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High stakes: Can the asset management sector get itself future-fit?

With growing demands from investors, the investment management industry is bracing itself for a make-over in a changing world. Is it up to the task?

“Investment managers can save humanity and the planet,” reads Daniel Godfrey’s Twitter biography. And he’s not even joking.

Godfrey came to this conclusion during his time at the helm of the Investment Association. The luxury of his job was getting to think about the industry’s future rather than having to worry about profit, costs and sales all the time, he says.

There, he learned that the industry has the power to change businesses’ behaviour in a way that is good for investors but can also resolve the planet’s existential problems.

Godfrey still believes in that power. Now an independent director and adviser to investment managers, Godfrey tells Money Marketing: “When you invest in your pension scheme, objectively you need two things: an absolute return over a long period of time and a world that’s worth living in, in which to spend your capital.”

The investment management industry’s job is to deliver just that.

Godfrey says: “A logical vision of the industry’s purpose would be that of sustainable wealth creation, and the delivery mechanism of that would be purposeful stewardship of the investments we make.”

However, the reality is that the asset management industry has not always lived up to that promise. Arguably, too many eyes are fixed on the short term. This focus on companies’ short-term goals against investors’ interests in the long term can create a disconnect between the investment management industry and the investors it is supposed to serve.

This contradiction – when investors need long-term, sustainable, absolute returns but where outperforming the index focuses on relatively short-term relative returns – can create conflicts of interest. For example, when a manager is underweight a stock, the investor still wants it to do really well because that is good for their absolute return. But the manager has a reduced incentive to undertake stewardship or to engage to help the company do better, because that could harm their return relative to the index.

Godfrey says: “Beating the index would be a by-product of being good at managing investments, whereas we have seen the index being too much of a holy grail for asset managers.”

A logical vision of the industry’s purpose would be that of sustainable wealth creation

Godfrey may have been ahead of his time, as the IA has recently revealed its vision for the industry for the coming five years, which includes a shift in focus towards long-term and sustainable investment.

A bold Vision for the future

Last month, the trade association – which represents 250 members managing a total of £7.7trn worth of assets – presented its blueprint for the industry for the five years ahead, in which it outlined where the industry is going based on some “megatrends”.

The IA chief executive Chris Cummings opens the report, 2025 Vision, by saying that there has never been greater focus on what investment management firms can do to deliver for consumers and the wider economy – a trend that will only escalate.

The report offers a prescription for a “value-focused industry, aligned with the needs of its customers and society”.

Nudges in the right direction

As one of the drivers of change, the IA identified transformation of the long-term savings and pensions landscape in a world where we are living longer and the weight of saving for retirement is increasingly on the shoulders of the individual.

In the same way as we have had successful campaigns over public health issues such as smoking and safe sex, people can be nudged into starting to save for retirement early, concluded a panel at the IA’s Annual Policy Conference, where its 2025 Vision was presented.

At the conference, the IA also announced its new proposed structure for a ‘long-term asset fund’ – a vehicle for illiquid assets that would trade in intervals longer than a day.

Although this came right in the midst of a Woodford-sparked debate over the pitfalls of illiquid assets in daily trading fund structures, the thinking behind the long-term asset fund has been in train for over a year as part of the UK Asset Management Task Force.

Investment Association to include ETFs in sectors

The proposal for a long-term asset fund sparked a reaction from fellow trade body the Association of Investment Companies, which represents closed-ended funds. Chief executive Ian Sayers claimed that the vehicle will not address systemic issues, and recommended that fund managers opting for the newly proposed fund should have to explain to investors why it is better than an investment trust.

Russell & Co Financial Advisers independent financial adviser Tim Morris says he is not “too keen” on the long-term asset fund.

Morris says: “It does indeed sound like an investment trust. Although I do advise on those, I tend to avoid more illiquid investments. This includes things such as structured products.”
However, Morris adds that, while all his clients view their investments as long term, the majority like to have some kind of flexibility to access this money fairly easily, especially older clients who may have health issues in the not-too-distant future.

‘Demanding’ asset owners

Another of the key trends that the IA outlined was wider societal expectations of investment managers with the growing importance of stewardship and sustainability.

In his Ted Talk from 2015, Aviva head of responsible investment Steve Waygood said that only a psychopath would be happy to benefit financially from the death of a friend or family member, but individuals’ pensions money is unknowingly used to fund arms and tobacco companies.

Fast-forward four years and Aviva launched a default environmental, social and governance option for pension schemes. This was on the first day of London Climate Week, which followed London mayor Sadiq Khan’s declaration of an environmental and climate emergency, acting on demands from activists such as Extinction Rebellion, who took to the streets for weeks earlier this year.

The ‘Attenborough Effect’ means you can’t make assumptions about who is interested in impact investing

The day after, activists including unions representing actors and stage managers – on whose behalf Aviva manages £140m in pensions – protested in front of the Green Finance Summit, where Waygood took part in a panel entitled ‘Investing in a Sustainable Future’, calling for default pension options to be completely fossil-fuel-free.

Boutique wealth manager EQ Investors offers its clients positive impact portfolios, where clients can invest their money aligned with their values.

The most common exclusion requested by their clients is fossil fuels.

Executive director Jeannie Boyle says that while there is a strong argument in favour of shareholder engagement with these companies, she fears that clients would be turned off from investing if they felt they had not been listened to or ignored.

In the six years EQ has been offering the propositions, it has experienced a consistently higher-than-average level of investment from women and young people, but last year saw “remarkable” interest from clients who might not be the typical candidate for a ‘green’ port-folio, according to Boyle.

She says: “The ‘Attenborough Effect’ means you can’t make assumptions about who is interested in impact investing and who won’t be interested.”

Washing away the green

Growing interest from asset owners in ESG issues and its trendiness has led to a situation in which some asset management firms can try to appear ‘greener’ than they really  are, however.

Godfrey warns an  increase in demand can have unintended consequences: “There is a danger that, beyond a small number of asset managers that take it very seriously and do it very well, some managers will find ways of talking a good game without doing that much.

Leading asset managers target transparency failures over environmental impacts

“One of the problems with the current version of the Financial Reporting Council’s UK Stewardship Code was that it essentially rated you based on what you said your policies did rather than on the actual outcomes.”

The regulators are starting to pick up on this, however. The UK Stewardship Code is currently under review. Similarly, United Nations-backed initiative Principles for Responsible Investment, which is centred on six principles of ESG, has been “watching” those signatories that have not committed to the code, nudging them to step up their game – with an intention to delist them should they fail to improve.

Boyle says: “The problems of terminology and greenwashing are interlinked. It’s easy to market an investment as sustainable and give it a green-sounding name whilst including significant holdings in oil majors.”

At EQ, the firm has come up with a way of showing its clients what impact their investment has had.

Boyle says: “The impact calculator engages clients in two ways. Firstly, it is visual and allows a client to see the value of their portfolio in a completely new way. Secondly, it allows us to demonstrate the validity of the impact investment label by measuring impact outcomes.”

As part of the 2025 Vision, the IA has called for “far greater clarity and comparability” over the different responsible investment approaches that are available, as well as improved disclosure of how they relate to sustainability, which it deems a “critical foundation” of this trend.

IA’s 2025 Vision offers a prescription for a ‘value-focused industry, aligned with the needs of its customers and society’

The IA itself launched an industry-wide consultation on sustainable and responsible investment last year, which seeks greater clarity to help investors navigate the space in line with agreed definitions.

Godfrey thinks that investment managers have been doing a better job of stewardship, thereby helping to save the planet and humanity – as his Twitter bio puts it – in recent years.

He says: “In part, it is because of increased demand, although we can still go a long, long way. This will need asset owners to put a much bigger weighting on stewardship and engagement. Media attention and employee interest have made an impact and many investment managers have really stepped up, but as an industry, we urgently need to make the case to investors better and bring them with us.”

He adds: “The stakes couldn’t be higher. Collectively, the investment industry controls assets worth a hundred trillion dollars. Mobilised to focus on sustainability, we could deliver better long-term returns to investors and play a key role in building a world in which human potential can flourish.”

Adviser view: Chris Welsford, managing director,
Ayres Punchard Investment Management

Chris WelsfordI think most people, not just young people, are weighed down with falling or static real incomes and increasing anxiety over the future – not just around issues such as Brexit or Trump, but the ecological and climate-change disaster that is unfolding before us.

Many young people are very aware of this and it’s affecting them to the extent that they see little point in saving for
the future, with retirement so far away in a future they have trouble imagining in any positive sense. We need to understand this and give them hope that the big challenges set out in the UN Global Compact on Sustainable Development can be addressed.

It is all too easy for us to give up, say there’s nothing we can do and just end up living entirely for the moment. This is why sustainable – and now regenerative – investment is becoming increasingly important to all clients. People are more and more concerned that we invest their money responsibly.

They want us to demonstrate that we are limiting the damage done to the planet by investing in companies that are part of the solution, not the problem. It is also important to all clients that we can show we are able to offer them competitive returns as a result of our investment strategy – which we do.

Expert view: Robin Powell: Change depends on a corporate culture shift

Robin PowellIt’s hard to argue with any of the stated goals of 2025 Vision. But it begs the question: why have we seen so little progress made towards these goals before now?

Is the IA really serious about providing more value for consumers? And if it is, how much influence will it realistically have on member firms who, frankly, would much prefer to maintain the status quo? We have, after all, seen several such reports emanate from the industry over the years, and yet, for all the talk, there’s been precious little action.

The reason, I would suggest, is that there’s a fundamental misalignment of interests here, and it’s this: what’s good for the industry is generally bad for the consumer, and vice versa.

The proposal for a new long-term asset fund, for instance, is a good idea which should have been implemented long ago. The problem is that although long-term investing undoubtedly produces better consumer outcomes, it often clashes with the commercial interests of the industry. Indeed, fund managers, brokers and consultants benefit from short-term noise. It suits them, from a revenue point of view, for investors not to think long-term, but to act instead on news and market sentiment.

The real challenge facing the industry – as Daniel Godfrey, Chris Cummings’ predecessor as the IA’s chief executive, rightly identified – is to create a better alignment of interests between those who work in it and those who use it. That’s partly about addressing financial incentives, and ensuring that pay and bonuses fairly reflect the actual value added for consumers.

More importantly, though, it’s about changing corporate culture. It means putting employees of real integrity into leadership positions. It also means recruiting people with a genuine interest in enriching others, and not just themselves, regardless of their background, colour or gender.

Robin Powell is a freelance journalist, editor of The Evidence-Based Investor and an ambassador for the Transparency Task Force

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