ress reports have claimed the UK's asset management industry is under threat from Brexit and moves by France to attract firms to its shores. But when Citywire Selector looked at the issue last year, conflicting messages abounded.
[These comments originally appeared in the July edition of Citywire Selector magazine and were published online in September.]
London’s standing as a leading financial centre on the world stage is not in dispute but there’s no doubt that Brexit has introduced an air of uncertainty that is hard to ignore.
Columbia Threadneedle and M&G Investments both swiftly followed the 23 June European Union referendum by announcing plans to develop their hubs in Luxembourg and it wasn’t long before twitchy city-dwellers were speculating on which major asset manager would be the first to exit the capital.
As my fingers hit the keyboard, JP Morgan has announced plans to house 1,000 of its staff at a newly-purchased location in Dublin – a convenient stretch away from the politically uncertain soil just across the Irish Sea.
The new site, which will become operational in 2018 in Dublin’s docklands, illustrates how the investment industry’s leading players are reassessing their relationship with London in light of future challenges which may lie ahead. But, what of the fund selectors who live and work in the City?
Andrew Harradine, head of long-only selection for Swiss group EFG, situated in London’s Green Park area, believes these moves are likely to become more common as asset management firms and private banks hedge their bets amid uncertainty. So is he worried? Hardly.
‘Clearly, we know there is talk of banks and asset managers moving operational staff to Ireland and to some other European markets. But are we suddenly going to see a lot of London-based fund managers relocating to continental Europe? That’s unlikely, although it is perhaps too early to tell,’ he says.
A short trip on the London Underground across to Bank finds Andrew Summers, head of fund research at Investec Wealth & Investment. Summers oversees £8 billion (€9.3 billion) in collective investment vehicles from the South Africa-owned group’s giant Gresham Street offices.
Summers agrees with Harradine that more clarity is needed. But, he is mindful there may be increased pressure for UK companies to go beyond symbolic representation in Europe and up their physical presence on the Continent.
‘This is largely theoretical, as we are two years away from actual negotiations, but it is a hugely important consideration. What if the Europeans were to say: “You can’t sell a fund to a French person if that fund is managed out of a non-EU country”, which they could do?
‘Admittedly, the EU would be massively limiting the number of financial products its citizens can invest in but the French may see that as a wonderful thing and they might insist that UK-based asset managers actually put some substance into the French or German markets, for example.
‘Many of them are, for all intents and purposes, just post boxes at the moment. So far, the European regulator has been okay with that but the French, in particular, are very keen to promote and increase the presence these companies have on the ground in these countries, which could change,’ he says.
Breaking for the border
So, would there be the much-feared exodus of London-based talent? With roughly one-third of Europe’s entire mutual AuM operated out of London, Summers (pictured above) doesn’t envision a sudden rush across the Channel just yet.
‘Assuming we don’t completely shoot ourselves in our respective feet and say we won’t buy each other’s products, then it should be fine. The EU might demand some decent substance from UK asset managers in Europe and we might insist on the same. But, having said that, most European asset managers already have a lot of presence here.’
A few Tube stops further on takes me to Canary Wharf and the iconic skyline of the UK’s financial heartland, where Ian Aylward, head of manager and fund selection at Barclays Wealth and Investment Management, oversees roughly £7 billion (€8.1 billion) in assets.
‘The vast bulk of Europe’s asset managers are based in London,’ he says. ‘Investment vehicles, potentially, could move, yes. But actual fund managers and staff? No, I don’t see a reason for those people to move, even if it does mean having a vehicle somewhere else.
‘On the flipside, we can still go to France and award a mandate, whether it is to Carmignac or Comgest, but we don’t currently have any Parisian managers. Even within this changing landscape, we will continue to travel globally and select managers, as Ucits, ex the US, is very much established and I don’t think that will change.’
Aylward says a more practical implication for him is the potential disruption Brexit could cause to existing rules regarding EU workers in London. For this reason some of his 13-strong team are already investigating ways in which they could obtain British citizenship, so they are prepared for any outcome.
‘We have a very cosmopolitan and experienced team and they are committed to having their homes in London,’ he says.
‘People are adjusting accordingly as a result of the referendum. We have one team member from Lebanon, one from France and also someone from Russia, so it’s quite a mix, and they need to ensure they have the right passport over the next two years,’ he says.
But what about selectors who honed their skills outside the UK and now operate in London? German national Eckhard Weidner swapped Düsseldorf for Canary Wharf almost seven years ago and oversees fund selection at HSBC Private Bank within its global multi-manager operations.
For Weidner the international appeal of London as a base for fund selection has not been diminished by the EU referendum. HSBC PB chose the city as its global centre for its fund selection efforts last year , consolidating its Geneva and Monaco-based funds teams into London in the process.
‘Everybody realises that a lot of managers are based here and a lot come through to see clients. That makes it a very convenient place to meet, even for those asset managers who don’t have an office here, and that’s not likely to change.
‘Almost all of them have clients here and it is a good place to be, so I don’t see any disadvantages in us basing our efforts here, I can only see advantages,’ he says.
‘Thanks to the ease of technology, we continue to work extremely closely with our Hong Kong and Singapore teams. While we manage fund selection out of London we are very much a global team, with a global approach and one global recommendation list,’ he says.
What if the Europeans were to say: “You can’t sell a fund to a French person if that fund ismanaged out of a non-EU country”, which they could do? - Andrew Summers, Investec Wealth & Investment
Harradine says London’s international role is here to stay and, while travel may be more difficult if and when personal passporting regulations change, its close vicinity to Europe means fund buyers won’t suddenly find this region’s opportunities closed to them.
‘It’s about finding what is practical and useful. In a world where credit spreads are pretty tight across most segments of fixed income – investment grade, high yield and increasingly EM – finding a manager with the
flexibility to actively manage duration or do relative value trades makes a lot of sense, and Kempen’s Euro Credit fund would be an example of that,’ he says.
‘Kempen is a Dutch boutique that we might not have discovered without that travel element and that is not going away. This shows how getting on planes and going to see managers on the Continent is, and will remain, key. From a London perspective I think it would be quite easy to miss some managers.
‘Some firms’ brands are more prominent in the UK market than others, while Kempen is a bit more below-the-radar in a UK context,’ Harradine says.
What much of these discussions have brought home is that despite Brexit, fund selectors working in London will continue to share the same problems faced by their counterparts across the Channel.
Summers says: ‘A lot of the challenges we face will be the same as those in France, Germany and even Switzerland but just with a slightly different client base. MiFID II is universal even though it is EU-focused because we still have to work with these countries, so ignoring it is not an option.’
The rise and rise of passives, for example, is as prominent in discussions as Brexit. ‘Passives will continue to put more pressure on the role we perform and the reason for our existence,’ says Aylward (pictured above).
Weidner concurs: ‘The rise of passive investing and ETFs means investors often feel they don’t need active funds.’
Summers is more forthright. ‘The debate on active versus passive is a bit staid. The articles on outperformance of one versus the other, blah, blah, blah, are all irrelevant. We know passive can outperform active, some does and some doesn’t, but the fact is as long as a portion of a sector has outperforming active managers then the key question remains: how do you identify those managers in advance?
‘That is increasingly lost in the debate about “oh look only 30% of UK funds outperformed last year” and “active is dead”. Rubbish. Thirty per cent outperformed and the question is, were you invested in that 30%? And, if you were, was it luck, was it process or was it a selector adding value and being able to spot those that can outperform over the next 10 years?’
The pressure on fund selectors to justify their worth is an issue that clearly crosses boundaries, as is incoming regulation. Harradine (pictured above) believes boutique players, both in the UK and on the Continent, will come under pressure as regulatory burdens increase.
‘If we take something like paying for research and transparency, for example, that is an issue on the horizon. There are a few firms who have said they are going to pay for research themselves but clearly different industry participants are taking different views.
‘One of the key questions here is how are boutiques going to deal with this? By their nature, they are smaller and rely, in some cases, on the sell-side, so MiFID has big implications for these firms.’
Aylward takes the opposite view and believes, in his capacity as a fund selector at least, MiFID II could have obvious benefits, particularly around target marketing. ‘We could be a beneficiary as the more funds which are road-tested and fit for purpose then the better and easier it will be for us and for our end clients,’ he says.
But Weidner says his day-to-day role is largely the same: ‘My role changed last summer in the sense that previously I had more investment and portfolio management responsibility, but in private banking it is much more about advisory.
‘But it continues to be about selecting funds and communicating investment ideas to those in the front office so they can present them to clients and explain the thinking and research behind the recommendations. The fund selection part hasn’t really changed at all’ he says.
Both MiFID II and Brexit have yet to be fully unleashed, so it’s business as usual for the time being, Summers says.
However, he is wary of looking complacent and Investec W&I will be keeping in step with MiFID II as it develops, even if UK companies are no longer beholden to EU regulation in the long-term.
‘You must remember that the two-year Article 50 is the process of us leaving the EU, it is not the process of us negotiating a new trade arrangement with the EU – that doesn’t start until we have left, which is why we have to keep a close watch on the concept of equivalence,’ he says.
‘Under the terms of the exit, our passporting rules will change, so we won’t be able to just get on a flight to France as we have done, that won’t be allowed any more. There’s that to contend with and that is part of taking us out of the single market.
‘But when it comes to passporting funds, we will still need to meet the guidelines set down by the EU regulator to sell into these markets. That is the same as US, Japanese or Chinese asset managers wanting to sell into these markets, they have to meet the guidelines and rules set by the EU.
‘So, as a group, we realise that if we begin to allow our regulatory regime to deviate from what is expected from the EU guidelines, then the harder it is going to be to re-establish the equivalence principle when we do actually get to the negotiation stage. So we are doing this now to keep step regardless of future outcomes,’ he says.
But with uncertainty set to persist for two years at least, what can investors do now? ‘I think, as with all things Brexit-related, it depends on the ultimate final agreement. If the worst-case scenario materialised, that could be quite damaging for our end clients,’ says Summers.
‘But one has to assume that common sense will prevail and it is in nobody’s interest to inflict damage. I am relatively positive about it because I think politicians will come to their senses,’ he says.