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It used to be simple. When explaining to someone how the investment strategies of life and pensions insurers differed from their general insurance cousins it used to be all about how the former invested for the long term, looking for secure growth over decades, while the latter took a short term approach. It is rather more complex nowadays.
The premiums general insurers collect support short-term contracts and as an across-the-board average one-fifth of those give rise to a claim every year. That means the assets those premiums are invested in have to be capable of being realised very quickly – liquidity is king. However, insurers would still hope for a return on investing those premiums, even for a short period.
Today’s investment managers in the general insurance sector must look back with envy at the easy life of their predecessors. There was a time in the late 1970s and 1980s when it was all about “cash flow underwriting”. Pile in the premiums, get them invested in high interest bearing gilts and fast-growing equities and little could go wrong. Pay out the claims, tie up the books for that year and move on, leaving a very tidy return on investments.
Two things have changed that dramatically.
The first is the new world of permanent low-interest rates, making eking out a return on traditional gilt investments very tough.
The second is the gradual build-up of long-term liabilities in short term books of business. The growth in structured settlements where the costs of settling claims for people with catastrophic injuries have slowly moved from large one-off payments to continuous payments over many years has crept up on motor insurers and employers liability insurers. Some were already waking up to the fact that a very large part of their claims reserves were spoken for decades to come. For instance, a young person with a severe brain injury as a result of a road accident might require expensive care for several decades and advances in medical science mean that care will be more expensive and required for longer. Changes over the last year in how these should be accounted for have just exacerbated the problem.
There are specialist motor insurers, in particular some of those in the Lloyd’s market, that are said to be looking at over half of their annual claims costs taken up with structured settlements, long-term liabilities sitting on a short term book. This has required investment managers to review their strategies and ask whether the long term, less liquid, assets favoured by those in the life and pensions sector should now have a place in their portfolios.
This requires new expertise and that does not come cheap. As investment returns have come under intense pressure and overall profitability is being squeezed, insurance company boards are not responding favourably to suggestions they need to expand investment teams to deepen their expertise in a wider range of asset classes. If anything, they want better returns for lower costs, not a formula for helping investment teams get to grips with the need to match a much more complex set of liabilities with a more diverse range of assets
Asset managers are trying to fill the gap but they always come with their latest new asset smartly packaged, ready for insurers’ money to flow into. Not surprisingly, a degree of cynicism can be found among CIOs at asset managers’ attempts to fill this knowledge gap.
In early 2020, Research in Finance is teaming up with sister company, Research in Insurance to launch The UK Insurance Investment Study.
This project will provide a deeper understanding of the investment strategies within the asset side of UK general insurance companies. How asset managers can effectively communicate, influence and engage with this audience.
The last decade saw the financial services sector attempt to rebuild itself following the global financial crisis of 2008, and the asset management industry began 2020 looking remarkably different compared to how it looked in 2010.
What changes can we expect over the next 10 years? We asked a series of senior investment professionals for their predictions on what will shape the industry throughout the 2020s.
With expectations of a resurgence of investment trusts, new central bank actions, entirely new asset classes, climate change and ESG continuing to the be at the forefront of asset managers’ agendas, further commitments to improve diversity and gender gaps, it is set to be an exciting and game-changing decade for many firms.
Read on for the detailed predictions, with a big ‘thank you’ to all our contributors.
John Ions, chief executive at Liontrust
“Globally, there is a growing need for people to save for their future and to be helped in achieving their financial objectives, and good active fund management will have a vital role to play in helping to reduce the huge savings shortfall worldwide.
“As active managers, we can only do this if we explain how we can benefit investors’ portfolios, including the ability to exploit market inefficiencies and to manage volatility over the long term in a way that passive funds cannot.
“Asset managers will have to embrace technology to personalise their service and information and be accessible to current and future generations of investors. Clients both deserve and want a bigger say in their investments; understanding and delivering these outcomes will be key. And of course, the demand for sustainable and impact investing will continue to grow, which a passive approach to investing cannot satisfy. We do not anticipate a reversal in these flows for active managers over the next few years.”
James Budden, director of marketing and distribution at Baillie Gifford
“I will predict that investment trusts will move mainstream in 2020. Performance across the closed-ended sector has continually out-strips open ended equivalents. The bigger trusts are very competitive on cost. Distribution will improve as Aegon (Cofunds) and Old Mutual (through FNZ) finally can list trusts alongside OEICs. Then there is the liquidity question brought into focus by Woodford and property funds in 2019. Illiquid assets are best held within the closed=ended structure. The advantages of investment trusts are becoming too big to ignore.”
Jenny Anderson, co-head of sustainable investment and ESG at Lazard Asset Management
“The economic and social impacts of climate change and bio-diversity loss have become increasingly visible in recent years, not least through social media channels. Societal awareness of these trends alongside heightened political and regulatory pressure has seen many countries, companies, and even some of the world’s largest institutional investors start to respond. This will continue to filter into the wealth management industry, where pressure from underlying investors for credible products that integrate these considerations into the investment process will likely build.
“There is now a big push internationally, but particularly in Europe, to better align capital allocation decisions with the transition to a low-carbon economy. The European Union, which has for some time been working on its Sustainable Finance agenda, announced in December a legally binding target of net zero emissions by 2050, and outlined further cuts to its 2030 carbon reduction target. Increasing regulation, technological innovation, and changing consumer behaviour provide attractive market opportunities for investors able to identify those companies that can accelerate change by helping to “green” economies and transition them to a low-carbon world.
“This is leading to increased demand for sustainable investment products and solutions, and we anticipate that this trend will continue to shape the agenda of the asset management industry this year and beyond. In 2020, sustainability issues are also set to become part of suitability assessments conducted by UK advisers in order to strengthen and improve the disclosure of information towards end-investors.”
Mandy Kirby, chief strategist at City Hive
“We predict that this decade will reward the firms that take action to futureproof and use a real opportunity to take ownership of that future – to drive real change so that we can achieve a positive, inclusive culture that is recognised by the public as trusted stewards.
“To do that, we need to commit to tackling some of the biggest barriers and disparities, that are in the heart of our industry and what we do.
“This means ensuring that we are cultivating the right emerging talent, attracting rich talent from other industries, and retaining our existing talent through better policies, practice and culture.
“And looking externally, it means making sure we are performing our vital role of protecting the assets of our end-clients. One major area where we can do so is serious commitment to close the gender pension gap, by recognising we are not servicing women effectively.”
Annabel Brodie-Smith, communications director of the Association of Investment Companies
“There has been a slow recognition that open-ended funds that invest in illiquid assets but offer daily redemption are not fit for purpose. My prediction for the 2020s is that this will be widely recognised and a new regulatory solution will be put in place – hopefully sooner rather than later – which aims to restore investor confidence in these funds. Clearly, open-ended property funds have had problems for some time. The first wave of suspensions came in the financial crisis in 2008, then there was another wave in 2016 after the EU Referendum, and more recently in December 2019 the £2.5bn M&G Property Portfolio Fund suspended. But it’s been the suspension and collapse of Woodford Equity Income that has really brought home concerns about liquidity mismatches when open-ended funds invest in illiquid assets.
“Mark Carney has warned of the systemic risks these funds pose, describing them as “built on a lie” at the Treasury Committee, and the latest Bank of England Financial Stability Report has confirmed these funds could create systemic risks as well as leading to unfair outcomes for investors. The Bank of England and FCA have suggested that a combination of longer redemption periods and discounted prices for investors leaving the fund at short notice could be used to address these issues.
“However, these proposals effectively give investors the choice of a ‘lock in’ or a ‘fire sale’. We are not convinced and have suggested ‘reliable redemption’, where the redemption terms of open-ended funds are fixed at the outset and matched to the time it would take to sell the assets in an orderly market. This would be much simpler to convey to investors and does not penalise them simply for wanting to leave the fund. It also avoids flooding a weak market with assets at low prices and protects against systemic risks.”
Christine Cantrell, sales director at BMO Global Asset Management
“I believe the main themes for the asset management industry in 2020 will be climate change, transparency and diversity, summarised as follows;
Increased public concern about climate change will drive investors to be more discerning about responsible investments; wealth managers and fund managers will be under more pressure to show what effect they’re having on the world and what positive change they’re delivering. BMO has an impressive engagement programme on climate change with some of the industry’s leading experts driving change through a combination of educational dialogue, voting policies and shareholder pressure.
More focus on transparency in how investments are managed, especially in regard to liquidity, since the FCA is reviewing the rules for open-ended funds and the Bank of England recently made comments suggesting how they could be improved.
Efforts will have to be reviewed and reinforced to see real change in diversity within the industry. In particular, diversity is a core part of BMO’s DNA and we are committed to making further progress towards our gender diversity goals.”
Alex Denny, head of investment trusts at Fidelity International
“The 2020s will be another successful decade for investment trusts, despite many commentators ringing their death-nell from time to time. The longevity and success of the sector is down to its ability, slowly but continually, to adapt itself. Existing companies will adopt new strategies, while new and innovative ideas come to market to replace those companies that are ultimately wound-up in the interests of shareholders. For this reason, throughout the next 10 years you may not notice many major step-changes, but the sector will look very different at the end of the decade to how it looks now, at the beginning.
“Throughout the 2020s, investment trusts will develop to address many of today’s emerging needs. In the past, development of new products focused on what investment capabilities that could be fitted into a listed company structure. There is now a greater focus on meeting specific client needs or to achieve their outcomes. Investment trusts will adapt, finding novel uses of their listed, fixed capital structure. For example, new ways will be developed to improve liquidity for large scale transactions in illiquid asset classes – where open-ended funds are failing to do so. We will see greater use of an investment trust’s ability to make fixed value dividend payments or coupon payments from their bonds to satisfy retirement income needs.
“We will also, of course, see entirely new asset classes being brought to market in listed structures to meet the ever-growing demands of multi-asset and model portfolio managers seeking new diversified sources of return.
“Lastly, we will see far greater engagement of investment trust boards and managers with their shareholders – feeding into more proactive engagement with the management of companies and assets held within portfolios.”
Keith Wade, chief economist & strategist, and Charles Prideaux, global head of investment, at Schroders
“There is [the possibility] that central banks could take a further step to boost activity. Modern Monetary Theory (MMT) argues that rather than printing money to buy financial assets, central banks should create money to directly fund public expenditure or tax cuts. Some have called this ‘People’s QE’, economists know it as a ‘helicopter drop’ Either way, it would inject cash directly into the economy and would undoubtedly boost activity, particularly inflation.
“In this respect though MMT would drive bond yields higher (as inflation expectations soared) and hence would cause a de-rating rather than re-rating of stock markets. Central banks would be a headwind rather than tailwind for markets as bond yields rose and valuations fell. Within equity markets though there would be a major rotation from the bond proxies to the value and cyclical stocks.
“Investors have also seen a noticeable increase in pressure from climate change. Widespread protest around the world has focused attention on government action (or lack of it) to mitigate the worst effects of global warming. The number of climate-related proposals at shareholder meetings has increased and will continue to rise as more investors adopt environmental guidelines.”