Key takeaways from FundForum 2016

Earlier this week, over 2000 global investment and wealth managers came together at the annual Fund Forum in Berlin to discuss the main trends affecting the industry. Although the scope of the discussions was broad, there were a number of topics which were at the heart of many of the debates and conversations throughout the 3-day event.Here are our top 5: 

Robo-advisors and technology

Tom Brown, Global Head of Investment Management at KPMG, segmented the issue of technology and digital disruption in the asset management industry into three main areas: customer experience, operational efficiency and the use of technology to manage money.

Robo-advisors – online wealth management platforms that provide automated portfolio management advice without the use of human financial planners – are perhaps the industry’s best example of all three points rolled into one. While the technology is still relatively new, use of robo-advisors has been growing exponentially, especially amongst the younger generation, which today prefers to view and manage its pension savings using a mobile app rather than going into a bank branch.

A number of traditional asset managers have equity stakes in robo-advisory platforms, aiming to strike a balance between traditional and technology-based approaches under the umbrella of an established, credible brand name. Others argue that artificial intelligence and machine learning will eventually lead to the demise of the fund manager entirely, the argument being that machines can do what humans can do but better. Consumer behaviour will adapt to the new environment as it always has done when presented with innovative leaps forward such as self-service checkouts, online interactions and soon, driverless cars.

Blockchain

In October last year The Economist devoted their cover story to Blockchain: “The trust machine: how the technology behind bitcoin could change the world”. In simple terms Blockchain is a digital, trusted, public ledger that everyone can inspect, but which no single user controls. It keeps track of transactions continuously, for example ownership of a diamond, rare painting, or piece of land.

The asset management industry continues to debate the potential applications of this technology, which started out by powering Bitcoin. In a panel moderated by Lawrence Wintermeyer, CEO of Innovate Finance, ideas ranged from Blockchain’s applicability in areas such as post-trade environment, collateral and liquidity management, regulatory reporting, and the handling of know-your-client (KYC) and anti-money laundering (AML) data. In each instance success will require close collaboration amongst the various parties involved.

Brexit and Trump

Mohamed El-Erian, Chief Economic Advisor at Allianz, addressed some of the shifts that are giving rise to the anti-establishment movements seen in many developed countries today.

“The common element throughout all these things,” he explained, “is that the advanced world has lost the ability to grow in a fair and inclusive manner, and when that ability is lost and people lose confidence, things start going wrong.”

El-Erian stressed that global growth to unlikely to be consistent and stable any time soon, thus the risk of non-normal distribution of events affecting the markets is always an issue. Secondly, he highlighted central banks’ inability to rein in financial volatility, which remains as frequent and unpredictable as ever.

The discussion centred on the fact that investment managers should try to adopt new framework about how they think about risk, and acknowledge that market events in both developed and emerging markets no longer follow a normal distribution curve.

Is ‘data’ the new gold?

A number of panels focused on the industry’s ability to understand and utilise the unprecedented amounts of data that are generated by each one of us in the digital world.

“By 9 o’clock each morning we have already created more data than mankind created from the beginning of time to the year 2000” said Andreas Weigend, former Chief Science Officer at Amazon.

“Because of the signals you send through sensors, microphones, GPS, gyroscopes and cameras, your phone knows almost everything about you: where you are walking and even how you are walking – it probably knows more about you than know yourself”.

Crunching and refining data such as these enables the industry to improve and tailor its products a lot more to client needs.

Costs and Transparency

The new European MiFID rules are due to take effect in early 2018 and will require funds to give more information on costs in their fund factsheets.

EU and UK regulators are demanding fairer and more transparent fees from fund managers in a bid to ensure greater transparency and accountability to investor clients. As discussed in previous blogs, as part of this process they are also assessing which costs should be borne by the asset manager and which can be passed on to the end client through management fees and commissions.

The new regulatory environment is forcing asset managers to rethink a number of elements of the traditional business model, such as how they consume and pay for investment research.

With technological innovation comes regulatory oversight. Those able to react quickest to the dual challenges of new regulations and market unpredictability are most likely to succeed.

Conference website

Full agenda

MSCI says no to China

Last night, MSCI, the world’s largest indexing firm, announced that it will not be adding China’s A shares as constituents of its widely followed EM index.

It has also made a number of comments which were of interest to global emerging funds following Pakistan, Nigeria, Argentina and Saudi Arabia.

In summary:

1. For passive EM funds, the MSCI EM index is the most significant globally by far, with around $1.5 trillion of indexed investment. For active investors, any change in the weighting of the index (which they are benchmarked against) forces them to reassess the composition of their portfolios.

2. MSCI pointed to a number reasons behind their decision regarding China’s A share market, the main one perhaps being capital mobility. First and foremost, the monthly repatriation limit (the amount of his total capital the investor is able to withdraw from the market during one month) of 20% is considered too low, especially should the fund be faced with redemptions. The time-consuming and opaque process of receiving approval for a quota (allowing investors to invest in Chinese stocks) is also a factor. On top of this, the need for preapproval of financial products on foreign stock exchanges that are linked to A-share indices has not been yet addressed.

It is important to note that China is already the largest component of the MSCI EM Index, making up over 25% of the index. This is made of up of ADRs of Chinese companies listed in NY or Chinese shares quoted in Hong Kong. The domestic (A-share) stock market – the largest in the world after US – is not included in the index.

3. MSCI announced that Pakistan will be reclassified as an Emerging Market. Given its current account deficit and need for capital to drive steady growth, many observers agreed that Pakistan was the biggest winner from yesterday’s announcement.

4. Argentina will be reviewed for a potential upgrade. In December 2015, the Argentinian Central Bank abolished foreign exchange restrictions and significantly relaxed the capital controls that have been in place for a number of years. These changes have resulted in a floating currency, the elimination of cash reserves and monthly repatriation limits on the equity market, as well as a significant reduction in the capital lock-up period for investments.

5. Nigeria may be removed from MSCI’s Frontier Markets Index and reclassified as a stand-alone market due to capital mobility issues. This may even come as soon as November this year. Early last year its Central Bank pegged the local currency to the US dollar resulting in a sharp decline in liquidity on the foreign exchange market. Hence, the ability of international institutional investors to repatriate capital has been significantly impaired to the point where the investability of the Nigerian equity market is being questioned.

6. MSCI said that it welcomes the recent market enhancements announced in Saudi Arabia, which opened its market for the first time to foreign investors last summer. These include changes to the rules for qualified foreign investors, settlement cycle of listed securities, elimination of the cash prefunding requirement and the introduction of proper delivery versus payment. Many of these are on course to be implemented by mid-2017 and will bring the Saudi equity market closer to EM standards.

Sources: MSCI, FT, Natixis

New Feature Update: IR Event Pages

Summary: Investor Relation teams can now use event pages to share investor material during roadshows, capital market days and earnings. The built in email and RSVP system allows companies to manage invitations amongst its investors and analysts.

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Uses: IR event planning and execution

Available for: Investor Relations teams with a standard Closir subscription.

How does it work? Event pages help companies keep material organised ahead of any event involving investors and analysts. Companies can create an event page, upload relevant information and files and share or notify investors via the built in email system.

Information that investors are looking from companies prior to an IR roadshow:

  • Who is travelling and available for meetings
  • Updated version of the presentation
  • A simple way to request a meeting

Visibility: All event page have a public facing page that can be accessed using a secret PIN. Events pages are visible to both investors and company users part of the Closir community.

User quotes:During roadshows, dealing with simple things like sharing our investor material with the numerous parties can be quite time consuming. We use the event pages to keep most updated version of our presentation online and point our investors and brokers to download it from there”.

“When we travel to New York or London we use this feature to blast out a message about it to all of our investors. We then track (via the RSVP) system who is interested to see us. After that, we prioritise and create a 1-1 and group meeting schedule. We always try to have a group meeting at every roadshow to accommodate tier 2 and tier 3 investors”

New Feature Update: Consolidated IR Calendar

Summary: Investor Relation teams can now see broker events, industry earnings dates and IR events, both local and international in one view.

Uses: Event planning.

Available for: Investor Relations teams with a standard Closir subscription.

How does it work? Brokers conferences and IR events are visible under Conferences tab. Industry earnings dates are visible under Events tab. Both views are sortable by various categories. Furthermore, under the ‘Events’ tab users can create and save bespoke watchlists (e.g Oil & Gas Russia).

IR teams can also express interest or register for certain events using the right hand side menu bars. If a company selects ‘I am attending’, it will then export to the IR calendar. Selecting ‘I am interested’ in feature will send this request to respective organisers.

Visibility: Both companies and investors can see events on Conferences and Events pages.

User quotes: “Having all events, especially broker conferences, in one place is very helpful”

Closir team comment: We have heard from many IR teams that it would be useful to consolidate various events that are relevant to the everyday life of an IR team. In addition to just creating a list, we connected events to organisers who will receive requests about any companies interested in attending them. 

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New Feature Update: Investor Self Identification via IR Website

Summary: Investor Relation teams can capture interest for meetings from institutional investors directly via their IR websites using our plug in.

Uses: Investor Targeting. Roadshow planning. IR Website enhancement.

Available for: Investor Relations teams with a premium Closir subscription.

How does it work? Closir embeds a plug in to company’s IR calendar on its website that reflects its events and roadshows. The calendar has a ‘request meeting’ button. Investors click to request their interest in meeting a company while they travel. Closir filters this information and presents you only qualified institutional investors.

Visibility: Our connected calendar is designed to sit within IR pages and is publicly visible to everyone.

User quotes: “We wanted to capture more information from our IR website, especially the information about which investors are interested in meeting us when we travel. In this regard this feature does the job. We use this aggregated information to supplement our meeting schedules with new investors.”

Closir team comment: We always found the IR calendar section on company IR websites to be fairly static and ‘one way’. We wanted to give investors visiting the IR websites ability to express interest in meetings or road shows, and thus providing an extra layer of intelligence for company targeting efforts.

A public calendar switch makes your Closir calendar available to the public via an external link. You can easily add or edit events on your calendar.

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Investors have the option to express interest in meetings on your travel. This information is filtered by Closir team and aggregated in one place.

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The calendar can then be embedded into your IR website calendar. You can track investor interest in your roadshows real time by logging back into the Closir platform.

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New Feature Update: Your IR Calendar Analytics

Summary: Investor Relations teams now have the ability to visualise their investor outreach activities graphically by event type, city and broker.

Uses: Roadshow planning. Management reporting. Broker relationship mapping.

Available for: Investor Relations teams with a standard Closir subscription.

How does it work? : The IR Calendar Analytics feature generates the charts automatically from the data on your Closir IR Calendar. Once your IR calendar is updated, simply click on the ‘Overview’ tab on top right of the screen and you will be taken to IR Calendar Analytics section.

Visibility: Only company (IR) Closir account holders can see analytics for their company. The analytics screens are not visible to any other companies or investors.

User quotes: It’s very important for me to keep track of which brokers I assign roadshow days and conferences to. I try to make sure that every broker that covers my stock gets at least one roadshow/ conference and this allows me to quickly understand this.”

“We print this out after our quarterly earnings roadshows and add it to our management newsletter. We used Excel for this before”

Closir team comment: This is a simple tool we built that helps you visualise your IR investor engagement activities. Going forward we would like our systems to be giving you a lot more, for example suggestions which cities you should be visiting (that you are not already), how much time you should be spending in key regions… all based on real investor interest data maps.

 

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Technology’s potential to ‘emerge’ markets

Earlier this year, one of the largest remaining ‘closed’ emerging markets, Iran, followed Saudi Arabia in opening up its stock market to foreign investors as financial sanctions were officially lifted following last year’s breakthrough nuclear deal between Iran, the US and other world powers.

Emerging and frontier market fund managers are now looking closely at Iran to evaluate its investment potential, as shown by the rapidly growing number of Iran-focused funds as well as the increase in investor travel to Tehran during the last six months. The Tehran Stock Exchange already has a large, diversified and liquid stock market with more than 400 listed companies and a market capitalization of around $90bn. On top of this, the country’s IPO pipeline is potentially as large as $100bn, an enticing prospect for international investors looking for growth opportunities.

Before they are able to invest substantially in Iran, investors must first satisfy internal compliance teams by getting to grips with a market where investor relations and corporate governance standards still have a lot of catching up to do. This is usually a long and fairly painful process as investors, companies and regulators move at different speeds, speak different languages and follow different practices.

Technology could play a vital role in helping companies in countries who are entering the global capital markets arena for the first time, such as Iran and Saudi Arabia, to integrate and engage with the international investment community. It’s probably fair to say that the success of technological innovation in this area will be based largely on its ability to help companies to level the playing field between global investors and local investors.

The investor relations community has been slow to embrace innovations which are already revolutionising other industries. A Google Street View of the Emirates Airbus A380 for example gives travellers a full virtual product tour of the plane from their desks. Bernie Sanders used the 360 interactive video to great effect at his rally in the run-up to the Iowa caucus.

For most fund managers, there is no substitute for a face-to-face meeting or a company site visit, during which they can see the whites of management’s eyes and walk around the corridors of the company’s headquarters. But as global portfolios become more and more diversified, technology could help investors to cover more ground by increasing the effectiveness of ‘remote’ engagement at a fraction of the cost. Forward-thinking IR teams could adapt 360 technology to enable analysts and investors to interact not only with company premises, but also with senior executives and product managers. In a few years, the Oculus Rift headset could take this idea a step further to provide an even more immersive experience.

Simple smartphone applications allow ordinary consumers to order taxis, find dates, book flights, order takeaways and operate their central heating from the office. They allow warehouse managers to control stock and doctors to monitor patients’ blood pressure. At the same time, IROs and fund managers still rely heavily on emails, phone calls and business trips to conduct most of their daily tasks, which require time, money and organisation. In this environment, it is perhaps unsurprising that the process of building knowledge, trust and confidence in a company or market takes as long as it does.

For innovation to be embraced, it must make the fund manager’s job more efficient without forcing him to surrender his competitive edge or limiting his access to the company in any way. It must help the IRO to tell the company story more efficiently and to a wider audience. The opportunity for such a solution is perhaps greatest in emerging and frontier markets given the lack of existing IR infrastructure and desire for short-term international growth. Despite still being relatively undeveloped from a global capital markets point of view, countries such as Iran, China and Indonesia boast increasingly tech-sophisticated consumer markets, which perhaps bodes well for their respective corporate counterparts.

Technology innovations could offer open-minded IR teams in emerging and frontier markets a unique chance to quickly close the gap between them and their richer, more experienced developed market rivals. The lack of an existing process for engaging with international investors may even give them an advantage over established companies reluctant to think outside the box and adapt.

This article first appeared in the spring edition of UK IR Society’s magazine ‘Informed’.