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IIMI Singapore launches

IIMI, the boutique asset management think tank, is pleased to announce that it has launched operations in Singapore in response to demand from asset managers in the region.

There are 11 founding members in IIMI Singapore, which is chaired by Timothy Hay, the CEO of Somerset Capital Management’s Singapore office.

Since its foundation in 2010, IIMI has offered an expert voice in the debate over the future of financial regulation, representing independent, owner-managed firms that are entirely focused on and aligned with the interests of their clients and investors. Today, its European membership is comprised of 46 leading independent asset management firms from the UK, France, Norway and Switzerland, managing approximately £500 billion of clients’ money and employing several thousand people.

Both IIMI branches in Europe and Singapore, along with their combined membership, will work with the Monetary Authority of Singapore (MAS) and the FCA to open up and increase opportunities between the two markets as they share experiences and ideas. This includes supporting MAS efforts to develop the Variable Capital Company (VCC) fund structure, on which IIMI will hold a meeting next month with London members and a delegation from MAS.

Commenting on the launch, IIMI Chairman Jamie Carter said: “We are very proud of what IIMI has achieved over the last nine years in promoting the values and interests of boutique asset managers, and we feel the time is now right to expand our geographical presence. Singapore has one of the most thriving asset management communities in the East and we look forward to working with the new IIMI team there as we maintain an open dialogue with both the MAS and FCA for the benefit of our expanding membership.”

IIMI Singapore’s Chairman Tim Hay added: “IIMI has established itself as a respected voice in the asset management industry and we look forward to leveraging its experience and learnings for our new IIMI Singapore members. Owner-managed, client-centric firms play a key role in preserving the stability and long-term focus of the financial sector and we are pleased to support the important work of independent asset managers in Singapore and the surrounding region.”

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Concern among members that M&A activity within the asset management industry is reducing competition and undermining investor choice

IIMI, the boutique asset management think tank, has today published a paper calling for a more proportionate approach to regulation in response to increasing consolidation in the sector, which many of its members believe is reducing competition and investor choice. The full paper, entitled “M&A in Asset Management: Is it strangling boutiques?”, can be found here.

The paper explores the drivers behind the ongoing M&A activity and questions whether decisive action needs to be taken at a governmental or regulatory level. As part of this analysis into M&A trends within the industry, IIIMI spoke to a number of its diverse boutique asset manager members about the impact consolidation was having.

Drivers for consolidation

Asset management M&A has been riding high over the last few years. According to data from Mercer Capital, both deal volume and deal count in 2018 were at their highest levels since 20091. Consolidation at large asset managers has been driven by a combination of factors, including the reallocation of funds by investors into cheaper passive products, and a dramatic increase in managers’ costs. Regulations in the EU have been particularly intense for asset managers, with rules such as AIFMD, MiFID II, EMIR, UCITS V, GDPR and PRIIPs all collectively affecting fund manager margins. For many firms struggling under the weight of these complex regulations, consolidation is often seen as the best option.

It has also been noted that there are “second order” barriers. Within the UK discretionary wealth management and IFA sector, there has been huge consolidation as firms deal with regulatory complexity and look to achieve economies of scale. As a result, they advise much larger pools of capital which must be allocated to managers who can accept sizeable investments, namely those with higher capacity. The biggest managers are typically the ones who can onboard the larger flows, but smaller funds – or those that are disciplined about capacity and the liquidity they offer – cannot accept these outsized allocations. Again, this is widening the gulf between big and small.

The performance case for boutiques

If investors are unable to access as many SME asset managers, they may struggle to obtain portfolio diversification through wider exposures to niche strategies, which can also have a negative impact on returns. One IIMI member noted: “As large asset managers get bigger, performance sometimes gets worse as it is not as easy to move in and out of trades. Even if investors are paying lower fees at these large fund managers, they might not be getting the performance they deserve. Boutique asset managers can give investors exposure to niche or specialised products, which is much harder to do at larger fund managers”. Furthermore, boutique asset managers have a proven track record of outperformance, both against their largest rivals and index trackers.

“It is clear there is widespread concern among our members that continued consolidation in the asset management industry will force investors to allocate into only the largest, dominant asset managers – ultimately depriving them of choice and potentially even returns. If the UK is to have a competitive asset management industry moving forward, IIMI strongly recommends that a more proportionate approach to regulation would be a good starting point to enable boutique managers to flourish alongside their larger peers.

“These new regulatory changes are a unique opportunity for asset managers to upgrade their business model, their FX operational processes and improve efficiency to reduce investment costs and improve fund performance. That can only be good for building strong business relationships.”

Jamie Carter, Chairman of IIMI

ENDS

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Policy Papers

M&A in Asset Management: Is it strangling boutiques?

In the aftermath of the financial crisis, many asset managers saw M&A (mergers & acquisitions) with their competitors as a means to survival, principally a necessary evil by which to preserve their businesses amid the tumbling markets and as a counterweight to offset the sheer volume of client redemptions. Since then, M&A has only accelerated at major asset managers, as firms look to create economies of scale facilitating investor diversification and wider product distribution footprints. These larger enterprises can also better absorb the increasing operational and regulatory costs that come with running an asset management business in 2019. However, this rush towards consolidation carries risks.

In this paper, NCI looks at some of the implications which M&A is having on the boutique asset manager community. It also questions whether decisive action needs to be taken at a governmental or regulatory level to further scrutinise this M&A activity, especially if there is evidence that these transactions are drowning out competition and undermining investor choice. As part of this analysis into M&A trends within the industry, NCI spoke to a number of its diverse boutique asset manager members about the impact consolidation was having.

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IIMI calls for boutique firms to be represented in debate about the future of the UK’s financial services in response to Treasury Select Committee’s inquiry

IIMI, the boutique asset management think tank, has called upon the Treasury Select Committee to include its representatives in any consultations and working parties associated with the Committee’s inquiry into the future of the UK’s financial services once the UK has left the EU. The full written submission, entitled “Carpe Diem: Advice and Opportunities from the Boutique SME Asset Management Sector to the Future of Financial Services”, can be found here.

The Treasury Select Committee examines what the Government’s financial services priorities should be when it negotiates the UK’s future trading relationship with the EU and third countries. The Committee launched its inquiry in January 2019 and invited stakeholders to submit written evidence in response.

Summary

The importance of SMEs to the broader economy is widely recognised. It is IIMI’s belief that its members – which are often manager or partner owned, with a distinct culture and propensity for co-operation that promotes innovation, client-focus and thoughtful risk-management practices – share characteristics, and support needs, with the broader SME sector.

The political and regulatory response to the Global Financial Crisis led to a focus on larger firms and the banking sector, and reforms implemented in response have sometimes led to unintended consequences, such as increased barriers to entry. Now that ten years have passed, and with the UK’s focus on opportunities for the future, IIMI submits that it is now time for an alternative, bottom-up approach that draws from the wisdom and efforts of the SME sector.

Drawing upon its past work, IIMI shows how its members offer a distinct and important contribution to the debate about the future of financial services, concluding that any consultations and working parties must include their representatives to give the optimal outcome for the broader economy and society.

The Unique Perspective of Boutique SME Asset Managers

IIMI’s submission provides proposals for the future direction of financial services through the lens of boutique asset managers, with a focus on the following areas:

  • Alignment of interest, culture and performance
  • Liquidity transformation
  • Broad-based innovation and the power of clustering
  • Stewardship and patient capital
  • Proportionality and incubation in regulation

“Boutiques, such as NCI’s members, are the SMEs of the asset management industry and are an important cluster of such activity for the UK and global economy. They promote innovation in the broadest sense – with corollary benefits for society – through economic growth, employment and global trade in services. As such, NCI believes that government and regulators best serve their broad constituencies by recognising and listening to the perspective and proposals of boutique firms: our members certainly welcome the opportunity to contribute to the debates ahead.”

Jamie Carter, Chairman of IIMI

ENDS

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Policy Papers

Carpe Diem: Advice and Opportunities from the Boutique SME Asset Management Sector to the Future of Financial Services

NCI considers the unique and considered perspective of its members, the SMEs of the asset management industry and broader financial services, in guiding a path for the future of financial services. The political and regulatory response to the Global Financial Crisis led to a focus on larger firms and the banking sector, and reforms implemented in response have sometimes led to unintended consequences, for example in the effect of liquidity regulations on the asset management sector and increased barriers to entry. Now that ten years have passed, and with the UK’s focus on opportunities for the future, NCI submits that it is now the time for an alternative, bottom-up approach that draws from the wisdom and efforts of the SME sector. Drawing upon its past work, NCI shows how its members offer a distinct and important contribution to the debate about the future of financial services, concluding that any consultations and working parties must include their representatives to give the optimal outcome for the broader economy and society.

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IIMI survey reveals major shift in ESG focus for membership

IIMI, the boutique asset management think tank, reveals, in a member survey published today, that almost double the number of member firms are incorporating environmental, social and governance factors (ESG) into their portfolios, compared with five years ago. The results of the survey are included in IIMI’s paper: The Evolution of ESG in Asset Management, published today.

SUMMARY OF IIMI’s ESG SURVEY RESULTS

  • Five years ago, 47.6% incorporated ESG in their portfolios – today the figure is 90.5%
  • 85.8% plan to further incorporate ESG factors
  • 90.4% are or intend to sign up to the UN Principles for Responsible Investment
  • Biggest driver behind adoption of ESG in portfolio decisions is risk management
  • Just over half of respondents concerned about the EU’s ESG regulatory proposals
  • All respondents agree that ESG should be industry-led rather than driven by regulators

“Our survey suggests ESG considerations are already firmly embedded in decision-making process and that a dramatic shift has happened in the past five years.

It is obvious however that the sheer variety of approaches to and interpretation of ESG has led to increasing debate in the industry and confusion amongst potential customers. With the European Commission’s announcement that it will step in with regulation, we felt it was important to sound out the view of IIMI’s members – specialist, independent, owner-managed boutiques.

The results of the survey and analysis of recent developments, including ESMA’s announcements in relation to ESG in December 2018, have informed a number of recommendations.

Firstly, The EU’s reporting requirements need to ensure they do not contradict or duplicate existing obligations such as those outlined in the TCFD. This will do nothing but confuse clients. A better solution could be for the industry to self-regulate and adopt one of the most comprehensive standards like TCFD on a universal basis.

Once the relevant Directives are in place, IIMI encourages ESMA to publish a regular summary of what it considers to be best practice under the principles-based approach, to encourage greater harmonisation and higher standards across the industry.

ESMA confirmed it will not adopt a prescriptive approach to ESG regulation which is a welcome announcement. However, the IIMI membership is unanimously opposed to ESG becoming an issue driven by regulators, instead preferring industry-led initiatives to support the development of sector standards.”

Jamie Carter, Chairman of IIMI

ENDS

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Policy Papers

The Evolution of ESG in Asset Management

There has been increasing information and debate about the role environmental, social and governance (ESG) factors could, or should, play within investment strategies. The sheer variety of approaches to, and interpretation of, ESG and its evolving nature, has led to confusion amongst potential customers. The European Commission has announced it will step in to provide clarification through regulation.

This paper takes a closer look at how ESG is being integrated into the investment strategies managed by NCI members, which are specialist, independent, owner-managed boutiques, and whether regulation or the free market will provide the right framework for fostering deeper understanding and facilitating continued innovation in ESG. A survey of NCI membership suggests ESG considerations are already firmly embedded in decision- making.

NCI’s recommendations focus on the need for clarity and transparency, but with free market choice through industry-led solutions. While many asset managers welcome the regulators’ decision not to adopt a prescriptive approach towards ESG integration, NCI believes it should be the industry that is leading the reform initiative.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners

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Policy Papers

The Conundrum of Liquidity Regulation: Observations from the Boutique SME Asset Manager

Liquidity is something that is often talked about in financial markets, usually when it is perceived to be absent. However, an exact and consistent definition is elusive and attempts to clarify matters are often forgotten and inherently difficult to isolate for analysis. What does seem to be agreed is that more liquidity is a good thing, although even that may not be the case if the liquidity comes from inflationary monetary policy. Where the risk of failures in liquidity lie and should lie is more contentious.

Historically, much liquidity risk was held within the banking sector: banks naturally take liquid deposits and make illiquid information-intensive loans. Recently, regulation has constrained banking activity and this has led to a transfer of liquidity risk to other sectors such as asset-management. This has unintended consequences, as discussed in this paper, and may not serve investors or the broader economy well: many asset management strategies explicitly rely upon liquidity transformation and the interconnectedness of different components of the financial services sectors means that regulation that affects one part has a corollary, perhaps unintended, consequence on another sector.

An intelligent and thoughtful approach to regulation and policy is in everyone’s interests. NCI acts as a catalyst for discussion and I am very pleased to introduce this paper, which takes a reflective and broad view of liquidity risk and the policy landscape that addresses it.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners

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Policy Papers

Boutique Asset Management: An SME Cluster

As CEO of a boutique asset manager, I understand well the challenges that come from being a smaller business. However, these are not without counterbalancing benefits. NCI has previously talked about the unique culture that small and medium-sized asset managers have and how this leads to superior outcomes for clients; this current paper extends that work to benefits offered to the wider economy. Small and medium-sized enterprises (SMEs) provide a disproportionately large contribution to innovation in the economy, particularly broad-based innovation that drives deep-seated positive change. Financial services SMEs, like NCI’s members, innovate markedly and collaborate together in open innovation as a cluster, much like that commonly associated with Cambridge or other hubs of innovation.

NCI’s view is that this SME cluster of small and medium-sized asset managers should be recognized and nurtured, as should the SME sector generally. However, support from government in one area, such as IMS II, does not offset the resource and financing constraints that limit SME innovation. By way of example, financial services and asset management SMEs, like certain other sectors, are unable to avail themselves of innovation funding or tax advantages that accrue to early-stage backers in other industry segments. NCI argues that this should change and that the unique and vibrant voice of NCI’s members, acting as an SME cluster of innovation, should be recognized with representation on the Asset Management Taskforce and other bodies.

I am pleased to introduce this paper on SME clusters of boutique asset managers, proud to be partner and CEO of one of them, and honoured to be able to represent NCI’s members as chairman.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners

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Policy Papers

Capital Controls: Preparing for the Unthinkable

The idea of capital controls being implemented in a major developed market economy such as the UK seems improbable, but there are two events on the horizon which could cause such action to be taken and encouraged us to think about these risks:

  1. A cliff-edge Brexit. The recent agreement for a transition period was disappointing in that it is conditional on there being a full withdrawal agreement. This conditionality raises rather than reduces the chance of a cliff-edge. An unprecedented event such as this provides no historical comparison with which to guide us, but in the paper we explore the imposition of capital controls elsewhere.
  2. A Labour government. NCI is apolitical, but an independent, objective assessment of some of the policies currently being suggested by the Labour Party increase the risk of capital flight. We discuss these policies and the potential ramifications.

NCI cannot predict the probability of either event, but good risk management requires assessment of all types of risks, even those perceived to have a low probability of occurring. This paper is intended to provide members with food for thought, a trigger for some contingency planning should we be faced with the imposition of capital controls in the UK (or elsewhere for that matter). We assess the impact on the asset management industry, its customers and suppliers, the clearing and settlement process and we’ve used the case study of a UK fund vehicle with a global investment mandate to outline some key operational issues and provide suggested remedies which members and their customers should consider.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners

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