by Jake Moeller.
The twelfth annual Thomson Reuters Lipper Alpha Expert Forum was held in London on November 7, 2017 and maintained its reputation as one of the European mutual fund industry’s premier thought-leadership events.
We welcomed some of the preeminent fund industry executives in Europe to share their views on key developments and challenges facing the industry today.
Once again we partnered with the Chartered Institute of Securities and Investment–the leading professional investment body in the U.K.–as our co-hosts, and a full house in the Thomson Reuters Auditorium ensured a lively debate.
The evolution of ethical investing to ESG and beyond
The morning’s first panel session was moderated by Investment Week’s founding editor, Lawrence Gosling, who welcomed Andrew Parry–Head of Sustainable Investing, Hermes Investment Management; Chris Welsford–IFA and Managing Director of Ayres Punchard Investment Management Limited; and Trevor Allen–Product Manager, Risk and Performance Division, BNP Paribas.
The panel discussed the increasing influence of environmental, social and governance (ESG) criteria into mainstream investing, with Mr. Parry noting that poor governance is not only an investor threat, but could “come back to bite companies.”
Mr Allen noted that shareholder rights are an increasingly key component for ESG outcomes while Mr. Welsford warned that shareholder engagement may not always be based on ESG criteria and maintained the importance of considering ethics independently of broader ESG inputs. Litigation, too, was mentioned as a potential means of engagement.
The panel noted that ESG can no longer simply be used as a marketing tool. Investors and fund selectors are increasingly prepared to hold fund managers to account on actionable ESG outcomes recognising that ESG screens consistently improve performance outcomes.
The European flows environment
Detlef Glow, Head of Lipper EMEA Research, outlined key patterns of flows into mutual funds in 2017. He noted that European fund net flows of over €600 billion to the end of Q3 2017 were on track to set a new annual record, with total assets under management in Europe passing the €10-trillion mark for the first time.
Mr Glow noted the popularity of global equity funds which have collected over €60 billion of net inflows, reflecting investor appetite for regional diversification. He also noted that flows and AUM are both dominated by active funds, despite the perception the market is more disposed to cheaper passive products. Approximately 14% of total net flows for Q3 were into passive vehicles.
It was also noted that the UK remained the major individual fund market in the Europe with 20% of total assets. This was despite potential Brexit headwinds and the popularity of other fund domiciles.
The passive ascendancy; the rise of rules
Detlef Glow also moderated a panel session with Gregg Guerin–Senior Product Specialist, First Trust Global Portfolios; Hector McNeil–co-CEO and founder, HANetf; and Jason Xavier–Head of EMEA capital markets, Franklin Templeton ETFs.
The panel examined how rules-based and smart beta products are augmenting traditional passive offerings and allowing investors to move away from market-capitalised indices. It was agreed that this is particularly valuable in a late-cycle environment.
Mr. McNeil encouraged the audience to reevaluate their perceptions of ETFs, arguing they should be considered a piece of technology rather than an asset class. Mr. Guerin highlighted how rules-based investments provided excellent diversification for investors, potentially providing them access to undervalued assets. Mr. Xavier pointed out how the European regulatory environment is influencing the market for ETFs, noting its potential to increase retail demand.
Some of the panellists were dismissive of the argument that some sectors (e.g., emerging markets) are more fruitful than ETFs for active managers. It was recognised that, increasingly, themes such as technology and ESG are the next innovations for the ETF market.
2017 macro review and outlook for 2018
The final session saw Jake Moeller, Head of Lipper U.K. and Ireland Research, moderate the popular macroeconomic outlook session with Keith Wade–Chief Economist, Schroders; Jason Day–Senior Investment Manager, Standard Life Wealth; and Patrick Armstrong–CIO, Plurimi Investment Management.
Discussions of the increasing interest rate environment, central bank activity, and liquidity dominated the panel. Mr. Wade noted that, despite the global shift from quantitative easing (QE) to tightening (QT), there will still be sufficient liquidity to maintain bond yields at around 3%.
Mr. Armstrong warned that investors should reduce return expectations in respect to higher equities valuations. On the assumption of nominal growth and earnings growth of 4.5% over the next seven and an average multiple of 16.5x in 2025, the S&P500 would produce a return of only 1.3% per annum, he stated.
Mr. Day noted that returns on a balanced portfolio will be more difficult to maintain, and he observed the large dispersion between value and growth assets.
The panel concluded that valuations across many asset classes are on the high side, but the members favoured risk assets over bonds. Both emerging-market debt and equities were popular. European and Japan equities were preferred over U.S. equities. Inflation, too, could now begin to stir as labour markets become tighter.
Expert opinions matter
All the sessions experienced a high level of audience engagement, with lively questions and debate contributing to the success of the event. The three hours of Continuing Professional Development credit allocated to the event by CISI were well earned.
A live “Twitter Wall” proved popular during the event, with considerable activity posted via #LAEF17.
Thomson Reuters Lipper is very proud to have assembled such accomplished panellists to this forum. Our considerable gratitude is extended for their generosity and thought leadership. It is vital to the industry that their experience and knowledge be shared.
We look forward to welcoming you all back in 2018!
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This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.