A NEEDFUL ASSET MANAGEMENT INDUSTRY MAKEOVER

The situation couldn’t be more ironic.

On one side, regulatory pressures have left little room of manoeuvre to the financial industry. On the other side, fintech startups and social networks have soared as mushrooms. Threat and opportunity at the same time, this new phenomenon cast a shadow on the existence of traditional banks but has been democratising at the same time acces to financial information and services.

Twitter and other social networks have turned into complimentary sources of information for investors

Despite a slowdown in user’s growth, Twitter remains an impressive relay of information. Its influence is such that some even dare recognising it as a “market maker” which is nevertheless overstated in my opinion. However, truly, information relayed on social networks have been able to cause sudden and significant moves in the market. As an example, Tesla’s CEO tweet in march 2015 prompted a few minutes later a signifcant rise in the fim’s valuation in just a few hours.

Fiona Frick, CEO of Unigestion Asset Management asserts that the firm dedicated about EUR10M in technology investments over the last 3 years. As she mentions, the flood of financial informations is so abundant that it is essential to process it in order to integrate them in their investment decisions – Being technologically advanced is now critical for asset managers.

Fintechs and their attractive features for investor’s younger generations

Beside social network applications, fintech companies have been providing investors  with attractive services , competing directly with traditional financial institutions. Lagging behind due to mounting regulation presssures, the financial industry is indeed the last sector to start its so-called “digitalisation”. A thematic that is now in most bank’s top agendas but looks like too versatile for these big giants englued in heavy structures and regulation.

From mobile payment services to credit and funds raising for small businesses, fintechs have literally invaded the Bank’s “old preserve” : Ant Financial services (Alibaba), Lending club, OnDeck, Bitspark, Sparro to name a few are moving fast and with an agility that banks can barely compete with.

Long preserved, the Wealth Management industry is similarly affected by the digitalisation effect – quite logic when about two thirds of the new wealth creation comes from developing economies (Asia, Africa, Latin America, etc.). New wealthy investors located in emerging markets are indeed great adepts of new technologies and have a different mindset with respect to the use of financial institutions:

  • Gambling mindset;
  • Use of several banks as depositary institutions;
  • Use of Financial Advisors / Wealth Managers mainly for investment opinion (vs. porfolio management);
  • Limited loyalty and capacity to use different platforms / advisors as long as it matches expectations (low cost, higher yield).

Ironically, the asset management industry once assumed that developing to emerging market would only require them to locally replicate their business model. Eventually, it appears that investors themselves are driving a fundamental industry makeover: eager to reduce costs and broaden investment opportunities (beyond bank’s limited products offering) the younger generation of investors is gradually turning towards fintech services.

Large asset management institutions are therefore increasing the pace of global partnerships / acquisitions but will they be agile enough to keep up with the young generation versatility?

LATAM – CHINA : A YIN YANG CONCEPT

Latin America and China couldn’t express more clearly the Yin-Yang concept: so different but interdependent at the same time.

Having benefited of the commodities bonanza years in the 2000’s, Latin America is now painfully feeling the boomerang effect of China’s economic deceleration.

The boomerang effect after the commodities bonanza years

Last July, the IMF severly downgraded the economic outlook of Latin America (0.5% in 2015 – 1.7% in 2016) and this is obviously not surprising due to a global context that’s definitely penalizing this part of the world. China’s deceleration, commodities price slump and prospects of increased interet rates in the US are weighting heavily on the region’s growth prospects.

While these economic factors are definitely affecting the region, Petrobras related troubles in Brazil have been giving the final “knock out” effect to the region. With such a backdrop, Latin America and more generally emerging markets felt out of sight of most investors as additional corrections cannot be overshadowed.

Emerging markets remain the global economic locomotive

China’s economic deceleration rang an alarmist bell in investors mind, therefore leading to massive emerging markets outflows. Latin America in particular has been particularly slashed down but other emerging markets had to cope with the same feat. However, and without undermining the current gloomy backdrop, emerging markets potential remain one of the strongest at global level.

Representing about 50% of global GDP (PPP terms – IMF), emerging markets are also home of about 80% of the world’s population. Even if developed economies recover from the recession, the global economic growth will continue to be strongly influenced by the growing middle-class in emerging markets.

Services and consumption: engine motor of emerging markets economic growth

Long time commodities dependent, emerging markets are gradually shifting towards consumption and services driven economies – From Africa to Latin America and going through South East Asia, foreign direct investments have experienced a steady rise and are not anymore exclusively dedicated to the commodities sector: retail, real estate and services (healthcare, education, financial) are on the verge of becoming the new sector’s growth engine of emerging markets.

Emerging markets economic slowdown remains a relative one

China has been dominating the headlines over the last weeks because of the significant plunge in the country’s shanghai index. Although a hard landing cannot be totally dismissed, chinese authorities benefit from financial tools that should help the country overcome this economic shift.

Considering all the above, there is no doubt that emerging markets offer the greatest potential of investment return should the portfolio be properly diversified as growth prospects can dramatically differ from one country to another. As such, passive investment strategies seem pretty limited due their lack of stock picking strategies. Investing in emerging markets can be extremely rewarding but requires from a portfolio manager a set of 4 features: local market expertise, active management and a savvy macro understanding.

FLEXIBLE FUNDS: A MUST-HAVE IN VOLATILE CONDITIONS

Work, food and social habits are changing and so do investment products.

Investment products panels have never been so large and yet, the question remains: which framework to choose so as to optimize the potential return. Actually, the truth is that there is no ideal, standardized framework but rather specific schemes that are definitely best fitted according to the context.

In line to the current volatile backdrop, most investors are definitely unclear about where to allocate funds. In such endeavour, flexible funds offer attractive features for investors willing to capture most of markets growth but limit at the same time downward pressures.

 What is a flexible strategy?

To put it in a nutshell, flexible funds are funds that give more nimbless to portfolio managers, allowing them to choose how they allocate managed assets according to markets context. As such, flexible funds can be invested in any assets class (stock, bonds, money markets). Even if there’s no specific rule, stocks exposure usually vary from 10% to 50% or 60% to 100%. Some asset managers even offer a full flexibility approach where the stocks exposure can vary from 0 to 100% – This is the case of Dorval Finance which recently opened a “flexible management group” on Linkedin in order to open discussions about this growing trend in investment management.

 Why did Flexible Funds emerged?

Flexible management started to flourish in 2002-2003 but more incisively after the 2008 financial collapse due to the unprecedented accumulation of losses on stock markets. Flexible managers started to gain interest as part of investors thanks to a more tactical approach, aimed at providing downside protection and some sort of absolute return during volatile periods. Indeed, asset classes produce widely different returns from one period to another. As a matter of fact, a dynamic and tactical allocation usually offer better risk adjusted returns. This is even more true in current volatile conditions where anticipation and tactical approach are paramount.

 How risk is managed?

Flexible funds aim at protecting the invested capital. This is usually achieved through a proper arbitrage combined with a global macro approach that provide exposure to  growth periods and downward protection. In fine, a well managed flexible fund should have regular positive performances. Risk management is therefore paramount in order to precisely assess the best timing to alter the assets allocation.

 Similarly to any other investment strategy, choosing a flexible fund requires a good assessment of the asset manager : engine strategy, track record (that should demonstrate regular positive performances) and management team transparency about performances and investment choices.

EUROPE’S RETURN TO GRACE CONFIRMED

Despite numerous factors of global instability, the release of french stock’s first semester results confirmed Europe’s return to grace. Expectations were high and corporates provided what the market was desperately looking after: revenues growth but most importantly operating margin’s improvement.

Optimism at its highest

According to a french financial press report (Les Echos – July 31st), more than a dozen of french corporates reported double digit revenues growth, providing the market with a rare optimisim : growth expectations have been confirmed if not increased for most of them.

The whole story is obviously not “spotless” as many factors of unstability remain: domestic consumption is still lagging behind and China’s economic slowdown has been seriously affecting firms exposed to the land of rising sun (Schneider, Danone, etc.).

Notwithstanding the above, European markets benefit from a triple package that should definitely pull ahead firm’s results over the next months: low interest rates, Euro and Crude prices. The backdrop couldn’t be better for french corporates which, according to analysts make 61% of revenues in Europe 9 (CAC40), limiting therefore potential drawbacks from an over-exposition to China (estimated to 7% only by analysts).

Professional Management proved to be more rewarding in volatile conditions

Playing the European market through much loved passive investments such as ETFs might not be the most rewarding strategy though. While ETFs provide for a cheap and diversified exposure to european markets, the current market conditions (high volatility) impose investors to be selective.

Having a look at the best rated Europe exposed ETFs, returns are more than decent but can’t compare with some of the Best European SICAV recently selected by Le Figaro- French Financial newspaper (YTD returns exceeding 20%). While these returns were supported by the improved economic conditions, the difference in performance is definitely linked to the “case by case” management of professional, experts in the european market.

Markets will remain volatile and therefore portfolio diversification is necessary if not paramount. Regardless the allocation that will be chosen by investors, Europe may definitely represent a good share of it – The best should be ahead of us.