thematic strategies, and that working with asset managers to concoct and meet that appetite was where a fruitful partnership lay.

But Mark gave the most emphatic plea:

“I want to hear from managers who have clear strategies and can deliver a view.

“I want to hear from those who can differentiate themselves in some way. I don’t need another US large cap equity manager.”

WATCH RELATED DISCUSSION:

PANEL,THE GROWTH OF ETFS AND THEIR OPPORTUNITIES AND RISKS FOR THE MARKET

PLAY VIDEO

20

AN INTRODUCTION TO FACTOR INVESTING

Factor ETFs are getting a lot of investor interest. Smart beta funds attracted USD 24 billion of new investment globally in the first quarter of the year, a 2000% increase compared to the same period last year, according to ETFGI. ETFGI also reported that smart beta funds focusing on equity factor exposures had the strongest inflows of all smart beta in the first quarter.

The US is taking the lead with institutional investors and advisers starting to use factor investing more frequently.

WHAT IS FACTOR INVESTING?

Traditional asset allocation is done on the basis of diversification across asset class categories and geography. The financial crisis in 2007/2008 however demonstrated that that model of diversification has flaws as asset classes that had previously been relatively uncorrelated all fell at the same time.

Attempts to come up with a better framework identified a series of fundamental factors that provide superior insight into the risk and reward characteristics of groups of securities. Take the quality factor, for example. This starts from the basis that the application of certain filters to rank companies on metrics such as return-on-equity, debt-to-equity on the balance sheet and earnings variability can produce a ranking of companies based on the quality of their balance sheet, and that weighting in favor of those higher quality companies increases the chances of outperforming the market overall over the long term – with the market performance measured in the traditional way using market capitalisation.Research shows that long positions in these factors can produce superior risk-adjusted returns in the long term, which is why factor ETFs are increasingly being used for long-term strategic portfolio construction.

ARTICLE SPONSORED BY:

USING FACTORS TACTICALLY

One area of current development is working out how factors can be used tactically in the short term by creating methodologies to semi-actively manage portfolios of factors.

One way of doing this is to assess which factors do well at particular times in the business cycle, then overweighting the portfolio towards those factors. Our current research efforts are directed at developing a factor assessment framework that breaks down individual factor performance to facilitate taking a view on which factors are likely to outperform in future.For example, analyzing the fundamentals of the value factor tells us that at the moment value as an investment factor is trading at a discount to its benchmark on a long-term basis. We can also see that the valuation for minimum volatility is trading at a premium to its benchmark on a long-term basis and has been range-bound for the last few years.

Building up a picture of factor exposure performance provides the basis for asset managers and others to potentially create semi-active portfolios of factor exposures, and therefore potentially find an active role in an investment world that is increasingly turning towards index products.

At Deutsche Asset Management we have recently launched a formal quantitative framework that aims to provide such insights into factor performance. It is proving popular, and is generating a lot of interest from sophisticated investors.

ARTICLE BY:

VINCENT DENOISEUX, ETF HEAD OF QUANTITATIVE STRATEGY, DEUTSCHE ASSET MANAGEMENT

21

DIGITALISATION: BUSINESS TRANSFORMATION STRATEGIES TO DRIVE SCALE AND EFFICIENCY ACROSS THE VALUE CHAIN

22

ASIAN INNOVATION IN FINANCIAL SERVICES IS LEAPFROGGING THE WEST

In the late 90s, as eBay and Amazon were enjoying phenomenal growth, Western analysts dismissed the idea of a Chinese version.

There was little internet access in the country, hardly anyone used credit cards, and people didn’t trust each other. Ecommerce couldn’t take off, even if it wanted to, they reasoned. Not only that, but all the internet experts were in Silicon Valley, weren’t they?

We now know how wrong that assumption was.

In 1999, as the internet bubble was about to burst, Chinese entrepreneur and former teacher Jack Ma founded Alibaba, an online marketplace based in China. It would become the largest e-commerce market in the world.

What started as an idea to bring SMEs together to trade in end-to-end transaction platforms over the internet, soon scaled up to serve consumers.

During a single day in 2016, $17.8bn worth of products were sold through the website – eclipsing US sales on Black Friday and Cyber Monday combined.

The vast majority of those sales, 82%, took place on mobile devices

But if you’re wondering how this is relevant to FundForum, where the key interest is really in fintech, note that the two ideas – ecommerce and fintech – are inseparable.

Developed countries and developing countries require different types of business models.

23

THE RISE OF ECOMMERCE IN CHINA

Can you imagine walking into a Starbucks here in Berlin and being told that you can’t pay for your cappuccino with cash? asked Porter Erisman, former Alibaba Vice President, author, and presenter of a fascinating session on Asian financial innovation at FundForum.

Everyone knows about the Chinese transformation, the rise of the middle class, the urbanization of China, and the growth in wealth. But do they know that China is now the home of ecommerce?

In China, some shops have stopped accepting cash – because everybody pays through their mobile phone.

“China really has leapfrogged to a new fintech environment that is even beyond the West. It’s becoming a cashless society,” states Erisman.

And it’s because, in this fast-changing country, people are much more ready to accept technological transformation that we might otherwise have assumed, he adds.

Erisman spent eight years working closely with Ma, and says that the lessons of the rapid rise of fintech and ecommerce in China can easily be applied to other developing economies.

YOU CAN’T CUT AND PASTE WEST TO EAST

Chief among those lessons is the fact that you can’t cut and paste a western approach to ecommerce.

While German internet company Rocket Internet was successful at emulating US business models, the same can’t be done in emerging economies, stated Erisman.

Developed countries and developing countries require different types of business models.

Jack Ma employed the same innovative and hard-working spirit of the Valley, and positioned Alibaba as a global website.

But he also understood his market.

“What he understood is that, in Asia, people would rather have their own company than have a smaller role in a big company,” explains Erisman. “And it was this SME spirit that created the massive opportunity for Alibaba.”

Alibaba became a hugely successful trading community for SMEs, so Ma turned his attention to consumers and created Taobao.com.

Taobao.com is China’s eBay. But unlike eBay, which started as a market for collectables, Taobao capitalized on the millions of small retailers who just wanted a shop from which to sell their product.

Analysts assumed that, because the cultural sensitivities in China, particularly regarding trust among strangers, ecommerce wouldn’t work here.

But Ma already understood that, and added a conversational feature to the site. Buyers and sellers could chat before they committed to the purchase.

This human approach was also applied to Alipay, Alibaba’s payment system.

Knowing that people needed an element of trust within the system, he added an escrow account between buyer and seller – unlike Paypal, which goes from one straight to the other.

“This simple tweak is what allowed Alipay to take off, particularly through smartphones,” says Erisman.

“People just found it easier to pay digitally,” he states. “Especially when the smartphone came along. The card system never took off in China because it took the banks so long to integrate their systems,” he says.

FINTECH IN CHINA

Ma’s latest sights are set on Chinese banks, says Erisman.

“There are big opportunities for fintech in banks in China,” he muses.

“Typically banks have served two masters – the Government, and state-owned enterprises. Consumers have come a long way behind. As a result these banks are massively inefficient,” he explains.

24

Alipay is now Ant Financial, and is currently the fifth largest bank in China, involved in everything from P2P lending to wealth management to insurance.

The wealth management aspect is particularly interesting. Through Alibaba, Ant Financial has access to millions of SMEs, to whom they can target wealth management products, says Erisman.

And he thinks that robo-advisors will take off in China: “They are so new to the idea of wealth management and have embraced digital so well that robo-advisors will be very popular,” he argues.

China now has eight of the 27 fintech unicorns, says Erisman.

China’s journey is being repeated already, he says, in India and south east Asia.

But what about the opportunities for those in the room at FundForum?

It was simple, said Erisman.

“Ecommerce and digital will be the core of how things are done in developing markets. By tapping into that, you will have access to a whole host of potential investors with money in their hands.”

WATCH INTERVIEW WITH:

PORTER ERISMAN, FORMER ALIBABA VICE PRESIDENT AND AUTHOR, ALIBABA’S WORLD

PLAY VIDEO

Former Alibaba Vice President and Author, Alibaba’s World, Porter Erisman, discusses change and consumer behaviour that comes with it.

25

DRIVEN BY DATAARTICLE SPONSORED BY:

Anyone doubting the scope for digital technology innovation to challenge traditional investment management processes and business models need only look at the high-profile presence of fintech-related sessions on this year’s FundForum agenda.

Conference sessions and column inches are being filled with claims about the features and benefits promised to portfolio managers, financial advisors and end-clients. But the full potential of new apps, algorithms and big-data analytics can only be realised through a fundamental re-structuring and re-allocation of investment managers’ IT resources.

Many investment managers are already re-skilling, re-tooling, and re-purposing their IT departments. Overwhelmingly, the aim is to secure access to the skills and technologies that will be needed to deliver new products, embrace new service models and enter new markets. The need is arguably urgent. At the same time that margins on existing services are being squeezed by changing competitive dynamics, overall budgets are under pressure from higher regulatory costs, due to risk management and reporting requirements, for example.

In terms of IT strategy, we see asset managers re-directing their human and financial resources to where they can add most value to the client. This means shifting them away from oversight of the existing technology ‘stack’, focusing instead on developing partnerships with third-party vendors and developers to assemble a suite of solutions and tools that can deliver services faster, cheaper, and with higher quality than today.

While proprietary tools and capabilities will remain critical to competitive advantage, there will be less

emphasis on building and / or owning the underlying services and capabilities, especially those that are largely invisible and undifferentiated to the end-user.

Integral to this re-orientation within IT departments is the revamping of the existing technology infrastructure to enable asset managers to transfer, capture, store and analyse huge volumes of structured and unstructured data.

Data management is critical to asset managers’ efforts both to harness the power of digital innovation to meet clients’ evolving needs and to achieve cost-effectively regulatory compliance. But legacy platforms and networks are not necessarily structured or coordinated to support the levels of enterprise-wide data consistency and mobility that will be required. Already stretched to the breaking point, some legacy systems could go into meltdown if asked to support the data flows that are the lifeblood of today’s digitised tools and services.

The future direction was laid clear in a recent survey of senior data management executives at European and US investment management firms commissioned by BNY Mellon’s Eagle Investment Systems. Almost 90% said a strong data management foundation would improve operational risk management, while around three-quarters said it would support better decision making. But two-thirds said legacy technology was a significant barrier; 49% cited data silos. With the majority asserting that data quality and governance were critical to business transformation, it is not surprising that 47% were exploring managed services to enable better data management.

As effective data management is increasingly recognised as a key enabler, investment managers are weighing their options, often looking for third-party support. However, the increasing maturity of managed services offers the opportunity not only to outsource management of core IT infrastructure but also to tap into third-party tools and capabilities more effectively, including data management services. Put simply, managed services offer a shortcut to a data-driven future.

ARTICLE BY:

SAMIR PANDIRI, CEO GLOBAL ASSET SERVICING , BNY MELLON

26

WHY TRANSPARENCY IS THE WORD AT THE CENTRE OF A GLOBAL GOVERNANCE REVOLUTION

The credit crisis in 2008 is often thought of as being the catalyst for change and for new regulations in the financial services sector, but on face value, very little has actually changed in this time. These regulations on the whole formalised and standardised practices that were already in place for many organisations. One thing that has changed significantly in the past decade, however, is the way that we are using technology to put these procedures into place.

The use of board portals is now commonplace and widespread according to many people at the Fund Forum conference, and have been welcomed and embraced in the new spirit of good governance. The ability to join up your board portal with your entity management system is the next step in the process, allowing you to manage compliance across different jurisdictions, and beginning to ease the burden on the pressured role of the company secretary.

Good governance in 2017 means knowing what you are and why you exist and having internal values and behaviours that are perpetuated externally across the world. But have boards gone far enough to translate these values to the rest of their organisations and create transparency internally? Recent research conducted by eShare suggests otherwise.

Knowing who is saying what at a senior level, is important for both compliance and for establishing good behaviour across an organisation. Polling employees in the financial services sector, we discovered that 30% of employees were not able

ARTICLE SPONSORED BY: to name a single member of their board. This staggering figure highlights a disparity in boardroom visibility between its board and employees.

Communication down form the boardroom appears to be something that is handled better in the FinServ sector, with 67% believing that decisions are clearly communicated throughout their organisations. However, those decisions themselves may not actually be helping propel the organisation forward. 44% of employees said that their board is out of touch with day-to-day operations.

This is something that needs improvement according to eShare CEO, Alister Esam: “Two key elements of good governance and a strong corporate culture are the visibility of the leadership team and a strong employee understanding of what that company stands for and is aiming to achieve. But many boards are not delivering on this, and they must do more to demonstrate transparency, to engage better with their employees and communicate their vision more effectively.”

By ensuring the board are in touch with the organisation they run, and the grass roots can understand the vision their board have, you are fostering a culture that focusses on long-term sustainable growth for everyone as well as making good governance easier. The first step on this road is to ensure that meetings throughout your organisation are well organised, structured and have clear goals and auditable actions.

Utilising all of the technology available to your organisation, helps promote good governance through your whole organisation and helping to drive your business forward to a more prosperous and successful future.

27

WHERE’S THE PLAYBOOK FOR DIGITAL TRANSFORMATION?

The Future Finance Forum at this year’s FundForum in Berlin started off with that most misunderstood and sometimes contentious of subjects – digital transformation, culture and leadership.

In the 21st Century as consumer behaviour, corporate structures and even geopolitics are being reshaped by digital forces – how can companies formed and established during the analogue age (or even before that) respond and survive in the digital era?

Samantha Ghiotti, a partner at the Anthemis Group, who served as moderator and keynote speaker for the session, came out with the definite answer for 2017. “The playbook hasn’t been written.”

During her keynote, Ghiotti outlined three key areas companies need to be aware if when embarking on digital transformation.

One was digital stewardship, which looks at bringing people into the organisation who have deep sector knowledge of new ways of thinking and working.

Culture is the operating systems of an organisation. If it runs well, an organisation runs well.

28

This new mind set includes lean methodology, design thinking, a willingness to hack and experiment with projects.

A second area concerned creating a customer-led culture. According to Ghiotti, “Culture is the operating systems of an organisation. If it runs well, an organisation runs well.” Unfortunately, many traditional financial firms are running a culture no more advanced than “MS DOS”, she added.

The third area was what she described as followship – which means getting an organisation to rally around and follow the ‘best answers’. She warned the current and future digital leaders that the ‘best answer’ may not be one that originate with them.

Ghiotti followed her keynote with a panel of leaders to continue the discussion on digital transformation. Some of the panel went no further than to comment that ‘digital transformation is important.’ However, given that the asset management industry is often seem as lagging behind in digital adoption, even within the financial services industry, the debate needed to go further. And several of the panellists did dig deeper.

Fiona Frick, CEO Unigestion spoke about the holy trinity, which any organisation seeking to instil transformative and entrepreneurial culture within their organisation, needs to understand. That holy trinity included ‘allowing projects to fail’; relying on data to fuel decision making’ and ‘initiating a feedback loop to learn and explore each project’, she said.

The key to any project at the firm, according to Frick is three fold:

• Does it have a purpose?• Is it good for clients?• What worked in the past, may not work in the future.

Nuala Walsh, global head of marketing and client relations at Standard Life Investments, again, brought the conversation back to the customer. As an industry, asset managers are focused on change, “how the markets are changing’, for example, but “we are slow to change as an industry,” she said. “As an industry, we are not client-led - start with the clients.

Laurence Wintermeyer, CEO of Innovate Finance, reiterated Ghiotti’s assertion that the digital playbook has yet to be written. However, as CEO of a FinTech member organisation, Wintermeyer has witnessed many financial services organisations who are seeking to write that playbook. He mentioned the Barclays Bank association with the TechStars accelerator and the RISE incubators, as well as Lloyds Banking Groups digital and innovation lab, as two examples in the UK that are currently adding chapters to that playbook right now.

The panel ended with a discussion on the challenges in enacting a digital culture – what failed?Walsh warned against the assumption that everyone will have the same definition of what is digital. Most of the panel agreed that education, training and communication were key to get all areas of the business and various skill sets in each organisation on the same page.

According to Walsh, any digital playbook, once it is written, should include a digital definition that lets people understand:

• What is it?• What isn’t it?• How long will it take?

The digital transformation playbook is currently being written. The fund management industry should seek to add best practice to the first edition, rather than wait for the publication.

ARTICLE BY:

LIZ LUMLEY, GLOBAL INDEPENDENT FINTECH COMMENTATOR

29

#FUNDFORUM

WWW