Brief: Healthcare and emerging markets will deliver some of the best returns next year, according to a study that shows UK fund managers' optimism about the post-Covid world. The imminent rollout of vaccines across the globe and the receding threat of Covid-19 mean UK fund managers expect rising markets next year, the Association of Investment Companies (AIC) found. AIC, the UK trade body for closed-ended funds, found that 38% of managers see the arrival of vaccines as the biggest cause for optimism. Other significant factors included technology-driven economic growth and a value-growth rotation which both received 14% of the vote. Close to a quarter (24%) of managers tipped emerging markets as the sector most likely to reward investors, despite the fact that many developing economies have been hardest hit by the pandemic. The UK and the US were also highlighted by 19% and 14% of managers, respectively. Respondents were similarly positive on these markets over the longer-term with emerging markets and Asia Pacific ex-Japan both tipped by 19% to outperform over the next five years, followed by the UK and the US both tied on 14%. According to the AIC’s communications director, Annabel Brodie-Smith, “the prospect of a much longed-for return to normal is influencing managers’ thinking”.
Brief : After three years of criticism, administrative headaches for banks and an exodus from stock research, the pandemic prompted Europe to water down its key financial market rules. The MiFID II regulation, conceived at a time when Britain was a driving force behind the European Union’s financial-services regime, will be relaxed in a bid to boost the recovery from the pandemic. The changes lighten administrative burdens on experienced investors, alter rules on commodity derivatives, and revise the controversial “unbundling” rules that forced investors to pay for investment research separately from trading fees. The European Commission, the EU’s executive arm, said Wednesday that the changes to the revised Markets in Financial Instruments Directive will encourage the investment community to pay more attention to smaller and mid-sized firms, attracting investment as they grow and helping lift the region’s economies out of a historic recession. Under the new policy, equity research on firms with a market capitalization below 1 billion euros ($1.2 billion) can be “rebundled,” or offered for free to a firm’s trading clients. “This will help make it easier for our markets to support European businesses during this difficult time,” Mairead McGuinness, European commissioner for financial services, said in a statement. The Commission proposed changes to the rules in July as the economy took a hit from the Covid-19 pandemic.
Brief: Institutional investors are taking defensive positions into 2021, as they attempt to cushion portfolios against the long-term impact of the pandemic, including the fallout from government and central bank responses to the Covid-19 crisis. According to a recent survey of institutional investors by Natixis Investment Managers, eight in ten institutional investors say markets have underestimated the long-term impact of the global pandemic. The prospect of negative interest rates is considered the biggest portfolio risk for the next year, with four out of five institutional investors saying low rates have already distorted market valuations. In the UK, the Bank of England has kept its base rates at 0.1 per cent for eight months, but is considering taking rates negative in order to support economic activity and increase market liquidity. Other central banks including the European Central Bank, Swiss National Bank and the Bank of Japan, have already been using negative interest rate policies for several years. The risk of interest rates falling even lower is mounting, with Fidelity International saying in a recent note that ever-easier monetary policy “likely to become structural, especially in developed markets”. “As Covid-19 relief packages expire and to help mitigate the impact of a pending fiscal cliff, the Fed may also have to buy longer duration bonds, increase the pace of asset purchases and strengthen forward guidance. More easing is also likely in Europe given weaker growth and inflation expectations,” says Salman Ahmed, global head of Macro and Strategic Allocation at Fidelity.
Brief: While security has always been at the forefront for funds, this year has tested defence practices and security frameworks utilised by the sector globally. The Covid-19 pandemic has pushed firms to identify and quickly mitigate any new security gaps. This new landscape has accelerated the adoption of advanced security and control measures to survive.“Covid-19 and the impact of social distancing have become the ultimate tech disrupter, driving investment and digitalisation innovations,” says George Ralph, managing director, RFA, ”This growth has been reflected in an increase in the need to manage distributed workforce transformations and a need for new solutions for business productivity, collaboration, and mobility via the cloud and data management.” He notes how these growth areas are not unique to the RFA client, rather, they mirror the broader trends in the global hedge fund industry. Specifically, hedge fund managers are growing more comfortable with moving data to the cloud in an effort to enhance operational value. However, they do still find data management to be one of their most significant challenges and its cited as one of their top spending priorities for the year ahead. Ralph identifies a shift in acceptance and adoption of cloud-based technology: “This marks an inflection point for the hedge fund industry. Firms of all sizes must adapt to the digital working world. Those hedge fund managers that are fully or partially using the cloud will continue to see improvements in operational efficiency.
Brief: Just because an end is in sight for the coronavirus pandemic, it does not mean U.S. companies will stop tapping the bond market. One of the consequences of COVID-19 was a sharp ramping up of corporate debt issuance as companies raced to bolster liquidity in the face of plunging revenues. But even as the economic recovery from lockdowns gathered pace and liquidity became less of a concern, companies have continued issuing bonds, taking advantage of lower borrowing costs to refinance debt and extend maturities. "Refinancing was chapter 1 of the COVID story, which gave way to chapter 2, which is now the favorable conditions and getting ahead of the debt," said Nick Kraemer, head of ratings performance analytics at S&P Global Ratings. The dash for cash started in March. Having first drawn down on credit lines as financial markets began to seize, businesses then flooded into the bond market to pay back their obligations with longer-dated debt. The guarantee of support by the Fed smoothed out credit markets and yields fell back, encouraging companies to refinance at lower rates. By mid-August, investment-grade bond issuance had already surpassed the previous annual record of $1.221 trillion in 2017, according to data from LCD. As of the end of November, the 2020 total stood at $1.652 trillion.
Brief: The coronavirus pandemic has added kindling to the cost and fee pressures that have been smoldering in the asset management industry for years, according to Brown Brothers Harriman. The bank reported Tuesday that fifty-two percent of asset management firms plan to reduce expense ratios, or fees, over the next 12 months, according its new survey of asset management executives. The survey questioned C-suite executives on subjects including new products, costs, operations, outsourcing, and remote work arrangements. BBH interviewed CEOs, CFOs, COOs, and senior executives at global asset managers that included large multinational asset managers and smaller boutique firms. “Fee compression, compliance and regulatory changes, low organic asset growth, and rising technology costs fueled by rapid innovation have all weighed on asset managers,” wrote BBH partner Chris Remondi in a report on the findings. “Enter the COVID- 19 crisis, which accelerated the pace of many of these challenges.” According to the report, fee pressure is coming from big managers that benefit from economies of scale in certain products, as well as from the increased transparency around fees in recent years. One respondent said that “continuing fee pressures are a concern when it comes to revenue retention – it is no longer acceptable to simply pass along operational fees.”