After the curveball result of the Brexit referendum, I can’t say I was completely surprised at Donald Trump’s US election victory, though given his ambition to shake up many established features of the world order, it still came as a bit of a shock. As he takes up the reins of the world’s largest economy, the exact direction of his policies remains somewhat enigmatic, and it’s still early days to judge the impact of his presidency on asset managers. Markets have thrown them some opportunities and challenges already, but I wonder if there isn’t a bigger, existential issue lurking in the shadows…
Trump’s win has further fuelled the popular narrative of a backlash by the developed world’s disenfranchised against a perceived power elite. Hear the word elite and we conjure up images of politicians, royalty, film stars and high-flying bankers. Those with power, money and influence. But what if asset managers are also viewed by the bulk of people as fully paid-up members of this club?
Since the crisis of 2008, financial behemoths (in both human and corporate form) have provided easy targets for media ire and government regulation, with banks taking the worst of the flak. But asset managers have been moving into the crosshairs for some time with talk of ‘too big to fail’, and pressure building on fees and a need to prove the value of active management. Viewing the industry from the inside out, I have to admit that some of the cynicism shown towards asset managers isn’t without merit. There are undoubtedly too many fund products on European shelves that would struggle to convince the impartial observer that they offered good value for money and all active managers need to work harder to establish their value proposition, especially in light of the rise of passive investment.
Unfortunately, the steady drip drip of negative press attention on active funds with poor performance reinforces public distrust, which in turn has damaging consequences not only for fund managers, but for ordinary savers too. The industry’s raison d’être is to assist its clients in securing a stable and comfortable financial future. The returns on offer in many fund sectors have been vastly superior to those on cash in recent years, yet European citizens continue to plough a significantly higher proportion of their savings into cash than do their US counterparts. In this ultra-low-rate environment, such caution bears a major opportunity cost, but is also proof of the safety so desperately craved in the wake of 2008’s downturn (and those that came before it), and the lack of understanding of the good that funds can do.
It may sound trite for me to say that asset managers need to work on rebuilding trust, but this will be necessary to keep existing clients and win over new ones, as well as to stave off the threat of other firms, including distributors, muscling in on the fund-management patch. There are some encouraging signs here and there of groups trying to tackle the trust deficit head-on. In the UK, Woodford Investment Management has raised the bar on portfolio reporting, regularly revealing complete holdings – a smart move given the widespread demand for greater investment transparency expressed by Europe’s fund selectors to Fund Buyer Focus. The new ‘People’s Trust’, being set up by former Investment Association CEO Daniel Godfrey, is also making headlines for claims that it will pay no bonuses to employees, and feed part of their salary into the trust itself in order to encourage them to concentrate on long-term performance. Of course, it is easy for newcomers and boutiques to ride the sentiment wave; much harder for the oil tankers of the industry to make the big turns required to alter public perception, and yet these are the groups best placed to make a difference to the brand of fund management.
With markets experiencing a difficult journey in 2016, fund sales slowed down markedly from the previous four-year run of €200bn+ of annual net new subscriptions to long-term funds. Trump’s win places new question marks over the future returns of the year’s favoured investment destinations, such as bonds and emerging markets. The Brexit vote arguably fired the starting gun on a wave of political change that has been reinforced by the US election and is likely to make its mark elsewhere in Europe over the coming year, with a number of major votes in the pipeline. And the liquidity boost that has supported the industry in recent years looks to be reaching its end game. Times could get tougher still for asset managers before getting better – but they can soften the blow by inspiring greater confidence in the valuable work that they do.