Funds-Market 2017 – Evolution? Revolution? Disruption?

Three weeks into 2017 it is about time to speak about the trends and expectations for the New Year. Investment professionals, experts and service providers from the investment fund industry will do so at the FONDS professionell KONGRESS 2017 on January 25th and 26th in Mannheim.

It´s difficult to make predictions, especially about the future! For this reason views on the market development will be left to the investment professionals and not be touched upon in this blog. However, even if markets are volatile and hard to predict, the exercise is much simpler with regards to spotting and analysing major trends for the fund
industry – so this is where I will dare to give my personal outlook.

It’s all about the money

Clearly in the past and especially in 2016 we have seen increasing pressure on fees and increasing competition between actively managed funds and passive index-linked products (ETF). A lot of noise has been created around this topic by European regulators – amongst them the German regulator BaFin – who conducted studies on so called “closet indexing” strategies. Suspicions had arisen, that certain actively managed Funds might charge high management fees but actually perusing an “index tracking strategy”. Even though the results of the studies have not resulted in findings leading to sanctions, BaFin has already stated its intention to increase transparency requirements for actively managed funds – another disclosure that will add to cost.

The pressure on cost is likely to remain high in the years to come. Close to zero interest rates make it harder for fund managers to generate acceptable return without taking excessive risks and this naturally limits their share of the return investors are willing to pay for the service. Also recent innovations in asset management (see below) are likely to increase competition.

And the Oscar goes to…ETF…again?

Looks like the surge of index tracking funds is about to continue also in 2017? At least, with continuous supply of fresh money, all time highs in the stock markets and investors being more and more sensitive about fees the scene is set. But classic ETFs face increasing competition from innovative products as well and it seems like there are less “low hanging fruits”.

Investors and professionals have long been discussing about the drawback of passive strategies (particularly on major indices) that by their very setup will end up buying the biggest (and most expensive) companies, which have the biggest weight in the relevant index. Critics argue that this strategic flaw will leave index-linked funds more exposed to market drops than classic investment funds.

In the wake of these concerns new “smart” passive funds and strategies like smart beta, multi beta, multi smart beta…have emerged which by application of complex algorithms try to overcome the traditional weakness and passively select the assets with the highest beta potential without actually actively managing the fund.

Another angle but a similar philosophy – namely implementing algorithms to find the best strategy – is the business model of so called “Robo Advisors” who try to dynamically allocate assets in line with the Risk and Return expectations of the investor in a cost efficient manner. This will also impact the fund industry, as the algorithms are likely to increase turnover rates in fund products.

Only on January 17th the Munich based Robo Advisor Scalable Capital has secured a prime partnership with Siemens for all employees of Siemens. Another 250.000 potential clients!

Distribution Disruption

It has been in all newsfeeds in 2016 and maybe was the buzzword of the year, BLOCKCHAIN. And yet an outlook for 2017 would not be complete without stressing the potential disruptive potential of this technology. Even though there are still some concerns with regards to regulatory requirements and privacy of information, the benefits of a secure distributable ledger in particular for distribution, clearing and brokerage are hard to overlook. After all the technology already has a reasonable track record in these fields. Big and small players all over the world have developed or are working on blockchain based solutions. For example, according to Wall Street Journal J.P. Morgan Chase and Citigroup have already completed successful trial of blockchain technology for keeping track of credit-default swaps in April 2016.

It will not be long until fund brokerage will be done on the basis of this technology on a larger scale!

Our team of experts from Mazars will be following the discussions with great interest and be happy to share their knowledge and news from our global network. Meet us @FondsKONGRESS

Contact details : Florian Konz (Senior Manager)