Blurring of the lines
As asset allocation and demand has changed, the investors have changed as well. Kenny in particular has noticed a convergence in the abilities of the wholesale/retail space and the institutional side. “The waters are muddied,” says Kenny. “Institutional and wholesale has blurred. There has been consolidation in the market, and a specialisation in the research units we deal with. People say there has been an institutionalisation of the retail research capabilities and a retailisation of the institutional market place.”
What this means is that the classic institutions are more likely to buy funds rather than have segregated mandates. And the wholesale investors are hiring more investment specialists. “Whereas 10 years ago you would go in and there would be one guy doing fixed income; now there is one guy doing investment grade and someone else doing sovereign. There has been a specialisation.“
“Ten years ago institutions used to look down on wholesale as they assumed they were the superior business when it came to research, but they have been met by wholesale coming up,” says Kenny.
“It’s a cheap way of getting asset allocation,” says Kenny. “It takes the risk off the pension fund trustees or the consultants doing the asset allocation.” However, Kenny points out that in Italy, there is a spate of launches of funds of multi-asset funds. This, he thinks, is taking diversification too far. “It is a concept I struggle to rationalise,” he says. “But it is happening and so you need to say, ‘You know what? I can’t hold back the tide. I need to go with it.’ If that is what people want to do then we will be a willing component.”The quality of their research businesses has grown exponentially. While the wholesale investors have been upgrading their sophistication, the institutions have been outsourcing more of their asset allocation by buying global funds, unconstrained funds and joining in the general trend toward multi-asset.
Not everything has moved at the same pace. Italy and Spain, for instance, are both still very keen on fixed income. “I was at an event recently in Italy with 14 speakers – and 13 of them were on fixed income,” says Kenny. “If that had been the UK, people would have been walking out.“
“The majority of the savers in the Italian market have up to 25% in Italian government bonds. They have woken up to the fact that this is not a good place to be but they still want a steady, safe investment. As a result, you are seeing flows out of government bonds into mutual funds,” says Kenny.
While he expects some things to remain the same in the year ahead – for instance, the demand for income and absolute return should remain in the face of increasing volatility – post a US rate hike, new opportunities could develop. For example, Kames has recently launched an emerging markets bond fund.
“People say we are off our heads to do that now but, as a house, we think it could be an interesting space this year. The fund primarily looks at investment grade and we have constructed it to give off a decent yield of about 4.5%. And there are not many places you can go to get a 4.5% yield. Investment grade is yielding almost nothing; high yield is about 3-4%.“
“Another thing we are seeing in the equity space is the transition from regional components to global, and I think if the US puts rates up, that situation might reverse. European equities could be very popular – and if the euro goes as low as 0.85, that will give European manufacturing a huge boost.”
Whatever the changes this year, it is clear that the rate of change in the industry has no intention of slowing down yet.