Ladies and gentlemen, dear members, dear colleagues,
a) Thank you part
Thank you all for being here at the EFAMA Annual General Meeting in Bucharest.
I would like to thank AAF, the Romanian Association of Asset Managersfor organizing and hosting such a remarkable event.
I would also like to extend my sincere thanks and appreciation to all EFAMA members, the Board of Directors, the Management Committee and the entire team at EFAMA, for their constant commitment and efforts in serving our members, the industry and investors.
b) Review of last year statement
When I was elected President in June last year, I addressed the challenges facing asset managers. I outlined the experience we had gained following a debt and deleveraging crisis, a competition and political crisis, as well as a crisis of confidence.
This time last year, three major threats stood out:
A major concern for EFAMA was the unprecedented number of regulatory initiatives being imposed on the asset management industry. There are over 30 different regulatory initiatives underway that are likely to affect our sector, ranging from AIFMD and UCITS V generate in Brussels, to Fatca and Dodd-Frank emerging from the United States.
The second major threat I highlighted was a lack of a level playing field for financial products and the third came from the erosion of our margins. Despite average AUMs reaching pre-crisis levels, overall industry profit pools remained 20 percent below 2007 highs.
In order to tackle these key issues that EFAMA view as integral to the future of the asset management industry, I outlined the four priorities of my presidency:
- EFAMA, with the full support of the industry as a whole, needs to stand as a strong and credible voice at EU level
- A long-term investment framework should be developed to enable companies and governments to respond to new economic, social and environmental challenges
- The changes which constantly redefine the financial industry have created new requirements as well as new opportunities for institutions and market based intermediation to finance investments. In this challenging environment, it is clear that Asset Management is part of the solution, not the problem!
- Finally, maintaining and reinforcing investor trust, as without it we cannot hope to attract savings and increase assets under management. Investors are the bedrock on which will develop our solutions.
1st Part – View on the future of Asset Management
With these objectives in mind, it is important to review how clients are adapting to our new environment: regulatory developments and altered expectations following the financial crisis are just the beginning.
a) Overview in terms of global assets
The asset management industry achieved a second year of substantial growth after the welcome respite observed in 2012. The value of global AuM rose to a record high surpassing the pre-crisis level. AuM growth is still driven largely by market rallies, which have increased the value of securities rather than net cash flows. Net cash rose by 2% in 2012 and by 3% in 2013. 2013 was the strongest year of growth since the crisis but still far from the 6% growth in the years preceding it.
The financial crisis was a major economic event but can be seen as a temporary setback in the long-term growth of assets managed by the industry. Various studies predict a rise to around $100Tn by 2020, equivalent to a compound growth rate of nearly 6% in the coming years. Global wealth is increasing and will lead to further investment. There is a strong correlation between nominal gross domestic production and overall AuM growth in the fund industry. However, even if emerging markets catch the larger part of this growth, Europe will see an average growth of 3% in the next years.
b) Overview of asset class trends
Asset growth is returning but it will be invested differently. Investors’ expectations have changed and they have new needs that must be met. For example, despite the broad recovery of AuM in Europe, there where 30% of managers that lost 5% or more of their assets. The continued fast growth of low cost beta and alternative solutions confirms a structural shift in the market. The increased popularity of these asset classes will continue to outpace growth and squeeze the market share of traditional, actively managed, core assets.
Investors have become frustrated and disillusioned with the performance of traditional assets. When a benchmark is down 15%, outperforming it by 300 basis points still produces a loss in capital. And a poor return remains a poor return. The traditional diversified asset-class strategies failed the financial crisis. Correlations increased with the volatility. The increasing complexity and internationalization of financing markets has created new specialized asset classes along with the need for greater asset-allocation expertise. Today clients are saying “I will pay you more if you give me high convictions: alpha. Otherwise, I will invest in low cost beta exposure”.
Yesterday, we lived in a world where traditional benchmarked funds represented 90% of AuM. The landscape of tomorrow will be very different and is likely to be comprised of:
- 40% low cost beta exposure solutions such as ETFs and systematic beta solutions will emerge
- 30% of our “old fashioned” traditional funds
- 30% of alternative or total return solutions
c) Focus on alternative solutions
We have all witnessed the success of passive investments. But why will alternative solutions be crucial in the future? Three major changes in the macro investing environment are accelerating the move towards alternative solutions:
- New rules for insurance companies are being discussed that, if implemented, would apply punitive charges in terms of capital requirements to invest in equities. The cost of capital will require high convictions and persistent performances to overcome the capital charge associated;
- The resurgence of illiquid shadow-banking products is creating renewed concern about a potential liquidity shock. Long term investment solutions in infrastructure or loans do not offer the same liquidity as US treasury bonds;
- Finally, the anticipation that we are approaching a turning point in the long-term credit cycle is prompting investors to seek protection against excessive volatility in equity markets and against rising interest rates;
It is interesting that regulation is the factor which has created this opportunity. In the past, the hedge fund industry was not available to the mass retail distribution market. But with AIFMD in Europe and Dodd Frank in the US, transparency constraints require participants to engage in compliance and reporting procedures. However, a wrapper was missing. The final development has now emerged: the launch of “multi-alt” mutual funds in the U.S and the NewCITS wrapper in Europe. With this, the liquid alternative is born.
U.S liquid alternatives have surged, allowing assets to more than triple from $95 billion in 2008 to $305 billion in 2012. Global demand for liquid alternatives from the retail audience could easily reach $1Tn by 2017.
d) Discussion about distribution and fragmentation of the AM market
In this environment, ETFs will be driven by economies of scale and concentration of assets around a limited number of asset managers, while alternative investments will be driven by performance and high conviction. Our industry is one of the most fragmented in terms of market share. The top 5 asset managers represent less than 17% of the global market. The top 30 do not even amount to half the market. I’m not saying that the number of EFAMA members will decrease in the years ahead, but rather that we will have more giants in terms of AuM with a global range of products and in contrast, smaller asset managers focusing mainly on specific high conviction solutions and dedicated expertise.
A new distribution model will reinforce this structural shift on the management side. Distributors now have the same understanding of our job as institutional clients. The development of fund selectors is equivalent to that of consultants in the institutional area. This trend will be reinforced by technological developments alongside regulation.
- The increasing number of open architecture structures ensure a more level playing field between the asset managers;
- The development of passports (UCITS, AIF, Asian, …) and trade agreements (US – Europe, Australia – Singapore, …) around the world is encouraging a global to local investment management strategy;
- European discussions around the ban on inducements intends to end the existing partnership between distributors and asset managers. But the side-effects for the end clients are clearly underestimated;
- Last but not least, the emergence of direct distribution and the development of B to C fund platforms can potentially create a new distribution channel and pave the way for new actors. Web giants such as Google or Facebook benefit from superior technological capabilities, major traffic as well as indicators of clients’ interests. For the moment, they are preparing their entrance into the financial world through payments services. They are just one step away from branching out into asset management and revolutionizing the distribution model!
Asset management will clearly benefit from strong growth in the years ahead. However, as we can see, investment companies themselves are facing numerous challenges in the area of “manufacturing” and in their distribution model.
Part 2 – Roundup of the first year
Now, more than ever, EFAMA has a key role in facilitating the development of the asset management industry and in protecting the interests of the end investor and those of EFAMA members. Following our recent activity, it is time to assess what has been done with regards to the four priorities we identified and discussed in Amsterdam last year.
a) Have a strong united voice across the industry
I said we would ensure that EFAMA had a strong and credible voice at EU level, representing the opinions of all our members.
2013 was quite intense in terms of new regulation: it was a year that saw the introduction of PRIPS, MIFID, UCITS V, MMF, Benchmarks, ELTIF, EU FTT, … I will not go into detail on the position EFAMA has taken on each of these, as this will be discussed later during the event. However, I would like to thank again all EFAMA working group participants, consultation contributors, the management committee, the board, national associations, and of course EFAMA staff under the fruitful management of Peter and Jarkko for the great work that has been delivered. Despite diverging interests, we succeeded in achieving a common view on all topics allowing EFAMA to speak as one voice in front of European representatives for the benefit of the entire industry. Thank you everyone for demonstrating such unity!
I’m delighted to announce that EFAMA has welcomed 2 new corporate members (Names ?) and 3 new associate members (Names ?) since our last AGM in Amsterdam. Collectively, we now represent €17 trillion in assets under management, 1.5 times the GDP of the European Union.
2014 promises to be yet another eventful year in regards to regulation and with the European elections in May, and the appointment of a new commission in November; all eyes are focused on the legislative agenda going forwards. In order to reinforce our position and support our underlying arguments, we all agree that we must produce a study to be used with politicians, regulators, consumer groups and journalists that clearly establishes us in their eyes. This study will immediately explain what asset management is, why it is valuable to consumers and economies, its fiduciary nature and the difference between our industry and that of banks and insurance companies.
A number of measures have already been put in place to support this objective: Ernst & Young kindly financed an independent study by Professor Jens Hagendorff from University of Edinburgh Business School in close collaboration with EFAMA. We will have the opportunity to discuss further their key conclusions during the event.
Additionally, we further solidified our positioning and key messages by engaging in European press events in Italy, Sweden, Germany, France and Britain. At these events, we were able to share our views on the role of asset management as well as express our position on the various regulatory topics under discussion.
b) Offer viable solutions to the issue of long term investment
Our mission is to allocate and channel savings into investments. It will boost our industry, our capacity to innovate, and improve our competitiveness.
This year, we have seen amendments made to the UCITS directive, which have further raised the already high standards of investor protection offered by the product structure. By strengthening and making consistent the UCITS depositary regime, we are able to better protect clients’ assets.
This progress confirms UCITS as a viable and secure investment structure for a global audience. There is huge potential for growth in emerging markets, especially in Asia, and despite developments in the creation of an ASEAN Fund Passport, we hope that improvements to UCITS will positively bolster international recognition of the brand as the vehicle of choice. We continue to work alongside regulators, particularly across Asia, to promote UCITS as the optimal choice for the international distribution of investment funds.
Our next steps include working with the European Commission and ESMA to develop implementation methods to be adopted before the revised UCITS directive is officially put in place.
In the face of an aging population, much importance has been placed on identifying solutions to provide adequate pension solutions by European policy makers. The industry has worked together to create a long-term savings culture and the vote in the European Parliament in favour of European Long-Term Investment Funds (ELTIFs) was a promising step in the direction of sustainable growth.
EFAMA worked alongside the European Private Equity and Venture Capital Association (EVCA) and the Federation of European Securities Exchanges (FESE), two leading EU industry associations, to actively promote the financing of long-term investments. ELTIFs will offer flexibility to investors regarding lifetime. This will meet the needs of individual investors, as well as providing options for professional and semi-professional investors, allowing for the different requirements and expectations of a wide range of individuals.
A key feature is the maintenance of the ‘retail passport’ for ELTIFs. This will help to maximise the pool of eligible investors and brings us closer to portability of pension schemes within the European Union.
Additionally, the proposal included the listing of small and medium-sized businesses up to EUR1billion market capitalization as eligible investments. These businesses are crucial to the economic recovery of Europe: they create the largest number of new jobs and are the backbone of sustainable economic recovery.
I would also like to highlight the great work carried out under OCERP. EIOPA underlines publically the benefits of the study and this offers EFAMA the opportunity to defend its thesis for the first time in front of the European and American authorities.
Last but not least, the initiation of a transparency code at European level has been implemented and demonstrates a clear step forward in term of SRI and ESG criteria for EFAMA. If we believe we are long term investors, we must take into account long term challenges.
c) Help finance the economy
The evolving role of banks opens up new needs and opportunities for other institutions and market based intermediation to finance investment. Asset management can complement the role of banks by channeling financing in a more balanced way.
EFAMA is engaged, alongside AFME, to favour SME long term financing through the securitization market. Today, all agree – investors, companies and public authorities – that a market in securitised loans has a pivotal role to play in easing access to capital-market funds for unlisted companies. However, there is a clear and worrying gap between policymakers’ recognition of the benefits that securitisation can offer to SMEs and what policymakers actually do in terms of concrete actions.
Yet despite all these efforts, the securitisation market is still under the cloud of stigma arising from the financial crisis, and this stigma lingers, partly due to a lack of positive signals from Europe’s policymakers.
What sort of signals could help change this?
- The first would be simply to stop discriminating against this type of securitised product that can offer so much to the SME sector. Examples include the Solvency II proposals that would attach punitive risk weightings to insurance-company investments in securitised assets. The Basel Committee’s suggested restrictions on the eligibility of securitised assets to be included in banks’ liquidity portfolios;
- A second positive signal would be better co-ordination with new legislative and regulatory initiatives outside the EU, with special attention paid to those in the United States. At present, there is little alignment, which could make it difficult and more expensive – or, at worst, impossible – for European issuers to tap the vast American investor base;
- A third positive signal would be more ambitious and far-reaching and would see the establishment of a specialised European agency, with public support, that would take the risk of SME loans from the banks and transfer them to the capital markets. Such an approach has worked well with the German KfW Promise programme and would help “commoditise” SME loan securities, reducing investors’ concerns about the diverse nature of the loans and of the collateral on which they are secured and about the different legal structures involved.
The role of SMEs in European growth is vital, but strong public commitment is essential to give them the long-term financing solutions that they need.
d) Permanently look after the interests of our clients and safeguard the end investor
Without investor trust, we cannot hope to convince regulators and politicians to support our industry. Acting with our clients at the fore of all we do will be the bedrock on which we will develop our solutions.
This is especially true in Europe, where the risk and responsibility for financial decisions that will impact an individual’s future life, notably regarding pensions, are increasingly being shifted away from government and employers, to workers. The pension question is all the more important as rising life expectancy means the population will enjoy longer periods of retirement.
If they are not financially literate, individuals will not be able to choose the right saving plans or investments for themselves, and may even be vulnerable to fraud. A certain level of financial education will make them more likely to save, and equip them to challenge financial service providers to develop products that truly respond to their needs. This in turn should have a positive effect on the overall level of investment and economic growth.
In March this year, we published a report and held an event on the theme of Investor Education with three flagship themes: the vital role of financial education in rebuilding public confidence after the financial crisis; the need for financial education as a policy priority given the need for people to assume more responsibility for their own provision; and, the current atrocious state of financial literacy across Europe. The event highlighted our commitment to encouraging investor education and financial literacy, as we believe that these are key to achieving our overarching goal of investor protection.
We continue to take innovative steps to address this core value. The EFAMA board just approved (to verify) the launch of an interactive game on asset management: EFAMA Educational Long-term Savings Contest. The game is designed to stimulate student interest in investment portfolio management, promote the spirit of teamwork and emphasize the importance of sound research and a long-term approach in investment decision-making. It establishes the benefits of mutual funds as investment vehicles for individual investors. The competition is also designed to increase EFAMA brand awareness in universities and colleges across Europe.
Being President of EFAMA during this transitional period is an exciting and challenging opportunity. My Presidency, like that of my predecessors, will continue to be dedicated to ensuring the success of our industry.
In these challenging times, it is you, the members who we consistently strive to represent at the highest levels. In order to achieve this, the following four pillars will continue to be the foundation of my Presidency:
I. Provide a strong united voice across the industry
II. Offer viable solutions to the issue of long term investment
III. Help finance the economy
IV. Permanently look after the interests of our clients and safeguard the end investor
As a strong believer in Europe, together with Alexander and Peter,, I would like to assure you of my ongoing commitment to work closely with EFAMA’s Board, Management Committee, national associations, corporate members, associate members, and of course EFAMA’s staff.
I am honored by the trust you have placed in us so now let us continue to work together to meet these challenges head on, and embrace the opportunities presented to us.