Chameleon asset managers need to adapt to survive

These past 12 months have flashed by in a heartbeat. As ever, so much has happened, with our industry once again going through significant change. Given the musical theme of this year’s Investival was my favourite decade, the 1980s, it’s perhaps apt to think about the last 12 months as something akin to Culture Club’s 1983 classic ‘Karma Chameleon’. After all, asset managers are seemingly having to continually adapt to their changing surroundings to survive.

With COP26 dominating the headlines, it’s clear that 2021 has been a year where ESG investing feels like it has moved firmly into the mainstream. Asset managers can’t bring product to the market fast enough to satisfy the seemingly insatiable demand for all things shaded green. Or as Culture Club might say ‘ESG investing would be easy if your colours were like my dreams; green, green and green…..’. This is all well and good, but the speed of change gives rise to the risk of greenwashing, something the Bank of England warned against in the summer and is looking to tackle with a panel to create a green taxonomy. With a raft of announcements from COP26 around pledges to reduce fossil fuel finance, methane production, deforestation and guarantees of capital to fund all of this, there is plenty for asset managers and investors to digest. We are seemingly in the foothills of this journey and we can expect significantly more developments during the year ahead.

Sticking with the chameleon theme, active asset managers have quickly worked out that without adaptation they may well become an endangered species. The continuing theme of consolidation is how many are choosing to fight back, and 2021 was another year of significant M&A activity. The standout deal this year has been Threadneedle’s recently completed acquisition of BMO to create a £525bn giant, while there have been many other smaller deals this year. While it feels like size is becoming all important, the recent Investment Association Annual Survey made for interesting reading. A table tucked on p98 of this excellent 120-page document shows that, compared to 2015, the percentage of assets in the UK managed by asset managers below £25bn in size is almost unchanged at 70% vs 71% six years ago. This should make encouraging reading for all of those boutique managers looking to raise assets. The perception is seemingly different to the reality, as I suspect many of us would have felt that assets have been concentrated into the much bigger players in recent years.

At the risk of using another tenuous 1980s musical reference, T’Pau’s smash hit ‘China In Your Hand’ points neatly to another major theme of 2021 and one that will continue to dominate the investment landscape through 2022 and beyond; China. Having had a stellar 2020, China has been brought back down with a bump in 2021, as the government looks to rein in capitalist excess. With China making up c50% of both Asia and emerging market benchmarks, this has created a headache for a lot of managers, and performance for many has suffered. The winners and losers of 2021 can in many ways be judged simply by whether they were overweight or underweight the likes of Alibaba and Tencent. While a more interventionist government will almost certainly slow GDP growth a little, China is still on course to overtake the US as the world’s largest economy by 2030, and therefore can’t be ignored. Given its sheer scale, we wouldn’t be surprised to see further development of Asia ex-China or emerging markets ex-China products through 2022 to bring greater choice to investors.

On 15 November we saw a new fund structure come into existence, the LTAF (long-term asset fund) focused on illiquid assets such as private equity, infrastructure and real estate. This structure will see a minimum 90-day notice period for redemptions and is aimed at sophisticated investors and DC pension schemes, but will look to potentially widen distribution in 2022. While so far the FCA hasn’t linked the potential change in rules for open-ended physical property funds to this development, it wouldn’t be inconceivable that this is the direction they choose to take. As Bucks Fizz said back in 1981, it’s a case of ‘Making Your Mind Up’ for the FCA right now. During 2021, we saw both Aviva and Aegon announce the winding up of their physical property funds, and major questions remain for the rest of the sector which won’t be answered until the FCA provides full clarity on the outcome of their review.

As we reflect on another year of restrictions and hopefully a more positive 2022 that sees us return to a more normal pattern of life, it’s also clear that some things have changed potentially more permanently. The use of technology has certainly changed the way that my team and I are interacting with fund managers. The time spent travelling around London, going from meeting to meeting has been replaced with a far more efficient way of working. We have found fund managers far more accessible, with meetings often being richer given that both the fund manager and ourselves have access to live information during the discussion.

We have also been talking to managers, particularly those that manage funds focused on the US, Asia and emerging markets from the UK, about how they see their own research process changing. Most would have previously told us how ‘boots on the ground’ is a vital part of their research process, but having had 18 months of not being able to put their boots on the ground, the vast majority have performed just fine. This leads to an interesting quandary about how valuable all these trips were in the first place, now technology can replace so much of it. This results in better use of time, a better outcome for the environment and hopefully lower running costs too. So, it looks as if the virtual meeting is here to stay and we will all be having to ‘Pump Up The Volume’ on our Zoom calls just like MARRS told us to all those years ago.