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European Asset Managers Need Strategic Rethink

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Aymeric Poizot
By Aymeric Poizot, Managing Director, EMEA Fund and Asset Manager Ratings, Fitch Ratings.
Asset managers are facing a difficult environment. In order to compete in Europe, they will have to focus on the areas where they are credible, demand is sustained and performance expectations are high. They will need to strengthen their key areas of expertise, scale down or outsource other areas and expand in neighbouring activities while investing in new areas. Aymeric Poizot
There has been no growth in European assets under management (both funds and mandates) in the past five years, with assets unchanged at USD18trn. In the past three years, only 40% of managers experienced fund inflows and 75 to 80% of inflows were concentrated solely among the top ten houses across asset classes
Disaffected investors are turning their backs on managed products, while the retail sector is shifting its focus to bank deposits and institutional investors are increasingly internalising their asset management operations. These issues will be compounded over the coming months by other concerns, such as portfolios in the low yield environment being reallocated toward income generating and global assets, which is a real problem for managers focused on traditional domestic assets. Cross-border activity is also intensifying competition, with new entrants and less room for second-tier players
Fitch believes capital markets and investor demand will be driven by structural forces over the next few years. These include bank disintermediation, Solvency II and derisking, and globalisation. As a result, the asset classes and investment strategies likely to be favoured include credit; global equity, global fixed income, global credit;  investment solutions;  multi-strategy fixed-income;  non-directional credit and equity (eg market neutral); low risk/income-oriented multi-asset; and  equity themes.
Structural Forces
European institutional investors are now de-risking, while seeking out yield to meet commercial or actuarial targets. Credit is particularly appealing to institutional investors, while insurers favour investment grade corporates and pension funds target high yield and emerging markets, at the expense of equity. Sub-asset classes, such as inflation linkers, tactical asset allocation funds, infrastructure or cash are benefiting from some institutional interest, notably from Dutch and UK pension funds and continental European insurers. Managers that are not well positioned on credit – notably specialties (high yield, short term, emerging markets) are likely to lose institutional market share.
As markets change rapidly, managers must adapt quickly and well to new challenges. For example, in investment-grade credit, managers have focused on directional strategies. However, as spreads tighten, most proactive managers are now adding absolute return or market neutral strategies to their offerings
As investor demand will focus on income generation, global products and moderate volatility products, Fitch anticipates limited growth in the core assets of domestic equity and government bonds. While investors will maintain a reasonable allocation to such assets, they will become more receptive to switching to passive strategies, or to managers with stronger track records, an active management style and diversifying profiles. Competition for such assets will be intense.
We expect to see European asset managers re-shaping their activities in three key ways: strengthening their key areas of expertise; scaling down or outsourcing others areas; and expanding in neighbouring activities while investing in new areas.

Focusing the portfolio of expertise
To be successful, investment strategies where demand is anticipated and where the manager is credible, will require  strengthened resources (front office, commercial, product specialists, staff with international profiles); increased critical mass (by merging funds, using master feeders, moving client money); heightened commercial efforts (referencing, distribution, communication, ratings); and adoption of international standards (funds’ benchmark, product name and domicile).

Conversely, investment strategies where demand is expected to be weak and/or the manager lacks credibility will need to be scaled down, either by closing funds, outsourcing management or by using funds of funds or funds of mandates.

Expanding selectively
In order to remain competitive, asset managers in our view should not hesitate to expand into “neighbouring” activities, despite the resource and process adjustment this requires. For example, a high yield manager may consider expanding into loans, or a loan manager into high yield, as the issuer pool is similar.

Likewise, moving into the diversified income space is a logical progression for a European equity manager, given the overlap between large-cap stocks and investment-grade credit issuers. Such a development would require the recruitment of bond portfolio managers and the set-up of a top down allocation process. Long only stock and bond pickers are also well placed to navigate sideways markets by developing absolute return offerings.

Investing on long-term trends
Bank deleveraging and globalisation should also benefit the European asset management industry. The European banks’ deleveraging process is expected to generate market financing needs representing roughly 10% to 20% of the current European investor asset base (pension funds, insurance companies, mutual funds), New areas of growth fuelled by these factors  include: global equity or bond products; emerging markets; senior secured high yield; direct lending; and real assets. Many of these are new to asset managers, who must develop scale and credibility if they wish to successfully compete in these areas. Yet in most cases, doing so demands serious investment in terms of local analysts, sourcing channels, and technical and legal knowledge. Fitch believes that acquisition and team lift out are the only viable options.

However, developing new activities, for example in global equity or senior secured high yield, requires significant investments in terms of personnel and/or acquisitions. Managers unwilling or unable to commit in these areas now may find themselves less able to compete in the near future.

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Investment Roundtable: Live with Jim Bianco

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With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

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Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

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Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 1

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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What Investors are Looking for in the Next Fintech

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What Investors are Looking for in the Next Fintech 2

By Shaun Puckrin, Chief Product Officer, Global Processing Services

Are investors getting pickier when it comes to fintech? It’s hard to say for sure, but there are recent developments that point towards a shift in investor interests.

Firstly, research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8bn of venture capital was invested in 167 startups compared to H1 2019, when $3bn was invested in 263 startups.

However, it’s worth mentioning that the $1.8bn UK fintech investment earlier this year was still a 22% increase over the second half of 2019, when funding totalled $1.5bn. Therefore, all signs suggest that investors will make significant increases in capital investments during the rest of the year.

Secondly, it appears that the current investor appetite is for more mature, later-stage fintechs: more than half of the $1.8bn went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Perhaps it is the ongoing economic uncertainty surrounding the COVID-19 crisis that is prompting inventors towards perceived “safer bets”, but what we do know for a fact is that early-stage fintechs raised just 8% of the total investments.

Is there a silver lining? The coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.

So, what are the four things investors are looking for in the next big fintech?

  1. A strong, differentiated proposition

The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. Against this backdrop, “challenging the incumbents” is, unfortunately, no longer a USP.

To really catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.

Ultimately, investors are going to ask the question: why you? What are you doing that’s unique? What do you have that means you – and only you – can do this? They will also want to know how defendable that proposition is once you’ve built it.  What is your moat? Getting this right means a foot in the door with investors.

  1. A path to profitability or exit

This is an extremely pertinent point, especially given recent news surrounding the financial results for many of the big challenger banks, and how they show the route to profitability for challengers isn’t necessarily straightforward or easy.

In the current environment, an attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. By being able to demonstrate how you can plot a course to attract and serve your customers for less than you can monetise them will be at the route of any subsequent valuation, no matter how its outcome is achieved.

Whatever the goal, you need a plan to support your ambitions. You need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital – you must invest in the right people, partners and technology to make money. Developing competitive services, attracting customers and, crucially, monetising your offerings, requires hard work and the ability to adapt to your customer’s needs.

  1. Strong leadership and core team

Ultimately, securing investment is about building relationships and what often tips the scales is having the right people in the room. This is why a great team is crucial.

A great team means many things: Strong leadership with the vision to build something revolutionary. The skills and expertise to turn that vision into reality. The experience to traverse the pitfalls and opportunities you’ll face. And finally, the ambition and determination to make the business successful no matter what.

Building the right team with the right qualities is often what convinces investors that they’re putting their money in the right place.

  1. The right partnerships

Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.

From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.

Fintech investment is not dead

After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.

By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.

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