Finding strong active managers in the fund-management universe is crucial for fund selectors. Active ETFs stand to benefit. Piyasi Mitra speaks to fund selectors about this and other trends.
Participants:
- Manuela Thies, MD, head of multi-management, Allianz Global Investor
- Gregor Radnikow, head of funds of funds management, Generali Asset Management
- Luca di Patrizi, equity partner and head of intermediaries, Pictet Asset Management
- Richard Rainback, global head of ETF & fund selection, EFG International
What would you regard as the most critical aspect of your role as a fund selector?
Manuela Thies, MD, head of multi-management, Allianz Global Investors: The most important parameter for us as fund selectors and managers of multi-asset portfolios is to ensure the continuous effective allocation of our clients’ portfolios and an efficient selection of investment instruments. Financial market trends and news assessment, asset class development and performance drivers for making good investment decisions, play a decisive role in our daily business. It is essential to be constantly well informed and part of a global asset manager with experienced multi-asset teams across the globe to provide valuable insights. To be able to adapt quickly – especially in times of uncertainty – is also crucial to our work.
Gregor Radnikow, head of funds of funds management at Generali Asset Management (part of Generali Investments): Fund selectors should have an open mind regarding different investment philosophies and styles. Every approach, be it quantitative or qualitative, top-down or bottom-up, will have its merits given a specific market environment. The most critical aspect of fund selection in a portfolio context is to identify the best managers in a specific field to build portfolios that are robust and diversified, not only in terms of asset classes and regional allocation but also in terms of management approaches.
The focus has also started shifting towards the technical aspects of identifying these managers, by improving efficiency in the fund selection process. Using AI to support the fund screening and due diligence process is one of the areas in which fund selectors will focus on expanding their capabilities.
Luca di Patrizi, equity partner and head of intermediaries, Pictet Asset Management: In recent years we have been moving away from a model where we sell products (funds) to a new one where we offer investment services to our clients. This goes beyond just investment portfolios, but also the ongoing service and development of additional services beneficial to the clients of our clients. The best way to win new business today is to focus on our clients’ specific challenges and needs, identify their real pain points, and then come up with personalised solutions that can concretely address the pain points, solve their problems, and simplify their lives.
Indeed, we are selling more and more bespoke solutions incorporating clients’ values, desires and risk appetite. The best expression of this new way to engage with our clients is the sub-advisory model.
Richard Rainback, global head of ETF & fund selection, EFG International: One of the most critical parts of the role is the ability to see through a well-versed, glossy pitch, and gain a deep understanding of how the investment process functions. Meeting with the fund manager is important, but I also think that meeting with members of the investment team who are responsible for idea generation (research analysts, economists) is equally important. A detail-orientated approach is the key.
Gregor Radnikow: “Using AI to support the fund screening and due diligence process is one of the areas in which fund selectors will focus on expanding their capabilities.”
ETFs have gained significant popularity in recent years. How has this trend affected your strategies?Manuela Thies: The role of ETFs begins with the question of efficient investment instrument selection. If we want to implement an investment idea, we ask ourselves what is the most efficient way to accomplish this. Depending on various factors like investment horizon, alpha potential within a specific investment segment, ESG, costs and market access, we make use of a broad set of instruments. This includes active or passive funds, ETFs, but also derivatives or baskets of direct investments.
There are some segments in which passive instruments have certainly been beneficial, for example in the core US equity market. In the S&P500, a small number of stocks dominate the performance of the index – much to the frustration of active fund managers, who are bound by the specifications of the fund structure and are therefore somewhat constrained. Passive instruments such as ETFs can therefore be a viable alternative here. However, these circumstances are not set in stone and are subject to monitoring.
We continue to see great potential for actively managed funds with corresponding alpha potential in many other market segments. As the selector, we can continue to generate added value for our customers through active fund selection. More than two-thirds of the assets under management are invested in the strategies managed by our multi-management team and are still attributable to actively managed fund holdings.
Gregor Radnikow: The share of passive ETFs in the overall fund market is continuously increasing, but this has not necessarily changed the allocation to these products in our portfolios. Passive investments have always been considered a key component of our investment approach. We use them in the most efficient markets, where alpha is structurally more difficult to generate, or as a means for short-term implementation of our tactical asset allocation.
That said, we continue to be strong believers in good active management when it is attainable at a competitive price. Our fund analysis and selection process has repeatedly enabled us to identify asset managers and funds with significant competitive edges and repeatable return potential across different asset classes.
Luca di Patrizi: ETFs are just another type of wrapper used by our clients to access our investment expertise. ETFs are now firmly mainstream, and they are now moving well beyond their roots in indexing. While active management has been available in mutual funds for years, investors are increasingly turning to the ETF wrapper to access these strategies.
As an active manager, we believe it is important to constantly adapt our offering to our clients’ needs, both in terms of investment strategies and legal wrappers, and today the demand for active ETFs is showing such phenomenal growth that we can’t afford to ignore it.
Richard Rainback: Currently, we only use passively managed ETFs, not yet actively managed ETFs. Passive ETFs have certainly gained traction in recent years, and I would highlight two key areas where the demand is concentrated. Firstly, they are popular methods of accessing markets where active managers tend to struggle to beat the benchmark, such as US core equities and sovereign debt. Secondly, we commonly see investors using ETFs to gain exposure to niche investment themes, such as cybersecurity, instead of owning concentrated baskets of equities.
Manuela Thies: “A small number of stocks dominate the performance of the index – much to the frustration of active fund managers, who are bound by the specifications of the fund structure and are therefore somewhat constrained.”
Manuela Thies: “A small number of stocks dominate the performance of the index – much to the frustration of active fund managers, who are bound by the specifications of the fund structure and are therefore somewhat constrained.”
What is your outlook on the future of cross-border fund distribution, especially in key domiciles like Luxembourg and Ireland? What factors will drive more efficient distribution?
Manuela Thies: Luxembourg and Ireland are the two largest fund hubs in Europe and have been able to grow continuously over the past few years. They excel with their broad range of fund structures and international distribution options: For example, it is much easier to access Luxembourg or Irish fund vehicles in Asian markets than with vehicles domiciled in other European countries. The two fund hubs will therefore continue to focus on maintaining and expanding their status in the future.
Gregor Radnikow: We acknowledge the dominant position that both Luxembourg and Ireland have established in cross-border fund distribution in Europe. From a fund selector’s perspective, a concentration in only a few domiciles can have advantages. Cross-border fund distribution may arguably have led to more transparency, consistency (for example, in how costs are calculated), and a generally greater degree of harmonisation.
The fact that most cross-border fund distribution is concentrated in these two countries may also increase the comparability among products for a fund selector, and both countries seem to be in a good spot to maintain their dominant position. A key ingredient for this will be how the two countries will be able to attract and expand their business with alternative investment products, given that traditional investment products have experienced significant margin pressure across the fund industry.
Luca di Patrizi: “ETFs are now firmly mainstream, and they are now moving well beyond their roots in indexing. While active management has been available in mutual funds for years, investors are increasingly turning to the ETF wrapper to access these strategies. “
Luca Di Patrizi: Navigating cross-border fund distribution presents specific challenges, particularly with compliance. Adapting to regulatory changes and maintaining transparency to protect investors are crucial components. Furthermore, technological advances are reshaping the landscape for cross-border fund distribution. Pictet Asset Management is increasingly investing in technology to streamline the investment and distribution process, making it easier for clients to access our solutions. Data analytics and AI will be at the forefront, helping us to better understand market trends and clients’ behaviour.
Additionally, in Europe, the growth of investment platforms as a distribution channel is acting as a catalyst for greater cross-border distribution. Platforms can offer a streamlined, more harmonised process across different markets, ultimately enhancing efficiency and reducing operational barriers. They are well-positioned to take advantage of a more uniform set of rules when the Capital Markets Union is implemented in Europe.
Richard Rainback: “Ireland and Luxembourg remain by far the two most popular domiciles for funds on our buy list, and I cannot see this changing anytime soon.”
Richard Rainback: Ireland and Luxembourg remain by far the two most popular domiciles for funds on our buy list, and I cannot see this changing anytime soon. Aside from needing to be aware of differences in tax treatment and the stringency of target market restrictions, from a fund selection perspective, my team are largely indifferent between them.