Ladies and gentlemen, Dear friends,
Thank you all for being here at the EFAMA Investment Management Forum in Brussels.
I would like to thank the EFAMA team for organizing such an important event.
I would also like to offer my sincerest thanks to our future speakers and participants for responding positively to our invitation. It is an honor for EFAMA to host you all.
Also, I would like to thank all the sponsors of this year’s event: we are very grateful for their support.
The purpose of this two day conference will be to exchange ideas, experiences and opinions in order to identify and explore the key challenges our industry will face in the coming years.
A new world order is on its way and is currently being defined. As we prepare today to envision our future, let us take a moment to reflect on our current situation.
The asset management industry achieved a year of substantial growth, winning a welcome respite in 2012. In fact, the value of global AuM rose to a record high surpassing for the first time the pre-crisis level.
At the same time, the growth of the industry’s AuM was driven largely by the rally on the markets which pushed up the value of securities rather than by net new cash flows. The net new cash rose 2% in 2012, the strongest growth since the crisis but far from the 5 to 6% growth in the years before the crisis.
Despite the broad recovery of AuM, heterogeneity was felt particularly in Europe where 30% of managers lost 5% or more of their NNC.
In addition, we face a wide variation in products. The continuing fast growth of solutions and specialties confirms a structural shift in the market. The advance of these asset classes will continue to outpace the growth and squeeze the market share of traditional actively managed core assets. The most successful of us are either specialists or traditional providers who developed capabilities to capture new faster-growth assets.
In fact, investors have grown 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. A poor return is a poor return.
The traditional diversified asset-class strategies have failed the financial crisis. Correlations increase 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. “I will pay you more if you give me added value: alpha. Otherwise, I will invest in low cost beta exposure: ETF”.
A new world is on its way, and driving differently all the major variables
While the revenue pool and AuM has nearly returned to precrisis level, from a long term perspective, the picture is not quite as rosy. Profit levels remain about 20% below the precisis level, due primarily to escalating costs.
Rising costs may be explained by the increased wave of regulation in Europe, which has brought a high level of uncertainty and operational challenges to many players. The necessity of dealing with myriad new regulatory requirements at both national and European levels is already one of the biggest hurdles that must be overcome in order to achieve global growth goals.
Costs are also rising because of the increasing complexity of the retail distribution landscape, including the more demanding and sophisticated fragmented independent channel. As a result, sales and marketing costs now make up almost one-quarter of the typical asset manager’s cost base.
A new world is on its way, and driving differently the perception of our industry.
Let us take the example of shadow banking and the fear about systemic risk. Regulators define shadow banking as a system of entities which carries one of the following activities:
- Performs maturity transformation
- Performs liquidity transformation
- Allows credit risk transfer
- Uses direct or indirect leverage
Since the crisis, we have faced an unprecedented wave of regulation with the introduction of more than 30 new initiatives, making our industry one of the most regulated after nuclear waste. Asset management should not be seen in terms of the risks that it poses, it is essential to acknowledge the important role that we play within the financial sector. We constitute an alternative financing channel that is essential to the real economy.
As you know, MMFs are an important source of short-term financing for the economy. 38% of short-term debt issued by the banking sector and 22% by non financial companies and sovereign states are held by MMFs. MMFs represent a crucial link in bringing together supply and demand and short-term money.
The fund industry is covered by two directives: UCITS and AIF. There is no place for non regulated activities. AIFMD was designed in the post crisis environment and has been effective since last summer.
Securities financing and collateral management are the two shadow banking topics on the side of MMF. Both are addressed by ESMA Guidelines on UCITS.
Following the aftermathof the crisis, all industry participants are keen to make sure they adhere to regulatory standards moving forward European Commission, ESMA, FSB … However, going from one extreme to the other will not repair the damage of the crisis, in fact it will do the reverse if the regulatory measures are not carefully designed not to penalize the growth of the economy.
A new world is on its way and I believe there are two major threats to our industry.
The first is overregulation. We face an unprecedented wave of regulation, and, the distortions created by so many directives and regulations will have an enormous impact on both our industry and the people we are trying to serve – the investors.
The UCITS directive is 25 years in the making. After the first two UCITS directives which took nearly 16 years to put in place, the industry now must confront and deal with 3 different directives in less than 4 years. Having just digested UCITS IV we are facing the unknown implementation of UCITS V – and now we are told UCITS VI is en route.
The complexity of the current regulatory program means we are facing a long and costly process of compliance. If we do not intervene now, the distortions created by the large number of directives and regulations will be here to stay. Fiscal austerity is to government what excessive regulation is to finance: a major obstacle to the economy!
Today, the foundation of economic growth isthreatened, as the stability of an essential source of financing for companies and banking establishments is called into question. We must ensure a balance between new regulatory and supervisory measures to enable the financial sector to support the real economy.
The second major threat is coming from the lack of a level playing field. Regulation must be put in place to create an equal footing for financial products and consequently reduce investor confusion. Our main rivals are Banks and the Insurance industry, who regularly offer products and services in competition with Asset management products. In this context, the rules of the game need to be harmonized to ensure fair competition
With the KIID, our industry already provides a model of comparable, easy to understand information, but difficulties with PRIPS are a reminder of the long and arduous road to success. PRIPS is now a political discussion instead of a technical one. We are now in the 18th month of negotiation over this 17 page document,. The objectives of the European Parliament should be to defend transparency and the protection of investors. PRIPS should focus initially on packaged products. We would welcome further discussions about broadening the scope of regulation and exploring future revision of PRIPS once we have experienced its impact on package products. I hope that we will find a rapid solution to start the trilogue. Any actions which would further delay the vote on PRIPS would be detrimental to investor protection.
A new world is on its way which can be demonstrated by the various threats to our industry but also the range of challenges we need to take up. Remember Proudhon, “only transition is eternal”. Let’s be an actor of our future!
EFAMA is this voice! We derive our strength from our
- 27 national member associations
- 60 international corporate members
- 22 associate members
Collectively we represent €14 trillion in assets under management, more than the GDP of the European Union.
Our assets have increased by 25% over 5 years and 70% over 10 years. 54 000 investment funds run by 3100 asset management companies employing about 80 000 have been registered in Europe. Our industry is profitable and requires little capital. These two elements are fundamental in helping to develop a sustainable future.
EFAMA is acknowledged as the voice of the industry by European authorities and all relevant stakeholders, including investor associations. We are proud of this recognition but must remember that our profile and actions are always in the public eye, and thus our credibility is at stake. We will ensure that EFAMA has a strong and credible voice at EU level, representing the voices of all our members. This may be achieved through different types of initiatives:
- Sponsoring academic studies to highlight the quality of the work done by Asset managers;
- Writing synthetic documents to present our industry to the next Members of Parliament;
- For the use of CEOs: Preparing concise factsheets to brief CEOs composed on the main regulatory issues that Efama addresses;
- Promoting coordinated sponsorship with EC during our US-Asian tours.
It is in our best interest to safeguard our clients. Without investor trust, we cannot hope to attract savings and increase assets under management. Without investor trust, we cannot hope to convince regulators and politicians to support our industry.
We can achieve this most effectively through investor protection and education
We all know the risks associated with ignoring the interests of investors. Reputation is one of our key assets: we must preserve it! We must highlight the importance of placing our focus on the investor and emphasise the opportunities that this approach presents and almost of all, how it will pave the way for sustainable growth. Protecting clients’ interests must be at the core of regulation of asset management companies. By focusing on the investor, we can create alliances within the financial industry, with bankers, insurers, within our individual countries or internationally and with political authorities.
Education is a vital pillar of our approach. It can inform investors to potential problems, provide explanations of products and processes, while highlighting areas to explore and helpful tools to assess investments and financial services professionals. Investor education was, is and will be key to protecting the reputation of our industry. Acting with our clients is at the forefront of all we do and will be the foundation on which we will develop our solutions. I would welcome EFAMA to:
- Develop a proactive approach to communication via social media;
- Develop a dedicated website
- Set up road shows throughout European Universities. Students are our future clients, students are our future talents!
In these tough times, we have one key duty: to finance the economy
European citizens are currently experiencing high degrees of uncertainty, risk aversion and lack of confidence as a result of the weak macroeconomic situation and outlook.
Policy makers & governments are looking for alternatives to public resources and are turning to private financing to address the financing gap and the sustainability of national retirement systems.
Corporates are faced with a diverse investment landscape. Large firms benefit from deep financing sources compared to SMEs that suffer from a continual lack of liquidity.
Europe is characterized by a greater dependency on bank intermediation compared to the US.
Banks will, of course, not disappear from the intermediation chain in Europe. But there are new needs and opportunities for other intermediaries to complement the role of banks by channeling financing in a more balanced way.
The fund industry offers viable long term solutions that benefit both savers and the economy
Asset Managers should be seen as THE long term investor allocating & channeling savings for the benefit of the economy:
This will enable governments and businesses to be more productive and better prepared to respond to economic, social and environmental challenges;
This will boost our industry, our capacity to innovate, and will improve our competitiveness.
All in all, as investors, we are the solution and we can complement the role of banks.
Our industry has the talent and capacity to succeed. It is an exceptional challenge to be take up!
Our business is client centric. We show that we care about our clients by offering them dedicated solutions and services! We support the financial stability, liquidity and fluidity.
I know I am preaching to the converted here, but our industry is facing unprecedented challenges. So, I put before you the 4 pillars which will provide sustainable financing to the economy thanks to long term investments.
1/ Promote a responsible framework
How can we pretend to be a long term investor if we do not take into account challenges that the world is facing?
Our world is changing as well as our society and our companies. We live in an increasingly interdependent world facing social, governance and environmental challenges that can undermine the performance of our investments.
Our prime responsibility is to invest in the best long-term interest of our beneficiaries. More than a pipe dream or a leap of faith, sustainable development and responsible investment has become a daily reality.
More over “Non-financial information” can generate added value and positive growth. We can make a meaningful contribution by promoting investment in companies that integrate better governance criteria into their core business.
By doing so, we will protect and enhance long-term investment returns and benefit the interests of investors!
2/ Identify and provide an adapted investment vehicle
Currently the main investment funds addressed to retail investors are UCITS funds which mainly focus on transferable securities to ensure adequate liquidity to cover redemptions on demand. For institutional investors AIFs constitute the main investment vehicle with fewer constraints and with the benefit of an EU passport.
The European Commission proposed a new investment fund framework designed for investors who want to put money into companies and projects for the long term: the European Long-Term Investment Funds (ELTIF). The new Funds would be available to all types of investors across Europe subject to certain requirements set out in EU law. These requirements include the types of long-term assets and firms that the ELTIFs are allowed to invest in, for example infrastructure, transport and sustainable energy projects.
ELTIFs will attract all types of investors and therefore meet the main objective of financing the long-term needs of the EU economy. Small and medium institutional and retail investors will benefit from indirectly investing in long term projects while having the safety net of highly skilled asset management expertise.
I am not going to go into more detail, but the legislative proposal should find the right balance between supporting the regulatory aim of long term investments and at the same time ensuring adequate flexibility for the different needs of each category of the highly diversified investor base it intends to bring together.
3/ Favor an investor friendly environment
To make it a success, European Governments should consider the development at national level of any tax incentives related to long-term investments through ELTIFs. This will significantly help shift investments to new diversified structures and meet this Proposal’s policy goals on long-term investment. If there is no European fiscal union, this type of incentive would have to be made at national level. A simple way to do that would be by extending the national tax treatment of UCITS (where applicable) to ELTIFs.
4/ Encourage a coherent accounting environment
For both insurance and pension funds, there are on-going regulatory revisions on capital requirements which will significantly discourage investments in long-term guaranteed assets.
Solvency II as it stands foresees disproportionally high capital requirements in the case of illiquid long-term assets and does not take into account the benefits of diversification and reduced volatility over the lifetime of those assets.
Applying similar rules to IORPs would also discourage pension funds from investing in ELTIFs. Although the European Commission is reluctant to apply Solvency II-style prudential capital requirements in the case of IORPs, a clear approach on the matter is still missing.
We are living in a historical period on the cusp of a multipolar world and the end of western domination
A new world order is on its way and is currently being defined. Remember Proudhon, “Only transition is eternal”.
In these tough times, we have a duty: financing the economy. As investors, we are part of the solution not of the problem! Our industry has the talent and capacity to succeed and more than ever, our industry has an exceptional challenge to take up.
I am honored by the opportunity you have given me to express my beliefs, so now, if you agree, let us work together to tackle these challenges head-on, and embrace the opportunities presented to us. This investment management forum, is your forum! Our future, is also the European future!