Asset management experts anticipate a larger focus on new products, tax reform and reporting regulations in the coming years.
These topics are forecast to be key issues driving asset management in 2018, according to industry leaders surveyed by Money Management Executive.
CLS Investments CEO Ryan Beach looks at the implementation of Form N-PORT, an SEC reporting rule with a June 1 initial compliance date.
"With a wealth of new information slowly becoming available for both public and SEC consumption," Beach wrote, "fund managers will undoubtedly change how they behave."
Lisa Kealy, an assurance partner in the financial services group of EY, discussed what ETF providers must do to stand out in a rapidly expanding industry her firm estimates will top $7.6 trillion in global AUM by 2020.
"Becoming a low-cost provider will be essential to survival, even for the largest players," she wrote. But "while value remains central to ETFs' appeal, the industry needs to do more than offer low-cost products," she added.
Insight from Deloitte partner Edward Dougherty mentioned the potential effects of tax reform, while eVestment's VP of research, Peter Laurelli, discussed the rising interest in emerging managers.
PRODUCTS
Lisa Kealy, partner, EY
The ETF industry continues to grow at an astonishing rate and is expected to top $7.6 trillion in global assets under management by 2020, EY's 2017 ETF Research Report suggests. Our research also predicts that prices and TERs will decline further as new entrants join an already crowded market.
We believe ETF providers need to accept fee pressure as a permanent feature of the market. Becoming a low-cost provider will be essential to survival, even for the largest players. But while value remains central to ETFs' appeal, the industry needs to do more than offer low-cost products. Refining investor journeys is critical to unlocking sustained, profitable growth.
There are two key stages to refining investor journeys. The first is to understand in detail how different investors use ETFs.
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For example, our research tells us pension funds often use ETFs for liquidity management, while private banks are more likely to see them as building blocks for portfolio construction. We also know external factors such as geopolitics, tax and regulation can have a complex effect on investor appetite.
The second stage is to use this understanding to enhance investor relationships. That means focusing on the specific needs of different investors; developing local knowledge of regulatory standards; building up specialized sales teams; and working with investors to address any concerns about ETFs. Digital technology has a huge role to play here, especially in the retail arena.
We believe a clearer focus on the investor experience will help the ETF industry capitalize on megatrends that are already working in its favor, such as digitization and the shift to passive.
REGULATION
Ryan Beach, CEO, CLS Investments
Form N-PORT requirements are set to be implemented next year. With a wealth of new information slowly becoming available for both public and SEC consumption, fund managers will undoubtedly change how they behave, while investment managers should welcome these new disclosure obligations.
For investment managers, the additional disclosures provide a new weapon to evaluate each fund and ensure it meets their clients' goals. For example, new disclosure requirements regarding risk metric calculations will enable the investment manager to have greater visibility into the fund's sensitivity to changes in interest rate, credit spreads and asset prices. This transparency will shed light on risks that may have otherwise been hard to analyze.
Besides supplemental clarity and insight into the trends, risks and decision process at each fund, the most significant benefit of the form is the opportunity for investment managers to require funds to improve performance. It will also clarify why certain funds are underperforming, not only to the overall market but also in comparison to competitive funds.
For one, funds will be required to submit a standardized monthly report that discloses total returns, net realized gains or losses and net change in unrealized appreciation or depreciation. This new requirement allows the investment manager to more closely analyze funds.
For investment managers willing to adapt to the new data, this information should provide a competitive advantage. Keep in mind it will take time before the data is properly utilized, due to the implementation timeline and need for development of updated analytical tools.
But once the information is disclosed, investment managers should use it to force fund managers to make decisions that more clearly add value for the investor. Similar to any other industry undergoing disruptive change, those unwilling to adapt will be left behind.
STRATEGY
Peter Laurelli, vice president of research, eVestment
A trend that will only intensify in the institutional industry next year is the increased competition for assets. This creates a daunting environment for newly launched or emerging managers.
To better understand, we studied results of a recent survey on allocation and eVestment platform viewership trends between new firms offering new products (NFNP) and newly formed firms that manage at least one existing product from a predecessor firm (NFEP).
The first group captures newly founded firms managing all new products. The second includes new firms formed via independent spinoffs, mergers or other structural changes, and which still manage at least one product from their predecessors.
While our study found that emerging managers overall have been capturing a rising rate of attention since 2008, NFNPs experienced significant increases in interest in that time frame when compared to NFEPs.
In the second quarter, emerging managers represented 10.5% of total investor and consultant demand within the eVestment platform, nearly a 20% increase in interest from Q2 2014.
This rapid rise in interest can be attributed to a higher demand for new firms managing all new products. This holds true from an international viewpoint as well, as over 25% of demand came from non-U.S. domiciled firms.
To add insult to injury, these returns didn’t even come cheap. The average expense ratio was more than 1%.
Newly launched firms - successful enough to survive - have done well launching products that meet the themes of overall investor interest. In recent years, this means they are more internationally focused. Recent interest in NFNPs has been strong. We found that, in the first half of the year, U.S. investors added $3.32 billion into NFNP strategies, the largest two- quarter influx since 2008.
The largest base of interest in emerging managers is coming from sub-advised assets, with foundations and endowments serving as the second largest.
It's clear that the interest in emerging managers is continuing to gain prominence among investors. Investors, consultants, and new and established fund firms should be watching these trends closely in 2018.
TAXES
Edward Dougherty, partner, Deloitte
With Congress engaged in efforts to pass tax reform legislation, asset managers should consider the impact these proposed changes may have for their business in the year ahead.
Some tax proposals would dramatically change the way corporations are taxed. Portfolio managers are currently analyzing what these changes may mean for specific companies, as well as what the broader implications might be for the U.S. and global economies.
The proposals also include a variety of base erosion safeguards that might negatively impact multinational companies, both inbound and outbound. Successful trading and investing driven by tax reform would likely propel managers to the front of the line for capital raising.
There are several proposals that may directly impact managers. For alternative funds, the limits imposed on the carried interest benefit may reduce the after-tax income of managers, with hedge fund managers bearing the brunt.
The proposal to force funds to use the FIFO method for securities-lot relief in portfolios may have the impact of accelerating gains for investors and general partners who still qualify for the benefits of a carried interest.
Consider also the proposal to impose taxes on so-called super tax exempt state pensions that take the position they are exempt from UBTI rules. New rules may also require tax exempts to separately track unrelated business activities and eliminate the ability to offset losses from one activity with income from another. Losses disallowed would be carried forward to future years.
The result may be an impact on managers' ability to raise or retain assets from tax-exempt organizations.
Managers should understand the proposed changes to assess whether they should engage in year-end planning. For some, planning may encompass accelerating losses and expenses in 2017, and deferring gains and income to 2018, while others may want to do the opposite
