[OPINION] The future of finance
As fund managers managing money on behalf of our investors we look to Davos for how longer-term trends may impact the products we deliver and the markets we invest in. Our aim is to stay relevant to the needs of our clients – perhaps even to flag changes in their industry to our clients and help them understand the need for changes to their investments.
We outline a couple of key takeaways from one of the sessions held on the first day at Davos, which we believe to be directly relevant to all our clients and one issue that is relevant specifically to our clients in the insurance industry.
a. Asset management is increasingly being viewed as an area that holds opportunities for financial services seeking to grow their business. But what does this mean for the industry and its clients?
a. Insurers continue to be frustrated that regulators appear intent on extrapolating bank regulations to the insurance industry.
John Cryan, the CEO of Deutsche Bank, would appear to have not yet recovered from the bruising battle that the bank has had with US regulators. Settling a fine for poor practices, in Deutsche’s US mortgage securitisation business, at half the initial proposed amount, should have helped matters. However, at whopping $7.2 billion, or roughly one-quarter of the bank’s market capitalisation, he can’t be too happy at being tripped up by the banking regulatory regime.
The cynic may say that would explain why Cryan appeared enamoured with Deutsche’s asset management business, noting that with $750 billion in assets under management it was well placed to capitalise on the lighter touch regulation enjoyed by the asset management industry.
For us at Ashburton it highlighted a growing enthusiasm for the asset management industry which should lead to increased choice for consumers as well as more competitively priced products. But it also reminded us that it is unlikely that our industry will remain untouched by increasing regulations.
We have already seen a major debate globally around the money market fund industry with regard to guaranteed disinvestment values that never ‘break the buck’ or lose capital. This has led to major changes in the way the money market fund industry delivers its value proposition with a clearer distinction emerging between funds that offer such guarantees and those that don’t. Any guarantees offered to the end investor now force the fund manager to hold more investments that are safer, secure and less volatile.
Another area that the regulator has set his sights on is ‘liquidity risk’ or the potential for a ‘run’ on some funds in the event of a rush for the door by all investors. Here again regulations have become more prescriptive on the minimum amount of readily realisable or liquid assets that a fund must hold. Also, fund managers are being encouraged to ensure that they plumb into their funds, liquidity-facilitating tools, such as access to the repo market. Access to the repo market could allow the fund to gain access to cash quickly in order to meet redemptions without being forced to ‘fire sell’ assets at depressed market prices.
These are areas that we believe the South African regulator is going to pay increasing attention to and Ashburton is actively engaged through industry bodies such as ASISA in order to contribute our views and proactively shape the investment landscape in a way that will improve risk-adjusted returns for our investors.
I must admit that as I watched I was somewhat taken aback at a comment by the CEO of Zurich Insurance Group, Mario Greco.
“The regulators tend to have a memory for having ruled banks and they tend to consider insurance companies as banks, which we’re not. And so, the extension to insurance companies of banking rules fails to understand the riskiness of what we do. We live in a world where we accept liabilities from customers and we match assets to the liabilities and we run quite a good match of assets and liabilities over a long period of time. Banks don’t do that and this is something that we are still struggling to have the regulators understand.”
But it turns out that what Greco was getting at was the fact that moves are underfoot in Europe to require insurers to use good times in investment markets to set aside additional buffers against investment risk, which can then be used to smooth out any future downturn in markets.
If this were to come to pass it would be a very important development for retirement savers and investors for a couple of reasons:
• It could increase the cost buying an annuity from an insurance company if the insurance company has to hold more capital for adverse investment experience.
• It may deter insurers from investing in corporate bonds, loans to companies and infrastructure debt. It would do this because these investments would require an insurer to hold more capital as a buffer should there be a fall in the market value of these assets.
Greco’s point is therefore an important one. If the insurer has carried out judicious asset liability matching it should not be a forced seller of assets and should therefore be able to stay invested in these assets and ride out a market crisis. This is a key advantage that an insurer has over other investors – its ability to earn superior returns by investing in illiquid assets that match its liabilities. This long-term investment perspective is good for consumers of insurance products.
Fortunately for us in South Africa, common sense prevails and our regulations do not require such additional buffers. Nevertheless this is an area that should be monitored as it has the potential to impact the economy by raising the cost of capital to finance companies and projects. And although one could argue that for every loser there is a winner, transitions are never without volatility.
Shalin Bhagwan is head of Fixed Income at Ashburton Investments.
For more news, analysis and insights on Davos 2017 go to EWN’s WEF portal in partnership with Ashburton Investments.