An unexpected catalyst for change?
The year 2020 will be one that will be talked about for generations. The global Covid-19 pandemic resulted in concrete changes in lifestyle and social dynamics. Traffic jams were dissolved, holidays were altered, working from home became the norm and social contact was limited. Although it now seems that these changes are temporary and vaccines will enable us to quickly revert to normal behavior, there will be lasting effects. As economics remain a social science the longer-term consequences of the pandemic will not be limited to the direct financial impact on the balance sheets of companies and governments. Altered behavior will lead to new factors and risks to be discovered over the next decade.
This review however does not focus on these long-term changes. It is our narration of what we, as a consultancy firm for the investment management industry, have encountered over this strange year. It aims to record trends in the Dutch investment management industry as experienced in the consultancy assignments for our clients. We are not able to discuss the details of many of our assignments, but we can share the main trends. Additionally, we will inform you about relevant developments within our firm.
One of the prominent trends this year was team transfers. In the past, transfers of investment teams from one asset manager to another, were an exception. This year, Actiam, Kempen, NN Investment Partners and Robeco all lost investment teams to competitors. As cost pressure on asset managers increases there is less patience for building a team from scratch. Team transfers seems an attractive way to expand the range of expertise of an asset manager while attracting new assets. The pandemic has shown that the location where a team resides is less important. Although Dutch managers are more aware of this phenomenon, we expect this trend to continue next year. Investment professionals are frequently compensated less than the management of asset managers, while it is their reputation that is evaluated publicly through their performance. As long as this is not rectified and the investment teams are not an integral part of a credible company strategy, team transfers will remain a real risk.
Private debt’s accelerated maturation
Any new asset class will mature with ups and downs. The first challenge usually is the first main relevant market correction. Private debt is for many a relatively new asset class. It consists of many different segments. Dutch investors are familiar with some segments like Dutch retail mortgages, but largely unfamiliar with other segments like SME loans. Some of these segments of the private debt market will need to prove themselves to be resilient to the economic effects of the pandemic. At the same time private debt plays an important role in financing companies that are no longer served by their traditional financiers: the banks.
Dutch retail mortgages have become a popular allocation for Dutch institutional investors and recently also for international institutional investors. We have assisted many institutional investors in both selecting, structuring and monitoring their Dutch retail mortgage investments. Popularity however does not equal maturity. Many investors find it difficult to benchmark their investment. Therefore, the Private Debt team of AF Advisors took the initiative to co-develop a benchmark together with a number of large institutional investors. We anticipate completing a series of Dutch mortgage benchmarks in 2021.
The best example of the important role of alternative SME financing in the Netherlands is a social alternative named Qredits. Qredits combines loans to those otherwise not able to qualify with coaching by volunteers. During the pandemic Qredits expanded their offering by starting to offer bridging loans to those in need to temporary financing. They played an important role in financing SME during this crisis. Other more commercial alternatives, like Collin Crowdfund also made headway by providing a record number of new loans.
To provide more insight into the institutional appetite of providing capital for SME financing AF Advisors has drafted a report on request of the Dutch government. The conclusions of this report will be used to better tailor government initiatives like the Dutch Future Fund to help attract institutional capital to financing SMEs. AF Advisors has also assisted several new initiatives like SME loan funds in institutionalizing their offering to be better prepared to approach institutional investors. The difficult market environment this year and over the next years will separate the chaff from the wheat and will result in an accelerated maturation of the SME loan market. We expect that our Private Debt team will see an increasing interest of institutional investors over the next years in this new asset class. For more information contact Martine Vissers (firstname.lastname@example.org).
Anti-greenwashing regulations & Sustainable investing
Most investment managers have incorporated sustainability into their strategy, albeit some solely for the financial benefits of offering sustainable investment products. Investment managers flaunt their sustainable initiatives and share hefty sustainability policies. However, when we analyze these sustainable products, they are more often than not little different than traditional investment products. Extensive marketing makes any exclusion look like impact investing that will directly save the world. A plurality of approaches to sustainable investing is valuable, but standardization of marketing and reporting of sustainable investing is of equal importance. And while regulation should, in our opinion, be the last resort to produce change, industry initiatives to standardize reporting and marketing of sustainable products moved too slow due to different interests.
In 2018 the EU Commission published their ten-point plan on ‘financing sustainable growth’. This plan will result over the next years in a large number of new ‘sustainable investing themed’ regulations and regulatory changes. One of the first new regulations is the Sustainable Finance Disclosure Regulation (SFDR). This regulation is relevant for all financial institutions that incorporate investment strategies in their products. Pension funds, insurers, asset managers and wealth managers all will have to determine their ambition level pertaining to sustainable investing and have to report in a standardized manner.
As the deadline of level 1 implementation is mid-March 2021, many of our clients are preparing for the implementation, often with our assistance. When discussing this new regulation, we were surprised by how many financials are either not aware this regulation applies to them or have not started preparing for the implementation. Compared to other new regulations like MiFID II and AIFMD, SFDR has generated less exposure. We expect that many will be caught with their pants down when the first deadline is due.
The market participants face an interesting challenge. They are required to publicly announce their sustainable investing ambition level without specially knowing the consequences of their choices as the specific requirements for SFDR level 2 are not yet known. Our SFDR team is working hard to provide up-to-date insights and has a good overview of best practices. For more information contact Ernst De Klerk (email@example.com).
Assisting institutional investors in making the right choices in selecting the appropriate sustainable investing strategy requires detailed and no-nonsense insight into managers, service providers and data providers. Our Sustainable Investing team has assisted several institutional investors in designing their sustainable investing approach. For more information contact Nienke Kuppens (firstname.lastname@example.org).
Preparation for a new Dutch pension system
Another important development this year was the agreement by the social partners on an overhaul of the Dutch pension system. As the details of the pension reform still need to be designed the initial impact is clear. The Dutch pension system will consist of two variants: a collective defined contribution (CDC) and an individual defined contribution (IDC) pension. It is expected that most existing pension funds will not only adopt one of the two variants but also convert their existing defined benefit pension to the chosen pension variant.
For the investments there will be impact in two major areas. A conversion to either variant will entail a change in operating model. AF Advisors is currently researching the impact on the operating model and is interviewing all providers of pension and investment administration service providers to create an overview of both the impact and the solutions offered to assisting our clients in their choice of target operating model. The results of this research will be published by our Target Operating Model team. For more information contact Peter Dom (email@example.com).
The second area of impact will be the asset allocation. As the new pension variants will have different restrictions that will lead to changes in the asset allocation. Liability driven investing will change. Compared to DB, CDC will have different conceptual requirements for a matching portfolio. A lesser role of long duration bonds and swaps and discussion on the added value of inflation protection is expected. The return portfolio will also face changes in restrictions. We expect a more prominent role of alternative asset classes and a redesign of the allocations to traditional asset classes. AF Advisors assists both pension funds and asset managers in preparing for these changes. Over the last six years AF Advisors has assessed all commercially available iDC pension solutions and has created a database of all investment portfolios. The detailed knowledge that we have gained will benefit our Investment Consultancy team in helping our clients make the required changes. For more information contact Jasper Haak (firstname.lastname@example.org).
New business models in retail wealth management
Over the last years each of the six major wealth managers in the Dutch market has adopted a new business model. It is interesting to see that all six have made similar changes. Each has assessed their own expertise and their desired future state but derived a different solution. The result is not only a more future proof business model for wealth managers but more importantly a significantly lower wealth management fee for Dutch retail investors.
The variations in business model typically stem from which part of the wealth management service is executed by the wealth manager and which part by service providers. AF Advisors has assisted several wealth managers in designing and implementing changes to their business model. Additionally, our Market Analysis team offers competitive analysis and research into different types of wealth management markets. One example is our yearly Dutch Wealth Management Cost Overview. The next version will be published in January 2021. For more information contact Philip de Koeijer (email@example.com).
Product development and rationalization activity was limited
The larger Dutch asset managers developed few truly innovative new strategies in 2020. Most new investment strategies were sustainable investing themed. Robeco developed two fixed income strategies investing in bonds issued by companies and governments that have a lower carbon footprint and will continue to further lower their carbon footprint. Robeco was less active in launching new factor strategies as most of their factor strategies show significant underperformance compared to both standard indexes.
One of the few new NN Investment Partners strategies combines a few of NN Investment Partners’ greatest hits. ESG index optimization and emerging debt investing. Their new strategy follows the trend of new passive emerging debt strategies that incorporate ESG investing. Kempen launched a new fund of structured credit funds. While structured credit is already offered by many managers, a fund of fund can give access to a broad structured credit portfolio without manager selection expertise in this difficult to understand asset class. Actiam continued innovation in their passive ESG range. Their new ESG investment philosophy better combines engagement and exclusions. The result is a slightly higher tracking error portfolio with a more pronounced ESG profile.
AF Advisors’ Product Strategy team assists larger and smaller asset managers in product development. For more information contact Sef Laschek (firstname.lastname@example.org).
Each year asset managers also discontinue investment funds. This can be a result of underperformance or a lack of commercial success. This year the majority of the investment funds that were closed were a result of the take-over of their manager by another manager. The Loyalis and VvAA fund ranges were closed as a result of integration of their manager in a.s.r. Vermogensbeheer. Many other fund range rationalizations were postponed. The uncertain market circumstances were the primary reason for the delay. AF Advisors has a specialized Asset Transfer team that can assist in those operationally complex projects. For more information contact Saskia Leonard (email@example.com).
AF Advisors in 2020
For our company 2020 was equally challenging as for our clients. Working from home became the standard with a brief and limited relaxation over the summer months. We miss direct contact with our colleagues and our clients but make the best of this situation. Fortunately, our IT support has provided us a good IT and communication infrastructure, so that we were able to continue to support our clients, albeit now via video conferences. As pandemic commenced in first quarter of 2020, we expected the number of assignments to decrease and they did. However as of the third quarter we are back to our usual capacity. We are grateful that our clients continued to make use of our services. We kept in touch with our clients online or through catching up during a much-welcomed walk. A fun and healthy way to break the monotony of working in isolation.
Earlier in 2020 we invested in a new venture. Equitem is an IT and change management specialist. Frequently the outcome of our assignments requires embedding in the enterprise architecture or requires selection and implementation of new business applications. Equitem, our new sister company run by Frans Weijdener, Alex de Ruiter and our very own Peter Dom, is well able to assist our clients in various IT and change management challenges. For more information contact Peter Dom (firstname.lastname@example.org).
In 2020 we realize that the financial sector is relatively fortunate in dealing with the pandemic. Financial professionals can work from home and our companies are not closed in a lockdown. We therefore employed a few initiatives to share our good fortunes. In April we distributed (#helpdehoreca) vouchers to our clients. These vouchers supported the hospitality industry, and we were taken up by our offer to enjoy a coffee or beer together when the bars reopened. We offered our excess consultancy capacity free of charge to the pension administrator of the pension fund for the care and welfare sector (PGGM) as our way of giving back. We are grateful for all the hard and sometimes dangerous work the healthcare sector was and is doing to keep us healthy. PGGM took us up on our offer and we supported PGGM in two projects free of charge.
Lastly, we normally send our clients chocolate at the end of the year as a present. We have done so for as long as AF Advisors exists. This year we break with tradition. Not only is it useless to send chocolate to empty offices, but we have also found a better way to celebrate our cooperation and express our gratitude. We will be supporting the ‘Survival with Pancreatic Cancer Foundation’, in their search for a new treatment method for pancreatic cancer. This disease remains a death sentence for both young and old in most cases, and Professor Casper van Eijck is well on his way to change this. He is successfully using dendritic cell therapy, specific type of immunotherapy, to successfully extend the life of his patients. These early results will over the next years be tested on a much larger group of patients. We wholeheartedly support this campaign and will commence a long-term cooperation by not only an annual donation in your and our name, but also by supporting them with our professional expertise, by creating awareness and by assisting them in fund raising.
In conclusion, it was an eventful year that we all rather not would like to repeat. We look forward to working together next year and wish you all a healthy Christmas.