Author: Maha Khan Phillips
Mike Zelouf, CFA, Managing Director at Western Asset Management, with responsibility for the firm’s Europe and Middle Eastern business, highlights five key themes that all asset management leaders should consider for the future
- Going Back to Basics
The asset management industry is a steward of investor and client wealth capital savings, and that is something we need to remember. First and foremost, asset managers need to ensure that we have a really thorough understanding of what the investment goals and objectives of our investors are, and what their risk appetite and tolerance is. It’s about going back to basics. Even as we do things around artificial intelligence, machine learning, product development, or ESG, we have to ensure that we are meeting our fiduciary responsibilities.
Part of this approach means investing in the very best resources, particularly human resources, to help us carry out our stewardship duty. That means the best analysts, the best portfolio managers and traders, as well as risk management, compliance, distribution, and support teams. You have to be well resourced to meet the investment needs of your clients. In the rush to maximise revenues or to offer new solutions or rebrand things, sometimes that gets difficult.
- Thinking About Impact
You have to take into account the impact of investments on our broader society. There is a growing recognition around the challenges of the climate transition that we are all facing. Its tangible, because it matters to the ultimate asset owners and to shareholders, and it’s important, because we are all sharing one planet. You cannot just say you don’t care about sustainability, because a particular coal mining company has fantastic financials and is fantastically cheap. You have to think about other parameters. The challenge for fiduciaries is how you are able to do that. How can you align with these broader goals while at the same time maintaining your fiduciary responsibility? It’s easy to create impact funds that just invest in green bonds, for example, but are you meeting your fiduciary responsibility by just investing in green bonds?
- Investing in Technology
Our industry is massively underinvested in technology. We are catching up slowly, but the question is, what is the best way to do it? We have focused on improving efficiency through the technology of existing activities, both on the investment and distribution side of things, as well as the middle and back office. There is less manual information, and more automation. We need to do more in a number of areas, from risk systems, investment management systems, and CRM systems. For example, we are building out carbon price and climate scenario analysis within our risk systems right now. We are also running reports using AI and natural language processing based on data scraping and key phrase scraping. It’s all very early stage, but the bottom line is that we have to try and utilise what technology has to offer in a practical and affordable way in order to optimise what we do for our clients on a daily basis.
- Looking at Their Own Behaviour
Asset managers have spent a lot of time and focus on governance and CSR activities, but we need to do more to look at our own activities, on diversity and inclusion, on retention, on measuring our own carbon footprints and climate approach. In the same way that we are integrating ESG analysis into our investment process, by looking at the way companies and issuers are governing themselves and engaging with their shareholders and stakeholders, as well as the wider community, we should be doing the same to ourselves. In our office, for example, we had already become paper lite, so we made huge savings not just on paper, but on all the ancillary supplies, such as printer maintenance and use, and power and heat generation. I think one of the enduring legacies of the pandemic could well be significantly lower business travel, and that can be a good thing. We have for example started rolling out mobile road shows where climate services executives will go out on the road but the product managers and specialist would be patched in via a tablet or laptop straight into the clients or prospects offices using local hotspots or WIFI. These pilots are working extremely well, and we are finding that clients are very open to doing remote presentations.
- Considering New Opportunities
We believe that the climate of very low interest rates and low inflation will endure. Rates will be very low for a very long time, for a variety of reasons, and that will bring many secular challenges. We think there is room within asset management for both publically traded liquid, as well as private and less liquid strategies. Historically, we have focused on fixed income solutions in the publically traded markets, but we definitely see the need to augment that with private strategies.
Mike Zelouf, CFA, Managing Director at Western Asset Management