Asset Management is a Key Industry in the City of London
On 14 July 2016, the British Embassy Tokyo hosted its sixth UK asset management seminar, inviting UK experts to support Japan’s investment needs.
Experts from a number of asset management companies gave presentations in their sectors of specialisation, and participated in panel discussions to answer questions from their Japanese audience.
Presenters were from companies including Baillie Gifford, Charlemagne Capital, Hermes Investment Management, Investec Asset Management, ITI Asset Management, M&G Real Estate, Martin Currie Investment Management, Orbis Investment, Standard Life Investments, and Somerset Capital Management.
Former Deputy Head of Mission at the British Embassy Tokyo, Julia Longbottom, made the opening remarks.
Since the first iteration of the annual asset management seminars there have been many changes in the financial landscape in Japan, such as negative interest rates and the launch of Nippon Individual Savings Accounts (NISA), emulating the UK ISA scheme; these all strengthen the case for a need for diverse investment products and opportunities and UK asset management firms are well positioned to offer solutions.
Ms Longbottom reassured those present that the UK would continue to remain an open economy, and will continue to welcome trade and investment from Japan.
Attendees also heard from Lord Mountevans, the 689th and current Lord Mayor of the City of London, who was visiting Japan to talk about London as a global financial centre as well as the future outlook for the Corporation of the City of London.
He stressed that the City of London is a global financial centre across industries, from infrastructure to insurance, and is keen to find out how they can best help Tokyo achieve its goals.
The City’s openness has attracted businesses in the thousands over the years.
The UK is the largest fund management centre in Europe, the second largest globally, and it has seen seven successive years of growth.
Directly employing 57,000 people in this sector, the UK is an attractive prospect for businesses.
The asset management industry goes back a long way in Britain, with the first fund management company having been set up in Scotland in 1873.
The UK’s reputation as a centre for asset management has grown since then, earning the country a high reputation for professional services.
Lord Mountevans reassured the Japanese companies in attendance that the Brexit vote would not affect the quality of the services on offer, that the top-quality business environment, connection to global markets and access to a highly skilled talent pool would remain.
He also drew attention to the fact that the UK handles a large number of overseas clients, including Japan, and the two share a long partnership.
The UK Government is constantly working to further strengthen investment strategy.
The Financial Services Trade and Investment Board (FSTIB) in the UK is also making sure to nurture areas of high growth.
The UK is still one of the most competitive places for investment and asset management in the world.
Innovations in financial technology (fintech) are continually shaping the asset management sector, and UK fintech companies are making their products more accessible to different markets.
“Looking forward, the future looks bright,” said Lord Mountevans, in his parting message. “Don’t be discouraged by Brexit, as the asset management sector approaches the future from a position of notable strength.”
The key takeaways of the speech were that Brexit will bring interesting and challenging times in the years to come. The success of London and Edinburgh as financial centres depend not only on legislation from Brussels, but on a mix of talent and innovation.
Now that a new British Government in is place, the hope is that they will rapidly deal with the situation, and trade between the UK and the EU will continue much as before.
Concerns were raised by attendees on whether London would maintain its status as a financial centre, or whether this honour would go to a competing centre such as Frankfurt, Paris or Dublin.
The City of London is a business quarter with experts and sector specialists all within walking distance of each other, and this centralised structuring contributes to London’s historical success as a financial centre. This aspect of doing business in London will not change with an exit from the EU, meaning London will continue to be an attractive place for companies to set up and do business.
Scott Lothian, an Investment Manager at Scottish firm Baillie Gifford presented on “Diversified Growth Investing – A View from the UK.”
The 108-year old investment management firm, which was first established in Edinburgh, has been operating in Japan for over 25 years.
Multi-asset investing and having a diversified growth centre is an important part of Baillie Gifford’s business, helping them to maximize long-term returns and boost their strong performance record.
Demand in the market has meant the creation of a new product in Japan, the Diversified Return Yen Fund. This is now one of the available options.
The UK is Baillie Gifford’s home market, and has been the market leader in this area for the past 10 to 15 years.
“We believe this strategy will increase in Japan,” said Lothian.
Why invest in multi asset funds?
Investment in multi asset funds can deliver attractive returns while still providing lower volatility.
Multi asset funds have been popular in the UK because they share asset owner’s objectives, they offer broad underlying exposure and they ease governance for asset owners. Baillie Gifford believe that active asset allocation can generate real returns whilst reducing risk of loss, and that this type of strategy will be one that Japanese asset managers and investors increasingly turn to over the coming years.
Martin Currie Investment Management
Ashton Reid, Portfolio Manager at Martin Currie Investment Manager Ltd, presented on Australian Real Assets.
The firm launched in Japan in 2015.
“With real assets,” Reid explained, “income is not dependent on the economic cycle. Rather, it grows with Australia’s population.”
In addition, the International Monetary Fund forecasts that the Australian economy will show continued growth, moving from mining to other areas.
Australia’s gross domestic product (GDP) is also predicted to remain strong due to their strong population growth, which stems from a combination of a high birth rate that is forecast to continue, and immigration.
The United Nations suggests that the Australian population will increase by 40% in the next 35 years.
Domestic consumption will also continue to be important as a modern, services-based economy continues to develop.
Australia is also enjoying sustained housing price increases, and is seeing the development of huge retail shopping centers in suburban locations. The landlords here have monopoly on supply in their markets.
Growth in Australia is happening despite economic cycles, making it an ideal market for asset management and investment funds.
The Australian pension market is based on superannuation funds, with employers required to contribute a percentage of salary to the pension fund.
Real assets in Australia seem to be set to show growth over the coming years.
ITI Asset Management Ltd
Paul Hoff, Regional Representative of the Asia-Pacific region, spoke on Exchange Traded Funds (ETFs) for Portfolio Diversification and Liquidity.
Investors have long been keen to follow the tried and tested 60/40 stock-and-bond portfolio mix – over 90% of the world’s investment assets are in this strategy - the reason being that there were few other options for investors until now.
However, investors are moving away from this model for a number of reasons, including the low-interest-rate environment and increased life expectancy.
The recent explosive growth of Exchange Traded Funds (ETFs) offer low cost, liquid, and a pool of diversified investable instruments.
In simple terms, ETFs provide diversification.
ITI’s investment process involves building portfolios with a mean correlation equaling zero, and establishing a volatility target between 5% and 20%. Portfolios are rebalanced on a daily or weekly frequency, and all is done in a 100% systematic and quant based structure.
ITI Asset Management is looking to the future, partnering to deliver a new generation of predictable return, low cost retail investment options for a new generation of investors.
Charlemagne Capital Ltd
Julian Mayo, Co-CIO of Charlemagne Capital Ltd spoke on “Emerging Markets Equity – Growth & Income.”
Charlemagne’s growth and income emerging market strategy centres around their Magna Emerging Markets Dividend Fund.
This fund sees attractive returns from quality companies with a dividend paying culture, and experiences low volatility exposure to emerging markets.
The firm was established in 2000 and prides itself on being an emerging market equity specialist.
They are publicly listed and 40% employee-owned, with a strong balance sheet and no debt.
Charlemagne’s investment process and strategy is based around bottom-up, stock-focused and research-driven stock picking. There is also a focus on quantitative as well as qualitative analysis.
The firm looks to buy companies at a reasonable valuation. These companies also demonstrate a consistent management track record, attractive business models with pricing power, sustainable growth in earnings and cashflow, attractive returns on capital, and that have shareholder interests aligned.
Somerset Capital Management LLP
Sebastian Stewart, Head of Client Services at Somerset Capital Management, also presented on emerging markets. His topic was Boutique Asset Management: Investing in Emerging Markets.
The firm considers itself to be the active emerging market specialists.
“Emerging markets are underrepresented in global capital markets and also in investors’ portfolios,” says Stewart, “but now is the best time to look at emerging markets, in spite of the risks.”
Emerging markets have started outperforming developed markets in 2016, according to Stewart.
Falling oil prices have been beneficial for emerging markets like South Korea, Taiwan, China, and India.
Somerset Capital Management believes in reducing risk through long-term active management, and also through independent, bottom-up research.
The firm assesses all potential investments against four key risks: business, financial, governance, and valuation.
The key to investing in emerging markets is to be very selective, even more so than with developed markets, and choosing well run companies that are positioned for sustained, long-term growth.
Japanese Asset Managers Concerned About Brexit
The overwhelming questions from attendees centred around the financial impact of Brexit on the finance industry in the UK, with many wanting to know how a worst-case scenario would play out.
Presenters acknowledged the challenges and potential low growth that lie on the road ahead, but reassured Japanese investors that once political stability is achieved and if the EU negotiations go well – which is in the interest of the UK and the other 27 member states – investors will be flocking back to London.
Market volatility has followed the Brexit vote and this is not a credit crunch. The Bank of England is seeking to reassure the markets and ensure economic recovery.
Several of the speakers stated their belief that London will remain a key financial centre for business, as other cities cannot accommodate the volume of workers, they will have a smaller talent pool to offer, and workers who have settled in London may not want to relocate to other cities situated in the EU.
British asset managers are anticipating a recovery in 18 months to 2 years if negotiations are not protracted, something that would lower confidence and share prices with it.
Both sides have a vested interest in resolving the issue, however, and all speakers were positive about economic recovery and continued growth and investment in London and throughout the UK.
Article by Vanessa Holden, August 2016.