The New Fund Order

Fund Showcase with Jean-Francois: Dance To My Own Tune!

May 10, 2021 JB Beckett/ Jean-Francois Hautemulle Season 1 Episode 9
The New Fund Order
Fund Showcase with Jean-Francois: Dance To My Own Tune!
Show Notes Transcript Chapter Markers

Welcome to the New Fund Order. An Orwellian journey into the Darkside, the Frontier and the Fringe of Finance.

Somewhere a metronome begins ticking, he clicks his fingers then begins to tap dance across the room, then up the walls and finally onto the ceiling! He sets the beat for how he has developed funds over the years and dances to his own tune. 

I am joined by veteran fund strategist Jean-Francois Hautemulle. Join us as we share experiences from the buy AND sell side. Is M&A a game of musical chairs? What are the little tricks Distribution doesn't want buyers to know? We debate changes to the product; lifecycle, positioning, asset concentration, organic versus inorganic growth, innovation and evolution. The Scale game: why do supertanker funds exist; why do so few new funds reach 100 million in size? Why should fund development be seen by ExCos as strategic not tactical? Is ESG here to stay and how should we develop products to better meet investor needs? What then is value?


Fund selectors are unwittingly curated by unseen product managers and strategists into; new funds, sectors, fashions and vogues. How funds are then developed have a huge impact on the end outcomes for investors. So what does responsible and sustainable fund development look like?

Together with left-field opinion, global market news and latest views, direct from my dystopian bunker. In the Air, on the Ground, on the Street and around the corner of Debate. Watching, listening, in the Shadows and on your Airwaves. For Fund Selectors, distributors, wealth managers and investors.

In association with my sponsor Allianz Global Investors (AGI) one of the world's leading active managers. My thanks to my guest Jean-Francois and Terres Neuves.. and you dear listener.

Please LIKE, SHARE and SUBSCRIBE. Please leave a REVIEW and let me know what you think and what topics you would like for future episodes. Until then... stay safe and.. keep it left-field!!

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Credits;

George Orwell 'Nineteen-Eighty Four', Public Domain 1.0.
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Computer  0:01  
Episode 009

Clip from 'Royal Wedding' (1951)  0:03  
[Music]

JB Beckett  0:14  
Salutations Dear citizens as we peer into the new fund order to discover the immutable truth for asset management and wealth managers, the lowdown from the dark side, the frontier.. and the fringe of asset management and fund research.

Clip from 'Royal Wedding' (1951)  0:43  
[Music]

JB Beckett  0:43  
For wealth managers, fund selectors, distributors and investors bringing to you the People's Republic podcast or finance in association with my sponsor Allianz Global Investors, capturing the latest market news, views and interviews with leading minds in our industry.

Clip from 'Royal Wedding' (1951)  0:43  
[Music]

JB Beckett  0:53  
Allianz Global Investors is one of the world's leading active managers. 

Jean-Francois Hautemulle is the founder and principal of Terra Neuves consulting limited a consultancy advising asset gatherers on product matters such as; strategy positioning, marketing and innovation. Previously head of product strategy EMEA at JP Morgan Asset Management he built a team and expanded its coverage across the firm's fund platform. Jean-Francois was also been responsible for the pan European fund selection team of Unicredit private banking in Italy, Germany and Austria. And he has been involved in both buy side and sell side Investment Management since 1992.

And in these strange pandemic lockdown times, rest assured that all guests are calling in remotely. 

And welcome Jean-Francois to the new fund order... and let's talk about your fund showcase. And of course, dancing to your own tune when it comes to fund development. Welcome to the new fund order my friend...

Jean-Francois  2:20  
Hello JB, thank you very much for having me. This is a pleasure.

JB Beckett  2:24  
We have both been involved in what I might call fund and product strategy for for many years. That is, I see fund analysis as the sell side 'the Ying' to 'the Yang' of the buy side. And certainly knowing both I found that really helped me in my career,

Jean-Francois  2:40  
It has actually been very interesting to be to be on both sides. And and I will say that for me, you learn much more in terms of once you've done the bit of the buy side and you've done some some work on that and we should ever have done of course, you go back to the sell side, it's okay that this makes sense. I mean, I see that every single day, you know, when I'm when I'm working I'm currently doing with some of my clients that said, does this make sense? What are you saying here? What am I trying to convey to people?

JB Beckett  3:10  
I also found that having been on the sell side, you know, the tricks of the trade, right? So when you go back to the buy side, you know, those little tricks that the sell side likes to play. So there's, there's no hiding place,

Jean-Francois  3:22  
There's absolutely no hiding place. And you start and start asking very pointed and embarrassing questions like, 'Can you tell me when you're not going to be performing Well?' The answers you get out of that are not exactly good.. if you ever get an answer as a matter of fact,

JB Beckett  3:38  
So you and I both know that given that fund selectors then are carefully 'guided' how the products are developed, merged or acquired, it can have such a huge determination on investor portfolios. So let's take merger and acquisition. Right? It feels at times as a bit like musical chairs, everyone wants to win. Everyone wants to be bigger, that race to $1? trillion? Does size really matter?

Jean-Francois  4:04  
Well, yes, size does really matter in a certain way for for group. I mean. The way I've been looking at it personally is that the world of asset management is turning into a... is becoming 'binary', you have on the one hand, the asset gatherers, and we all know them all. And those people have a breadth of offering, they have a breadth of solutions and also at the forefront when it comes to client servicing because they have the tools and the resources to actually have the money to put behind all those activities. On the other hand, you have what I would call the alpha generators, which to me are more of the boutique side of the of the business where people actually are focusing on best in class investment expertise on a specific asset class or a number of classes, where it becomes tricky, and this is why we see merger and acquisition and when you have the mid size firms getting together. 

And to be fair, from what we've seen, I am not convinced this is the system altogether, they are too small to be a big guys what I'm urging, but they are too big to be a small guy. So he saw that there is always the definition of what's in the middle, they need to have a better understanding of why they're doing it, how they're doing it and have a sense of where they are, who they are.

JB Beckett  5:21  
Yeah, and we've seen this, you know, just complete disappearance of the mid sized asset manager. Right. You know, particularly the warning signs for me is once these maybe publicly list and you think, right, okay, this is the writing on the walls. Here we go again, of course, as a consequence, we're seeing this increasing asset concentration with these 'supertanker' managers like BlackRock Vanguard State Street is, is competition healthy in asset management?

Jean-Francois  5:45  
It's totally competitive. Totally. It's, it's, it has to be, you have to have competition. I mean, the supertankers can't do everything. And you need no, you need innovation, you need disruption, this is not going to happen from the big guys. I mean, the going back to another industry, look at the automotive industries, if we were not relying on GM, Volkswagen, or Ford, you wouldn't get the kind of Tesla's and allow those companies actually are changing the way you're doing things. So you need to have competition, both in terms of asset classes, in terms of innovation, new products, new ways of doing of managing money, you know, look at the likes of Lindsell Train or of Fund Smith in the UK, they actually are doing very, very well with a specific strategy and stick to their metal.

JB Beckett  6:41  
Yeah, but of course, you know, as a fund strategist, that, you know, we are faced with a number of decisions in terms of, you know, how do we take the strategy forward? Now, we can obviously grow our existing funds organically and try to sell and launch new products. Or we can go down that m&a route and acquire asset book from competitors, or get on the, I guess, on the efficiency train and try and consolidate the product offering down. Is m&a a viable strategy? just picking up that earlier point? Or does it point to just a lack of organic growth and maybe a lack of product innovation?

Jean-Francois  7:20  
The challenge with organic growth, it's very difficult to achieve, especially, as you mentioned earlier, we're in a world where winner takes all and if you take a look at all the other the subcategories of Morningstar, for instance, you will see that there's a limited number of products are actually gathering most of the assets, the rest is basically no, not doing terribly well. So in that sense, organic growth is tricky is probably easier when you are a smaller firm. Because you're, you know what you're doing and you do it well, and people are actually going to go for that. And actually in a way, when you're a fund selector you are looking for those smaller firms, which are doing are doing a better job at running that specific strategy. So you can actually add it to your, to your portfolios or to offer it to your clients. Now that again, to go back to what I think it's viable, as long as you're clear on what you're doing, and no, as you said, there are three ways after the other you quite you acquire AUMs. Basically, what you try to do is merge products, which are sub optimal at the moment and try to make them bigger and more appealing to clients, you actually are building investment capabilities, which you don't have, and you can't really go I mean, no, it's very difficult at the moment to now build, it's difficult and very time consuming to build activities in real in real assets, systematic or in ESG. So you actually buy that capability to make sure that you have it when people need it. And then you also have broaden your access to, to, to distribution now go to into market, to segment that you don't, you haven't been doing very well or you're not even present. But you have to be very, very clear on what you do, what you're doing and why you're doing it and go beyond the standard.. apple pie statement of... strategic fit, cultural affinity. 'We work well together', 'we like each other' that type of stuff, which really doesn't make any sense. As an ex fund selector I will be very dubious of that.

JB Beckett  9:37  
Everybody is vying for the budget, right? So if you're after budget - why are after budget? Either it's to develop the technology within the firm, either is to deal with regulatory issues arising for the firm, or is to develop product or it is corporate finance and it leads to this kind of m&a route and at times what I see. Especially in the larger firms is the corporate finance guy. He's more senior than the the product development guy, or woman, right or person, right. And so and so often the they get the budget, but often makes so little sense to, to colleagues within the firm and probably makes even less sense to colleagues in the acquiring firm, or, indeed, even less sense to the fund selectors. Right? We're sitting there kind of scratching our head saying, 'Why are you doing this?'

Jean-Francois  10:30  
Fund selectors, so that, that any m&a activity is is really a red signal for for for trouble, because other you have both firms on your platform. And you know, this is going to be changing over time. There's going to be years of a few years of the readjustments of what's going to happen to the strategy that you have. Number two, you have none of the none of the two on your platform. So what do you think that having a bigger entity that you don't really have already is going to be better that being part of your platform, that's not going to work out? And the third case is you have one, but you don't have the other? And again, you go back to Okay, what's going to happen to those strategies that I like, and and and, and know that my client that I'm my clients investing into, so that from a fund selector, that that is that is quite quite tricky. I think the anecdote, the merger part is probably more difficult than the acquisition. Because if you have again, you go back to strategic affinity.., and all that stuff. No, you have to have somebody drive the process. And this is probably why some of the larger firms are doing better, because they're buying so they're not. If you take a look at what Amundi has done, they are they are buying, they are turning now this is this is a Amundi buying No, not another of managers, and therefore they're running the show, when you have no no equals running the show, this becomes a problem. And we've seen that with a number of them. And I'm not sure this is the best way to to doing it. Now, that being said, Going back to your previous point on the allocation of resources, what you will see. And I see that no work having worked for large firms or  with large firms and smaller firms. Now, the resources, the allocation of money, and people and ability to do things in large firms is so much bigger and so much better than that. You have some compromises, yes, but you don't have the day today, well, we could 'we could do this, but we don't have the time, or we don't have the resources to do it, because we don't have the people to do it'. 

And then to go back to product developer, one key issue when it comes to new products is it's becoming increasingly important is the issue of 'seeding' the new strategy to make it know, to make it live and, and bring it to a level where investors actually going to go into.. this is much easier, to a certain extent, with larger firms than with with a medium sized. The boutiques are less of a problem, because they probably have no they have more limited number of strategies they want to follow. And they also have a very different relationship with their clients.

JB Beckett  13:34  
Absolutely. And you know, observing certain ExCos I would say the the fundamental mistake they make is that the view corporate finance as 'strategic' right? m&a is strategic. It's something that gets CFOs excited and gets CEOs excited. And somehow they view product is 'tactical'. And I think they make a fundamental flaw in that that because Asset Management lives and dies by the correct positioning of product right product should be strategic. 

Oh look, let's, let's put the let's put our little soapbox aside for m&a. Because we may we may I think, I think the listeners know we're getting pretty angry about it.

Jean-Francois  14:22  
You know what, this is a topic you can we can go over over and over again over the years to come. Of course, this is not going to add tomorrow. 

JB Beckett  14:30  
Absolutely, and we're gonna get on to another vexing problem for for product strategies. Which is the flip side of that m&a argument which of course is fund closures but I don't want to take you there just yet but we're gonna get to it but we'll but let's let's let's think about the product cycle. So many choices Jean-Francois; so little time. You know, when you look at the possibilities out there you when you look at the possible products that could be developed, you know how has the product development cycle changed during your career? And has it changed for the better or for the worse?

Jean-Francois  15:05  
Well, it actually it has changed. And it has changed for the better and for the worst at the same time. And you'll see, you'll see exactly what I'm gonna get to. I think, first of all, the product development process as become much more streamlined. I mean, I remember, my first foray in product development was launching a global emerging market fund or even worse, an India fund, it took forever to get those things done. Now, everybody seems to have and that's not only the product development team, the regulators, the lawyers have a much more streamlined approach to product development. So I don't say plain vanilla, because that's not the right word. But a simple product can be launched within three months nowadays, where it used to take six to nine months. And it's still a problem where more esoteric strategies, but you can get to market much faster. It also has become a much more coherent in a sense, as you said, there are so many so many choices, so little time. 

No, you cannot No, you can no longer launch a product in a vacuum at the moment. Now from an investment standpoint, is a lot more work being done on pre pre launch testing, paper portfolios, compliance with management, all those people are getting involved into this before you actually get the product to approval to the board and the regulators. 

The other thing also is that it's there's a much there's much more attention, probably not enough yet, but much more attention being paid to what's out there. And that helps you better define what you are offering versus what support to the company does mean I can't imagine nowadays, having a product, a new product proposal going to a board or to an investment committee without having a proper analysis of the competitors, their strengths, their at witnesses that type of stuff, did you really need to do this and where now we were thinking of launching a product, we did massive market research behind it. And thank God, we did it because at the end of the day, we realised that the product we were offering was not was not right yet. So that's one thing. 

Now that being said, going back to is it for the worse, it has become much more complex. First of all, the regulators are put onto this. And we are now becoming much more complicated in terms of know the kind of rules and regulation you have in place. The fund managers have access to more tools and more instruments, which you need to integrate into the investment process. And worse, trying to put them into the offering documents to make sure that it makes sense. And then. So you, you have no more of that.. that going on, which makes it and especially for the newest strategies on on alternatives, for instance, or multi assets, they tend to become long. It takes more time. But I think it's the product development process has definitely gotten much more professional. Since I started this..

JB Beckett  18:29  
You can guess where I'm going to go with this, which of course, is this rampant wave towards environmental social governance (ESG) structures structures towards sustainability towards climate strategies? Do you think the industry now sees that as very much as the golden egg? If it does, one of the biggest problems we know is is a lack of fund closures and too many funds. And it looks like we're just about to repeat the same mistake again?

Jean-Francois  18:53  
In my mind, ESG is here to stay. This is not something that's going to go away. And yes, a lot of them are a lot of firms are looking at as the golden egg. But when you start looking at as regulators, the distributors, the buyers, no, they really are increasingly asking, OK, 'you talk the talk, show me that you can walk the walk'. But I think what you will see is more and more traditional products, incorporating ESG concepts into their into their standard investment policy.

JB Beckett  19:27  
You know, repackaging existing products is going to be the easy one for a pro development right now because you know, you're not really going to face too much pushback from the ExCo because let's be honest, they want they want to port as much as of their AUM to be to be ESG. Right. So I mean that that's obviously something..

Jean-Francois  19:47  
As I said earlier, the whole issue of seeding and raising assets. Now if you convert a product from the traditional to a midsize product, me put it this way from a sort of so so type of thing to a more ESG focused type of offering, you already have an asset base, you can start using as leverage from.

JB Beckett  20:08  
My concern is that with so much new ESG product development going on, with a raft of new launches into the space, the quality is going to be variable but I guess in that respect. That's nothing new quality has always been variable. So, you know, maybe we should accept that. But it does worry me that so many non specialists have very quickly manoeuvred to get something to market and it does, it does give me a little bit concerns as an ex-selector like that then ties in with 'Why is the industry so bad at fund closures?' And, you know, we're we're launching so many new funds into the market, ...how to how do we fix this Jean-Francois? How do we how do we reduce the sheer volume of funds in Europe, which now I believe exceeds even the US so that that's a real worrying fact?

Jean-Francois  21:02  
Well it's, no.. I mean, let's go back to the US versus Europe. Now we're talking in a certain way, comparing apples and oranges, because the market dynamic, the history is very, very different. So I'm always reluctant to comparing US versus Europe, because that's not really what... that being said, are still more than 50,000 funds in Europe, a lot of them are legacy products and need to be... Now the one thing which is very tough, we need to acknowledge is that ..fund closures are very difficult. You've got a number of stakeholders to take into account, you've got a reputational risk to take account into account. And it's not always obvious, no regulators will sometimes refuse for you to close the fund, because you want to close it, you have to make a really good case for it. So that's not easy. And we know that the the we know that the Europeans are not as good probably as the Americans when it comes to making tough decisions. So consequently, consequently, this is not.. now one thing that actually, that actually could be a ray of hope here is that you start to see a number of things going on, for instance, one of our primary topic in the UK at the moment is the 'assessment of value', which actually is a good exercise internally, to have awkward conversation with management, with the managers and distribution. But why do we keep the thing it doesn't really add value to anybody. Now, the good thing is that a number of the firms now are looking not only doing that out of the UK range, but also for the pan European range or the global range. So in that sense, you will see more of that going on. You also have fee pressure, you know, people know you're talking about. No, there's limited capital available and not running a fund is extremely expensive is becoming more and more important, especially at a time when you actually have reduced margin to see, does it make sense for us to keep that so you will see more and more of that. 

All that going on as far as as far as I can see. And then No, there's also market pressure and distributors in terms of the say, the fund selectors are not going to continue buying funds for the sake of it, it's into the app to make to make sure that what you're offering makes sense. It fits with your brand is faced with the kind of activity the capabilities that you have, which means that if it's not true, it's not mainstream for you. And it's the sub optimal, get rid of it. It's gonna take time, it's not gonna happen overnight. I think that in some some ways, there is some research from broadridge over the last few years where you see actually the number of fund closures being the increasing over over time, but that's it's great to take them in ourselves. So a very recent piece of research done by a friend of mine, you realise that 30% of the funds that are being launched, only 30% of the funds reach $100 million, or pounds or euros 60% of those funds never reached that level. Now, some of them can be probably viable, but they're not smaller strategies. And they are very specific, but a lot of them you need to actually look at it as you say and I think that process is starting to go and you see more and more firms getting into a product review process a systematic product closure, optimization, rationalisation whatever you want to call it, and do that on an annual basis of that conversation, which is internal and external, is becoming much more prominent

JB Beckett  24:58  
Before you go Jean-Francois, I've been asking every guest to answer my quick rapid fire round of 10 questions. I know this is the budget I'm looking forward to right. So the secret here is it's gut feel it's one answer. Are you ready?

Jean-Francois  25:19  
I am indeed.

JB Beckett  25:21  
Okay, here goes. Question number one, bull or bear? 

Jean-Francois  25:28  
Bull. 

JB Beckett  25:29  
Question number two. Bogle or Buffett?

Jean-Francois  25:33  
Buffet.

JB Beckett  25:35  
Question number three, profit or planet? 

Jean-Francois  25:39  
Planet. 

JB Beckett  25:40  
Question number four, divest or engage?

Jean-Francois  25:44  
Engage. 

JB Beckett  25:46  
Question number five, lower cost or better value?

Jean-Francois  25:50  
Better value.

JB Beckett  25:52  
Question number six supertankers or boutiques?

Jean-Francois  25:57  
boutiques.

JB Beckett  25:59  
Question number seven star managers are team players?

Jean-Francois  26:04  
That's a tough one. I would say go with stone with Star managers.

JB Beckett  26:12  
Question number eight, public or private? 

Jean-Francois  26:16  
Private 

JB Beckett  26:18  
Question number nine, high growth or stable income?

Jean-Francois  26:22  
stable income.

JB Beckett  26:23  
And my favourite Question number 10. socialism of free markets? 

Jean-Francois  26:28  
Oh, yeah.

I guess I will go with free market

JB Beckett  26:35  
Great stuff.

Jean-Francois  26:36  
Although

JB Beckett  26:37  
you want to change your answer?

Jean-Francois  26:40  
No, no, no. No, my heart would go with socialism. But my head goes with free markets.

JB Beckett  26:48  
Now one last Bonus question Jean Francois, if you can pick for me a number between 11 and 14

Jean-Francois  26:54  
15. 

JB Beckett  26:55  
Okay question 15 big government or small government?

Jean-Francois  26:59  
Oh dear go back to the socialism versus free market thing. I would go with the government.

JB Beckett  27:05  
So that marks the end of our interview Jean-Francois, you have survived the new fund order? I just want to say thanks. Thanks very, very much. It's been a lot of fun.

Jean-Francois  27:15  
It's been great fun. Thank you so much. And okay, to continue those conversations of the month and years to come. That would be lovely. Absolutely. Lovely. Thank you so much.

JB Beckett  27:25  
Great stuff. Thanks, Jean Francois

Please don't forget to like and share and subscribe you know, click the subscribe button. A new podcast every two weeks with a new guest. Stay tuned. 

A big thanks to you dear listener for tuning in. Brought to you by my sponsor, Allianz Global Investors. A warm thanks to today's guest. Legally, I am compelled to remind everyone that all views of this podcast are of course independent and do not belong to any affiliation or organisation. Just in case that was in any doubt. 

Tune in for the next podcast every two weeks from the new fund order. Please subscribe, share, like and comment. Let me know what you think. What you'd like covered in future episodes. Until then, stay safe and keep it left!

Clip from 'Royal Wedding' (1951)  28:21  
[Music]

Transcribed by https://otter.ai

Introduction to Today's Guest
Interview with Jean-Francois
Rapid Fire Round
Outro and Thanks
End sequence