In 2023 you will have to be agile to succeed
Asset management companies revenues are linked to the assets they managed. An environment like the current one with volatile financial markets and high inflation is challenging for such companies as your cost increase while your revenues remain stable or even slightly decrease depending on the type of assets you manage. In addition, there is a slowdown in the implementation of new projects, which put additional challenges medium terms as important projects take typically months to be implemented. In this article I describe my receipt to succeed in 2023 and invite all the readers to read a “compte-rendu” or debriefing in 12 months from now.
2022 – Core activities
2022 is an atypical year. Financial markets started to fall from January and, in parallel Russia invaded Ukraine in February. Such elements create a lot of uncertainty. If you add to this oil increasing significantly, and a post Covid-19 environment that remained quite fragile, you finish the year with very limited new business. At FARAD Investment Management, in our traditional business lines, we have seen a significant slowdown on the investment fund side. While we worked on several fund project in the first Quarter, we finally had only one fund launch almost at the end of the year. This means that most projects have been put on hold and that for the ones moving on, it took a lot of time and in any case more than usually. On the second arm of our asset management business, the portfolio management activity, we have been much more active. The insurance market remained very dynamic and we have seen a significant increase in the number of portfolios we are in charge of with an equilibrated split between portfolios we manage and portfolio for which we are in charge of trading only.
2022 – Sustainability
Where we have seen a real and strong interest however is our non-core historical business offering or let say it differently, what is non-core for most asset managers. Here we can also split our activity in two parts. Firstly, everything linked to sustainability (non-core for most asset managers) and secondly, fund distribution (non-core in the offering of for FARAD Investment Management until recently).
Within sustainability, on one side we have seen a lot of interest of our AMC (certificate) launch over the Summer that is invested in Energy Transition and Human Capital. The idea behind this certificate is to over a real and significant exposure to these themes. Thanks to a quantitative screening, only companies with a significant part of their revenues coming from one of the two thematic can be included in the portfolio. The interest for the product came mainly from investors looking to diversify their traditional portfolios equity exposure. While the first couple of months of the product have been volatile, the rebound has been as strong as the original drawdown.
On the other side, the real interest has been on our GreenEthica Sustainability Reporting offering. Interestingly enough, the interest came from several part of the industry, insurance companies, banks as well as other asset managers. Sustainable reporting has become a hot topic thanks to regulation (SFDR) but also thanks to client expectations. There is the obligation to report information on their portfolios and their compositions for investment funds but it is obvious that clients that indicate ESG preference need to see the impact of their investment in terms of ESG. We understood this already in 2021 and thanks to the work done already in 2021, version 2 and then 3 of our sustainability reporting offering are very differentiating from our competitors thanks to the work done and the experience acquired. This also enables us to more easily integrate newer elements as the standard ones were already integrated. The fact that the reporting is now automated opened the door to discussions with larger players, whose interest is strong. We discovered that post-Covid, given the challenges and delays faced on other projects, most players are looking to outsource this reporting rather than developing it internally. The fact the requirements are expected to evolve over time also push most of them to outsource rather than having to continuously invest in it.
In addition, regarding our sustainability offering, we rapidly discovered that while for liquid assets, it is relatively straightforward to get data on assets and to run reports, the situation is different for alternatives. The requirements remain however similar whether an investment funds is invested in stocks or directly into companies. Investors’ expectations may even be more important for alternatives than for liquid as their potential impact is bigger. In the alternative field the work is however different. You don’t simply gather data from a data provider, select the best ones and produce a report. You need to determine what information you can get, how and how you can analyze it and aggregate it to produce a report that is understandable and that enables you to identify the weaknesses to work on during the life of the investment to move toward to predefined target. Predefined target you can also define thanks to the information you extract from the analysis. In this field the offering in the market is limited and in most cases, the proposals come from consultant who have no experience of managing money and don’t fully understand this industry.
2022 – Fund distribution
The second non-core topic (at least not an historical core activity for FARAD Investment Management) that gained a lot of interest is fund distribution. But isn’t fund distribution saturated in the country with the second largest fund industry in the world? Yes, but there is an opportunity. Post Brexit, UK-based placement agent or asset manager, can’t call European-based clients to sell them investment funds. To do so you need either to have the required license through a EU-based company or to work with tied agent in each of the country in which you want to be active. The challenge is that the cost of setting up a company is quite high. This shouldn’t be an issue for large players but the world of fund distribution is made mainly of small or mid-size companies for which such a cost is too high to be integrated, particularly in a world with high inflation. In addition, the administrative work to run such a regulated entity is also important. The second option, to work with one tied agent per country is again difficult to manage given the amount of work for small to medium-size entities. In this context, we have seen a strong interest from UK-based players looking to work with an established regulated EU entity. We never helped any third party in the past but found an efficient way to implement this. It’s a pure win-win situation as, in the end, the client spends probably less than 50% of the cost of setting up another company and 80% of the administrative work.
In 2022, we have been agile opportunistically but I am fully convinced that for 2023, to succeed you need to be proactively agile. I don’t know if financial markets will go up or down but I don’t think that you should rely on financial market trend to manage a company. I strongly believe that to succeed you need to identify differentiating factors like the sustainability reporting in the case of FARAD Investment Management, work on them to be amongst the best provider in the field and to be agile in your core business. In the case of FARAD Investment Management the focus has always been on the asset management part more than distribution. For us there is an opportunity in the distribution field. We invested in it, dedicate time on it and, again, by working firstly on the definition of the service but also on the operational efficiency of the service delivery, there is a possibility to grow and develop further the company independently of market trend. To summarize, for me the success of asset management companies for 2023 will rely on the agility and how to create value outside of the core business of managing money and being paid on assets. IN the case of FARAD Investment Management, it will be about the evolution and requirements regarding sustainability reporting (for traditional but also alternative assets) and by supporting UK players to market investment funds in Europe.
If you want to learn more about our sustainable investing products and services offering, please contact CRM@greenethica.eu
Conducting Officer, FARAD I.M.
Head of Portfolio Management