The Latest Headlines From Across The Wealth & Asset Management Sector - November

2023-11-14 |  Prince Naruka & Natalija Reeves

Welcome to our latest newsletter, we'll be exploring the top headlines impacting the world of wealth and asset management. 

In this month's newsletter, we dive deep into the current fixed income market and the impact ESG would have, we reveal why platform transfers are taking longer than expected and explore the latest regulatory news across LTAFs and Article 8 & 9 funds.

Here are our top stories…

Revealed: Why it’s taking so long to transfer off a platform

Despite FCA efforts to speed up switches, certain platforms are still putting up barriers that are slowing down transfers, creating issues for the market and hurting competition. The delays matter as they deter advisers from switching platforms, which harms market competition and undermines annual suitability checks, and clients can miss out on market returns if they are out of the market while the transfer takes place. Most platforms tend to be structured with a transfer-in team and a transfer-out team. According to some industry figures, several platforms dedicate far fewer resources to transfer-out teams. Matt Smith, product manager at Equisoft, agreed that it often comes down to resourcing priorities. He said although electronic transfers are far quicker than manual ones, they still often require some manual work from transfer-out teams. Holly Heald, director of Norwich-based Just Financial Planning, said the difficulty associated with platform switches means planners will often avoid switching clients unless as a last resort. In its letter to CEOs in September, the FCA said the consumer duty demands a ‘higher standard’ for firms and they must ensure consumers do not ‘face unreasonable barriers or delay to transfer requests’.

What it would take for Europe to be a true player in global tech

Europe would need to break down a host of regulatory barriers and rethink how ideas traverse local borders if the region is to technologically compete with the US. This is according to Guy Verhofstadt, chair of the Conference on the Future of Europe and former prime minister of Belgium, who believes drastic steps are needed to improve the region’s competitiveness. Some of the suggested approaches include removing the unanimous voting systems from the EU to establish a majority led decision process and introducing a European FCC (Federal Communication Commission) as he believes the current lack of a single market for Digital and Technology in Europe is preventing the region from competing with the United States in developing world-beating technology companies. Finally Verhofstadt talks about the challenge of creating true fiscal union across Europe and the important steps needed, in terms of governance, if the collective is to expand by around 10 members over the next decade.

Why is ESG Integration important in fixed income?

Fixed income carries higher ESG risk than other asset classes, but for Fraser Lundie, Federated Hermes Head of Fixed Income - Public Markets, this only creates greater opportunity. The two key challenges identified are the lack of and staleness of Data, which requires a lot of additional thought and overlay instead of relying on External Data, and Financial Strength as companies may not possess equally robust financial credit worthiness. Federated Hermes utilised a top-down approach to narrow down interesting areas of focus within Fixed Income, where dedicated analysts and sustainability specialists do a combination of interrogating data and engaging with companies to bring potential names to the credit committee and provide opinions on their Sustainability evaluation. Uniquely, factors like how engageable the company is, how ambitious the decarbonisation policies of the company are and to what extent the company is a sustainable leader in its peer group are added to give a very holistic view. The big trend overall for Federated Hermes is the move towards trying to be forward-looking and long term in opinions and less focused on exclusionary activities based on historic numbers.

£4bn bond boss: ‘Biggest credit default cycle since 2008’ looms

Coolabah Capital chief investment officer Christopher Joye believes that the ‘biggest default cycle in global corporate credit since 2008’ looms, with private credit and high yield most vulnerable to pain. He suggested commercial real estate and construction are seeing pockets of concentrated stress and a big increase in insolvencies, he’s also particularly negative on private credit due to the expectation for illiquid asset classes to take the longest to adjust, noting that ‘we haven’t seen much adjustment at all in private credit spreads.’ Joye is also pessimistic on high-yield debt, suggesting that the current spreads available are not worth the risk, whilst he’s categorised cash, high-yield government bonds and high-grade bank bonds as the only safe havens. Coolabah, which has $5.1bn (£4.2bn) in assets under management (AUM), touts itself as having ‘highly active credit fund management and trading expertise’.

FCA confirms LTAFs will qualify for FSCS support

Investments in long-term assets funds (LTAFs) will be covered under the financial services compensation scheme (FSCS), following an FCA request for industry feedback. The FCA said it had decided to ‘not take forward’ the option to exclude FSCS cover for LTAFs, but that it would consider any future changes to the scope of protection from the lifeboat fund ‘in the round’. The request for feedback received 17 responses, 16 of which expressed ‘significant concern’ about the removal of FSCS protection, whilst the one in favour of removal stated interest in offering LTAFs to its member firms remains low and envisages direct exposure to the structure only among high net worth clients. Overall, the FCA said the overwhelming feedback was that removing FSCS protection would dent consumer confidence in LTAFs. This would go against broader moves by the government to encourage both more retail money and institutional investors like pension funds to invest in unlisted and growth assets. It is worth noting that LTAFs have yet to be rolled-out to retail investors from an industry perspective, and although Schroders, Aviva, and BlackRock have launched LTAF products this year, these are all focused on the DC pensions market.

Article 8 funds’ assets drop, Article 9 inflows slow, report finds

Investors continued to pull money from Article 8 funds, while less was invested in Article 9 strategies over the past quarter, according to a Morningstar report into SFDR-related fund trends. The pullback in assets in these types of funds comes against the backdrop of a wider market selloff in general markets, regardless of funds’ SFDR classifications. Article 8 funds found to have no outlined commitment to sustainable investing were the hardest hit, according to Morningstar. In total, €13bn was withdrawn from these types of funds, making up 60% of all money withdrawn over the analysis period. The appetite for Article 9 funds also cooled slightly, with €1.4bn invested over the quarter compared to the €3.7bn in Q2 2023, which is the lowest quarterly rate since SFDR was introduced in March 2021. The wider picture showed that revisions to SFDR status continued, with 279 funds reclassified in the quarter, which is up from 200 in Q2 and includes 11 Article 9 funds that were downgraded to Article 8. Morningstar noted there are now more than 1,000 Article 9 funds, compared with 947 three months earlier. The Article 8 market has also grown, which means Article 9’s share of the market has remained consistent throughout the year at around 3.7% of the total funds universe. New launches across Article 8 and 9 funds did slow slightly – 126 in Q3 against 186 in Q2. However, Morningstar said this could be a result of worsening market conditions and the Q3 figure is liable to be revised upwards as more data is received.

Private equity exploits power of M&A to grow

Paul Daggett of NB Private Equity explains how small ‘roll-up’ deals and big strategic acquisitions are driving the underlying returns of private equity funds. There has been a noticeable increase in the number and value of add-on deals completed over the last two years as a proportion of the market. In the first quarter of this year alone, almost 80% of all deals in the US private equity market consisted of portfolio company add-ons. Amidst challenging economic conditions, it’s no surprise that private equity groups are exploring M&A as an engine for growth; it’s necessary to improve and sometimes transform companies to generate returns. In the current market, M&A has maintained or increased in importance and platform companies are in a strong position to acquire or ‘add on’ companies, where sellers may potentially be increasingly motivated to strike a deal. Systematic or roll-up mergers involve the acquisition of a number of smaller companies within the same, often highly fragmented, industry. The end goal is to integrate the businesses and create a company of higher value than the sum of its parts. As roll-up acquisitions typically involve smaller businesses, these acquisitions often occur at relatively lower valuation multiples. Providing the acquisitions are successfully integrated and well managed and the company continues to demonstrate good organic growth, it should be worth more than the sum of its parts and as a larger platform, may have a higher strategic value to the next owner.

Thanks for reading. If you’d like to discuss any topics in the newsletter that are specific to you or your company, do get in touch.

Don't forget to sign up for the Wealth and Asset Management newsletter to get the latest headlines straight to your inbox.