^ Proportion of respondents expecting the economy to grow minus those expecting the economy to slow. Based on over 1100 interviews with senior business executives annually.
Non-bank market makers in Australian FX are not taking away many big clients from banks, but they are taking meaningful market share in smaller clients.
Net Confidence Index vs. GDP Growth
At approximately the same time each year Peter Lee Associates undertakes its Debt Securities Investors and Australian Equity Investors research programs. Despite these clearly focusing on different asset classes our combined respondent base has some degree of crossover. And whilst, in this case, our focus was on either Fixed Income or Equities we occasionally ask the same — or similar — questions of respondents. And it always surprises us when we learn that feedback from such questioning differs markedly between asset classes — once we had finished collating both sets of results in 2016 we again found ourselves looking at two very different outcomes.
For some time we have been hearing that the way equity markets operate in the future will be more like that now operating in fixed income markets — investors are establishing in-house research capabilities and thereby reducing their reliance on research teams at broking houses; commissions are under significant downward pressure and appear headed toward zero; and other aspects of the business such as corporate access and deal flow, execution services, and account management are now seen as being much more important.
Having said that, research remains a meaningful component of the overall service provided by equity brokers — and institutions are still prepared to pay for it. In 2016, 44% of all commissions went towards paying for research product — this is down from 59% in 2010 but it continues to be the number one reason as to why an institution pays commission to their service providers.
So, for equity investors, whilst their proportional spend on research has decreased significantly, research continues to be an integral component of the service they receive from brokers. But when we do a deep dive into similar feedback from debt investors a different picture emerges.
The question asked of debt investors on this topic — “How do you reward banks for quality research and analysis in the Bond market?” — enables respondents to provide a qualitative answer, as opposed to the quantitative reply we receive from our questioning equity investors. And this is where the dichotomy emerges.
Just over 40 institutions responded to this request:
15% don’t reward banks for providing quality research;
32% would give their bank a chance to quote on more business but not provide any guarantees on winning a greater share;
31% said the bank would be top of mind as a result but wouldn’t necessarily receive any business directly attributable to research quality;
22% would ensure the bank received more business.
And the message from this? Banks can continue to produce as much good research as they like, but shouldn’t expect to be paid for it. And as post-GFC markets continue to evolve, perhaps it signals we are looking to a time when no-one produces research — debt or equity — because the providers know that the marginal value of doing so might actually be negative.
www.peterleeassociates.com.au
Sandhya Chand | Managing Director at Peter Lee Associates
#research #marketinsights #brokerresearchvalue
For some time we have been hearing that the way equity markets operate in the future will be more like that now operating in fixed income markets — investors are establishing in-house research capabilities and thereby reducing their reliance on research teams at broking houses; commissions are under significant downward pressure and appear headed toward zero; and other aspects of the business such as corporate access and deal flow, execution services, and account management are now seen as being much more important.
Having said that, research remains a meaningful component of the overall service provided by equity brokers — and institutions are still prepared to pay for it. In 2016, 44% of all commissions went towards paying for research product — this is down from 59% in 2010 but it continues to be the number one reason as to why an institution pays commission to their service providers.
So, for equity investors, whilst their proportional spend on research has decreased significantly, research continues to be an integral component of the service they receive from brokers. But when we do a deep dive into similar feedback from debt investors a different picture emerges.
The question asked of debt investors on this topic — “How do you reward banks for quality research and analysis in the Bond market?” — enables respondents to provide a qualitative answer, as opposed to the quantitative reply we receive from our questioning equity investors. And this is where the dichotomy emerges.
Just over 40 institutions responded to this request:
15% don’t reward banks for providing quality research;
32% would give their bank a chance to quote on more business but not provide any guarantees on winning a greater share;
31% said the bank would be top of mind as a result but wouldn’t necessarily receive any business directly attributable to research quality;
22% would ensure the bank received more business.
And the message from this? Banks can continue to produce as much good research as they like, but shouldn’t expect to be paid for it. And as post-GFC markets continue to evolve, perhaps it signals we are looking to a time when no-one produces research — debt or equity — because the providers know that the marginal value of doing so might actually be negative.
www.peterleeassociates.com.au
Sandhya Chand | Managing Director at Peter Lee Associates
#research #marketinsights #brokerresearchvalue
Proportion of respondents expecting the economy to grow minus those expecting the economy to slow.
Based on over 1300 interviews with senior business executives annually.
GDP data (seasonally adjusted) taken from the Australian Bureau of Statistics.
na - no data collected.
Based on over 1300 interviews with senior business executives annually.
GDP data (seasonally adjusted) taken from the Australian Bureau of Statistics.
na - no data collected.
It is a little more than 10 years since the Principles of Responsible Investment organisation was established with a Mission Statement reading - “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.”
As the recently completed 2017 Peter Lee Associates Investment Management research program shows, Responsible Investment - now better known in Australian investment circles as ESG - appears to be gaining quite a bit more traction amongst pension funds as a selection tool when looking at potential managers to run their money - and it’s not just the big boys moving in this direction either.
This increased emphasis on ESG became obvious to us when we asked fund executives how important is it that their investment managers integrate ESG in their investment process. More than half of the funds looking to award Equity Manager mandates regard such integration as very important or critical - whilst only 14% rate this factor as essentially unimportant. Although fund executives seeking Fixed Income managers do not generally rate ESG integration as highly (34%) it is still clearly a significant point of reference in their decision-making process - and has become more important over the past 5 years. Perhaps not unexpectedly, it is the Industry and Government funds who are leading the charge but when we break the data down by size of institution we are seeing funds with less than $1 billion embracing the methodology to a greater extent, than some of the larger ones - and given these are largely foundations, endowments and not-for-profits, who are more able to readily pursue impact investing, it does suggest the trend is not going away.
So how does this compare with previous years? Despite ESG having existed for just a short period of time it has been an aspect of the Investment Management landscape we have followed through our program so we do have back data.
Whilst the wording of our questions has altered over time, responses to them still provide an indication as to how ESG has increased in popularity as a factor used in determining where a mandate goes and how perceptions as to its importance have changed amongst fund executives and asset consultants. In 2009, only one-in-five asset consultants had ESG as a criteria for shortlisting managers for equity mandates — but over 60% concluded that ESG was gaining importance as an evaluation criteria irrespective of asset class. However, even by 2011 a high 34% of fund executives still ascribed little or no importance to ESG when awarding mandates.
The critical difference in the treatment of ESG in portfolios over the past decade is that while some funds continue to employ mandates with a specific ESG or SRI focus, increasingly fund executives expect investment managers to integrate ESG thinking across the entire platform of solutions.
So it appears that, as PRI enters its 11th year, ESG has finally become a benchmark of sorts for pension funds. As this trend further evolves it will be interesting to observe if it has any ramifications for those who decide not to embrace it. Only time will tell, but clearly ESG is much more than a fad and has now become well entrenched in the psyche of the local investment management industry.
As the recently completed 2017 Peter Lee Associates Investment Management research program shows, Responsible Investment - now better known in Australian investment circles as ESG - appears to be gaining quite a bit more traction amongst pension funds as a selection tool when looking at potential managers to run their money - and it’s not just the big boys moving in this direction either.
This increased emphasis on ESG became obvious to us when we asked fund executives how important is it that their investment managers integrate ESG in their investment process. More than half of the funds looking to award Equity Manager mandates regard such integration as very important or critical - whilst only 14% rate this factor as essentially unimportant. Although fund executives seeking Fixed Income managers do not generally rate ESG integration as highly (34%) it is still clearly a significant point of reference in their decision-making process - and has become more important over the past 5 years. Perhaps not unexpectedly, it is the Industry and Government funds who are leading the charge but when we break the data down by size of institution we are seeing funds with less than $1 billion embracing the methodology to a greater extent, than some of the larger ones - and given these are largely foundations, endowments and not-for-profits, who are more able to readily pursue impact investing, it does suggest the trend is not going away.
So how does this compare with previous years? Despite ESG having existed for just a short period of time it has been an aspect of the Investment Management landscape we have followed through our program so we do have back data.
Whilst the wording of our questions has altered over time, responses to them still provide an indication as to how ESG has increased in popularity as a factor used in determining where a mandate goes and how perceptions as to its importance have changed amongst fund executives and asset consultants. In 2009, only one-in-five asset consultants had ESG as a criteria for shortlisting managers for equity mandates — but over 60% concluded that ESG was gaining importance as an evaluation criteria irrespective of asset class. However, even by 2011 a high 34% of fund executives still ascribed little or no importance to ESG when awarding mandates.
The critical difference in the treatment of ESG in portfolios over the past decade is that while some funds continue to employ mandates with a specific ESG or SRI focus, increasingly fund executives expect investment managers to integrate ESG thinking across the entire platform of solutions.
So it appears that, as PRI enters its 11th year, ESG has finally become a benchmark of sorts for pension funds. As this trend further evolves it will be interesting to observe if it has any ramifications for those who decide not to embrace it. Only time will tell, but clearly ESG is much more than a fad and has now become well entrenched in the psyche of the local investment management industry.
Having conducted Peter Lee Associates research programs for more than 25 years, we have access to much historical data and commentary which enables us to observe developing trends and potential changes occurring within an industry. After completing the 2017 Investment Management program and working through the responses we find ourselves being put on notice of a development that seems to be occurring with respect to the relationship that superannuation funds have with asset consultants.
Whether we are setting out to conduct research on an industry or just a subset of one we are always looking to receive both quantitative and qualitative feedback from respondents. Our questions are not framed in a way that encourages only a simple “Yes or No” response; in fact, they are designed to encourage respondents to elaborate on their answers. And these verbal responses form the basis of the “Verbatim” feedback we provide clients when we present our findings to them.
Whilst quantitative data provides an ability for us to show our findings in easy to understand tables or graphical presentations it is sometimes the verbal feedback that makes more of an impact on a client. A graph might show overall performance but comments suggesting that performance is slipping or needs improving, address underlying issues behind the numbers and can sometimes be more powerful way. In isolation one comment does not make much of a difference, but when the same line of thought continues to reappear - and in some cases each year - clients tend to focus on - and react to - the specific nature of an issue. And it is just such qualitative feedback from this year’s program that provided another angle to the changing relationships between funds and consultants - and had us looking back into our vaults to confirm our thoughts. How right we were!
Five years ago when we asked superannuation fund executives what was the single most important action their Investment Consultant should undertake to improve service, we generally received answers emphasising a need for more proactivity and responsiveness, less staff turnover and greater client knowledge.
Fast forward to 2017, when both the tone and demands of fund executives have changed noticeably. We still receive the staff turnover and lack of proactivity comments but more focus is now being placed on strategic imperatives, collaboration and sharing IP - such as dynamic asset allocation advice; greater look through to manager assessments and ratings processes; deeper analysis of general investment trends, market activity and developments; and improving clients’ knowledge of newer investment styles (ESG, renewables, global infrastructure).
So, while it is no surprise that the relationship between funds and consultants is changing, to remain an integral part of the investment process (asset allocation, manager hiring, due diligence, sustainability etc) consultants must step up and provide a much more customised and “unbundled” service to their clients, based on a greater focus on the needs of each fund.
Our quantitative data shows a slight tick up in the number of consultants used by each client. It might only be marginal, but more funds are now looking to add extra sources of advice and assistance - and are increasingly also turning to investment managers. This is a good indicator of the likelihood that client churn will increase and fees will remain under pressure, unless consultants provide an even more differentiated and client-driven service.
Whether we are setting out to conduct research on an industry or just a subset of one we are always looking to receive both quantitative and qualitative feedback from respondents. Our questions are not framed in a way that encourages only a simple “Yes or No” response; in fact, they are designed to encourage respondents to elaborate on their answers. And these verbal responses form the basis of the “Verbatim” feedback we provide clients when we present our findings to them.
Whilst quantitative data provides an ability for us to show our findings in easy to understand tables or graphical presentations it is sometimes the verbal feedback that makes more of an impact on a client. A graph might show overall performance but comments suggesting that performance is slipping or needs improving, address underlying issues behind the numbers and can sometimes be more powerful way. In isolation one comment does not make much of a difference, but when the same line of thought continues to reappear - and in some cases each year - clients tend to focus on - and react to - the specific nature of an issue. And it is just such qualitative feedback from this year’s program that provided another angle to the changing relationships between funds and consultants - and had us looking back into our vaults to confirm our thoughts. How right we were!
Five years ago when we asked superannuation fund executives what was the single most important action their Investment Consultant should undertake to improve service, we generally received answers emphasising a need for more proactivity and responsiveness, less staff turnover and greater client knowledge.
Fast forward to 2017, when both the tone and demands of fund executives have changed noticeably. We still receive the staff turnover and lack of proactivity comments but more focus is now being placed on strategic imperatives, collaboration and sharing IP - such as dynamic asset allocation advice; greater look through to manager assessments and ratings processes; deeper analysis of general investment trends, market activity and developments; and improving clients’ knowledge of newer investment styles (ESG, renewables, global infrastructure).
So, while it is no surprise that the relationship between funds and consultants is changing, to remain an integral part of the investment process (asset allocation, manager hiring, due diligence, sustainability etc) consultants must step up and provide a much more customised and “unbundled” service to their clients, based on a greater focus on the needs of each fund.
Our quantitative data shows a slight tick up in the number of consultants used by each client. It might only be marginal, but more funds are now looking to add extra sources of advice and assistance - and are increasingly also turning to investment managers. This is a good indicator of the likelihood that client churn will increase and fees will remain under pressure, unless consultants provide an even more differentiated and client-driven service.