Prudent man rules OK?
The second European Asset Management Congress in Frankfurt last month showed that it has established itself as one of the main gatherings, if not the main one, of the German asset management industry.
But the Maleki Group as organisers have no doubts about the event’s Europe-wide credentials, with Nader Malecki welcoming the “600 representatives from over 20 countries” to the two day of sessions. The first looked at the prudent man and quantitative rules issue, and Maleki set the scene, declaring that the “message should go out to Berlin and Brussels as to what we think of the prudent man rule”. He anticipated correctly that the panel discussion, chaired by consultant Andreas Povel; was in favour of the ‘prudent man’, despite reservations.
Riccardo Ricci, chief investment officer of Invesco Europe, led the charge. “There was no question that regulation in the pensions area is necessary, but no one has regulated successfully their clients’ asset allocation. We don’t require such regulations.” To impose asset allocation rules in defined benefits arrangements was damaging, he maintained. “No authority is in a position to dictate on allocation of assets.”
From southern Europe came a similar theme, with Robert Aleu of CECA, the association of Spanish savings banks, saying “our feeling is that when discussions with customers about their needs for retirement, what they want is information and transparency more than anything else. Quantitative rules are easy to impose but are not what people want.” He added: “Legislation is always late!”
Adam Lessing of AXA Investment Managers in London said that the prudent man rule encompassed all areas of investment decisions, and applied as much to defined benefit as defined contribution situations. Looking at examples of asset liability studies, he argued that there was no one single quantitative rule that could apply and “no one right decision on asset allocation, you had to study with clients to reach the optimal allocation for them”.
The EU’s proposed directive ceiling of 70% limit on equities might be a quantitative restriction, but “in our experience of prudent man rule issues was sufficient and so we do not regard it as restrictive”, said Alexander Schrader, head of pension and retirement services, Allianz Asset Management in Munich. But he welcomed moves against quantitative restrictions, such as the 4% return levels being suggested in new German legislation. “For politicians, such a 4% is just a number, but we know it could affect the wealth of pensioners significantly.” He pointed to the much higher cost of providing pension benefits in Germany compared with the UK. “In Germany, the pensions stagnation is due to the regulatory approach here.” He added: “Prudent man rule does not mean ‘anything goes’.”
The approach that should be taken was to set a framework for pensions asset management, Peter Scherkamp, head of investment management at Siemens Financial Services in Munich. Pointing to the asset liability management tools the company’s pensions advisory group had developed to handle the diversity in the group worldwide, he said that funds would fight for the prudent man approach. “We don’t see why we should transfer management to a set of quantitative rules.”
While Manfred Laux, general managing director of the BVI, the German fund management association in Frankfurt, argued the case for quantitative rules in products such as AS funds designed for individual investors to achieve balance, he agreed there could be a case for prudent man approach in discretionary portfolios for groups.
The future shape of the asset management industry was the theme tackled by another group of panellists, with Tom Cross Brown, chief executive of ABN Amro Asset Management Worldwide in London, looking at the prospects in Europe compared to the US and Japan. Dismissing the US as a mature market, with no growth and low margins and the Japanese as a “long haul” and still virtually closed to foreigners, he asked “is there a European market for asset management?” There were no middlemen such as independent financial advisers or consultants operating on a pan European basis, either in the mutual fund or institutional markets. “So if Europe was really open, how do you crack it?” For his group, the only way was to be on the ground locally, in order to understand the local marketplace. “You cannot do it by having a couple of centres excellence until Europe becomes homogenous.” Investors still like the local national tilt.
He also predicted that if “long active managers” don’t outperform over the next five to 10 years, if the market would go the way of passive core with alternative investments as the satellites to add out-performance.
James Goulding, chief executive of Deutsche Asset Management Europe referred to the problems of creating a scaleable business model in the future: “The profitability of the business was helped by rising equity markets in the last decade. But the poorer markets are going to show up the question of true profitability.” The question of having an investment team of the size to create performance, but diluting the decision process as teams got bigger. “The people who get that right will build the scaleable businesses of the future.”
On building global businesses, firms need to manage money locally on the ground in each region, and have the research and investment process to create portfolios to run money on a global basis, said Goulding. Multinational customers expected a global process.
He pointed to the increasing search for alpha, as for example hedge funds with long-short strategies. “Why shouldn’t we have long-short strategies for all our traditional products – maybe in three or four years’ time we will run our money that way.” Firms needed to manage their brokerage relations more as a partnership and not adversarily as in the past. “We lose money by the way we deal.” He also reckoned there would be more financially engineered products developed in the alpha search.
As far as European asset management was concerned, Goulding said “there was no clear winners and no one yet dominated, though there were some with clear strategies. But I would predict there will be three or four clear leaders in Europe in the next five years.”
Ronald Logue, chief operating officer, State Street in Boston, claimed the industry, whether as service provider or asset managers had the one perspective since they were “all in the same business together”.
He pointed to the asset pools being built up on the back of retirement savings in Europe which are at the heart of the opportunity. The creation of these pools of assets ensured comfortable retirements for individuals concerned, who were at the heart of what the industry does. “The trend to prefunded pensions will power economic growth in which we all will participate. But it is the individual investors, who drive this.”
As investors demand more choice, investment managers would come under increasing pressures about capital allocation. Yet managers were under pressure to become more efficient, as a result of STP and meeting T plus 1 settlement. Investment managers involved in doing own administration and other services were carrying additional risk, said Logue. Managers needed to reduce their future spend in these areas, but increase spend on product development. “They need to go for their core competencies,” he said. “We believe the demand is for an integrated product set,” he said.
Incumbent complacency was the biggest risk in the industry today, John Reinsberg, managing director of Lazard Asset Management in New York told the congress.
“Plan sponsors hire asset managers for their ability to deliver alpha. And manufacturing quality will still reign supreme.” He foresaw a trend to much more customised benchmarks. “No longer would it be to beat the S&P500 or EuroStoxx50.One client told us to forget any benchmark, just beat Coca Cola!”
The good product manufacturers would get better, he said. Consultants in the US put managers into boxes such as single style. “But can you have just one style to meet all clients’ worldwide needs? You cannot!”
“The biggest challenge for the mid-sized players in the market, is how to develop your profile”, said Friedrich Schmitz, global head of asset management at Commerzbank in Frankfurt.
“Create an entrepreneurial, innovative environment for your most talented people, as the battle is to attract the most talented people,” he said. Cost containment was another major challenge of the business currently. “Create a global mission statement – for your business but empower your people locally and motivate them with equity participation.”
Making large fund management units would not work in the future, said Richard Wohanka, glogal head of asset management at WestAM. “Combining retail and institutional fund management in the same business won’t work, as the needs of the clients are so different as to require different types of fund managers and products.” He saw the industry splitting between specialist instiutional managers and mass market retail, with different products.
“There will be a massive explosion in Europe of boutiques,replicating the US experience,” he said. “The market is dominated by big banks and insurance companies. Investors’ choice is pathetic in comparison with the US.” As institutions get more sophisticated they will want “more alpha”, which big managers will not be able to deliver consistently. Mass market business will concentrate into the hands of a few large groups in Europe.
“I believe operating margins will collapse, from their absurdly high current levels,” he predicted.
“If Europe does not get its act together, nothing will stop the dominance of the Anglo Saxons, by which I mean the Americans, rather than the British.” He saw the continuation of national systems of regulation, which made it extremely difficult for any European bank to build a pan European operation. “It has to be a series of local operations, but this does not give them the basis on which to attack the markets on a global basis. But the US groups with a much bigger market base will have the edge.”