Eduardo Ripollés, Director of Business Development at MAPFRE AM
It seems that, little by little and step by step, we are returning to a certain state of normality, but without knowing what the near future will be like and what activities we will be able to engage in. We are all operating on the basis that, after so many weeks of lockdown, any process of returning to something resembling life as it was lived at the beginning of the year will be a glimmer of hope. Routines are part of everyday human existence, and create a reassuring sensation that brings us a sense of security. They thus give us back the feeling that we are in control of our daily lives. However, there is no way that we’re going to be returning to an unchanged existence. New needs are going to emerge, together with new ways of doing things and presenting them, and, above all, new ways of convincing others.
The institutional mutual funds market will be no exception. Quite the contrary, it will be a clear example of changes and new ways of dealing with a changing market and with new demands, which all members of the industry will need to adapt to.
As Albert Einstein said, “Without crises, there are no challenges, and without challenges, life is just a routine, a slow road to death. Without crises, there is no merit.” I have the impression that these wise words point to a reality with which we already find ourselves face-to-face. Past solutions and traditional approaches no longer apply; what we need now is innovation. Clients, both private and institutional, will no longer demand mere profitability from the assets in which they invest, but also security.
Going back to Einstein’s words, the time has come for challenges, for innovation, so that, in this way, we can once again generate excitement when it comes to investing. In a low-interest-rate environment with huge economic uncertainty for years to come, where we talk about “v,” “w,” or “u” shaped recovery, or the new “Nike” letter, it is clear that hands-on management will have a key role to play.
As expensive securities become increasingly expensive, and cheaper ones become cheaper and cheaper, a number of mutually opposed conclusions can be reached. First, we are dealing with a new economy, in which traditional companies are languishing due to their lack of capacity for innovation or inability to adapt to a changing environment.
On the contrary, a second conclusion could be reached, by which the huge amount of money invested in passive management products or ETFs has left to one side companies that remain profitable, well managed and with strong future prospects that, because they have less and less influence on the indexes, have been forgotten and have been left behind in the investment queue for this type of instrument.
Time and the market will tell us which of these two variables will ultimately weigh more “or not,” as some might say.
However, as managers, we cannot stand by waiting and we must know how to choose, both tactically and strategically, the values that are most representative of both situations. Growth values that will continue to grow and forgotten values that will be candidates for a recovery in their valuations. Thus, reactive management is a way of placing in the hands of professionals the right choice of portfolios that outperform comfortably on the market but generate value for investors. This reasoning is valid for the Fixed Income and Variable Income markets and, of course, applies to Mixed and Profiled funds.
Fund commissions, as they have long already done so, will pave the way that investors decide to follow. Anyone who wants to “stay afloat” on the market, will do so through passive management and will demand reduced costs. On the contrary, those who seek “alpha” values will turn to reactive managers, and management commissions will adapt to the success of their strategies. In such conditions, the market will be sovereign and will expel any alternatives that fail in their attempts, while commission structures will not be contested if the returns are as desired. It is true that these fees will tend to be reduced by bringing into play success fees that serve as a reward for good management and achievement of objectives. The saying “what’s cheap turns out to be expensive” does not apply here, but what we can say is that “what’s cheap does not bring value.” But what is value? We do not all understand it in the same way; it can be tangible, intangible, implicit, explicit.
The time has undoubtedly come for ‘another’ form of anticipated profitability. It will no longer be simply a question of economic profitability or, so to speak, fiscal finance. Social and environmental profitability and good corporate governance are now going to come into the picture. Concepts such as “best prospects,” “best effort,” or “best in class,” among others, can only be analyzed through a careful selection of values, leading us to a second criterion based on the impact they generate on society. Passive management unfortunately sticks to quantitative aspects without including the values mentioned above.
Large institutional investors, private banks or independent wealth advisory services are waiting for our answers, and they will be extremely demanding when it comes to seeking new solutions. Institutional business is going to have to adapt to all these changes, both training us and showing it can listen to what the market is asking of us. The game has started again, but the rules are different. The goalposts have changed and we risk being excluded from the game if we do not convey a clear, consistent, and lasting message.
Let us be creative, innovative, credible and, above all, let us listen to what the market is asking of us so that it will continue to trust us. This will be no mean challenge to handle if we want to win the day.