How to meet the evolving needs of the modern global investor

Across the finan­cial ser­vices indus­try, an ever-expand­ing reg­u­la­to­ry back­drop means the cost of doing busi­ness is con­tin­u­ing to increase. That is dri­ving sig­nif­i­cant change for wealth and asset man­age­ment firms as they seek ways to reduce costs with­out com­pro­mis­ing on client ser­vice. Trends like impact invest­ing, per­son­al­i­sa­tion and bespoke solu­tions are cre­at­ing new oppor­tu­ni­ties, such as the growth in con­sol­i­da­tion among wealth man­agers.

“That ris­ing cost of doing busi­ness tends to dri­ve a busi­ness mod­el where economies of scale can play to your advan­tage,” says Nick Ring, CEO for Europe, Mid­dle East and Africa (EMEA) at Colum­bia Thread­nee­dle Invest­ments. “So economies of scale are the impe­tus for the con­sol­i­da­tion that we’re see­ing and that is like­ly to con­tin­ue. There will always be small niche providers who can charge a pre­mi­um for ser­vices, but there is a whole load of firms in the mid­dle and it is hard for them to iden­ti­fy how to dif­fer­en­ti­ate them­selves oth­er than on ser­vice.”

That is cre­at­ing con­di­tions ripe for con­sol­i­da­tion that in turn can dri­ve big­ger invest­ments in tech­nol­o­gy that can help reduce costs fur­ther. Yet that is only one part of the pic­ture; con­sol­i­da­tion also means that as wealth firms get big­ger, they look to engage dif­fer­ent­ly with prod­uct providers like Colum­bia Thread­nee­dle.

“Firms are look­ing at how they can lever­age off their con­sol­i­dat­ed size but equal­ly impor­tant­ly, they under­stand that in order to max­imise those economies of scale, they need to be doing busi­ness with a small­er num­ber of prod­uct providers who can offer a broad­er range of capa­bil­i­ties,” says Ring. “They’re look­ing for more of a strate­gic align­ment and part­ner­ship-type arrange­ment, because a) they are big enough to want to move from being in a client/provider rela­tion­ship, to a strate­gic part­ner­ship rela­tion­ship, and b) it helps to dri­ve effi­cien­cies with­in their organ­i­sa­tion.”

Product offering expansion

For invest­ment man­age­ment firms, that means ensur­ing they are able to meet these evolv­ing client needs by expand­ing their prod­uct suite. That was one of the key dri­vers for Colum­bia Thread­nee­dle in its acqui­si­tion last year of the Bank of Montreal’s (BMO) asset man­age­ment busi­ness in EMEA, a deal which has seen the com­bined firm’s assets under man­age­ment swell to £531bn, accord­ing to Colum­bia Thread­nee­dle Invest­ments and BMO GAM (EMEA) as of 31 March 2022.

“We absolute­ly under­stood that how­ev­er good we were, we can always be bet­ter, and we can always improve our propo­si­tion for our clients and bet­ter posi­tion our­selves for that dynam­ic of a small­er num­ber of con­sol­i­dat­ed wealth man­agers want­i­ng to do more busi­ness with few­er providers,” says Ring.

We absolute­ly under­stood that how­ev­er good we were, we can always be bet­ter, and we can always improve our posi­tion for our clients

While Colum­bia Thread­nee­dle has tra­di­tion­al­ly offered a range of open-end funds, it didn’t offer any closed-end funds such as invest­ment trusts. Last year’s acqui­si­tion gave the com­pa­ny a broad­er range of invest­ment capa­bil­i­ties and struc­tures, such as alter­na­tive assets includ­ing Euro­pean real estate and pri­vate equi­ty, and estab­lished lia­bil­i­ty dri­ven invest­ment and fidu­cia­ry man­age­ment busi­ness­es in Europe.

“Bring­ing in the BMO busi­ness has allowed us to offer a broad­er range of capa­bil­i­ties and vehi­cles in terms of invest­ment trusts, and there­fore we can say to wealth man­agers we can now offer you even more with­in a sin­gle inte­grat­ed client propo­si­tion,” Ring says.

Increased sustainability focus

Anoth­er major trend that is reshap­ing invest­ment man­agers’ prod­uct offer­ings is the rise in envi­ron­men­tal, social and gov­er­nance (ESG) aware­ness and an increased demand for sus­tain­able invest­ments. That was anoth­er cat­a­lyst for Colum­bia Threadneedle’s acqui­si­tion of BMO GAM (EMEA), which shares the firm’s com­mit­ment to respon­si­ble invest­ment and how that is inte­grat­ed into its invest­ment approach.

While both firms have long had ESG baked into their DNA, the urgency among wealth man­agers and end investors to act on the ESG agen­da is a rel­a­tive­ly recent trend, dri­ven in part by Euro­pean reg­u­la­tors and the Sus­tain­able Finance Dis­clo­sure Reg­u­la­tion (SFDR). The new reg­u­la­tions are designed to increase trans­paren­cy around ESG prod­ucts, with funds being assigned dif­fer­ent cat­e­gori­sa­tions (Arti­cle 6, 8 or 9) depend­ing on the scope of their ESG con­tent. Arti­cle 8 funds, for exam­ple, can include invest­ments that broad­ly pro­mote envi­ron­men­tal and social goals, while Arti­cle 9 funds must tar­get spe­cif­ic sus­tain­able invest­ments.

“Reg­u­la­tors have realised they have an impor­tant role to play in dri­ving the util­i­sa­tion of ESG con­sid­er­a­tions with­in cap­i­tal mar­kets,” says Ring. “That’s a very top-down push, but there is also the bot­tom-up effect where a lot of indi­vid­u­als are becom­ing more aware of ESG risks and an appre­ci­a­tion that things need to change and that investors have a role to play in that.”

That top-down pres­sure from reg­u­la­tors and bot­tom-up inter­est among end investors means wealth man­agers are increas­ing­ly demand­ing more ESG-cer­ti­fied prod­ucts.

“We’ve been sur­prised about how quick­ly wealth man­agers have embraced this,” says Ring.

“They’re say­ing that prod­ucts they have been very hap­py to invest in for a long peri­od of time, which already had ESG cre­den­tials, need to be encased in a for­mal Arti­cle 8 struc­ture – and if you can’t com­mit to that by a cer­tain date, we will move the mon­ey out of the fund.”

Reg­u­la­tors have realised they have an impor­tant role to play in dri­ving the util­i­sa­tion of ESG con­sid­er­a­tions with­in cap­i­tal mar­kets

Colum­bia Threadneedle’s approach is not to sim­ply split its funds into ESG and non-ESG prod­ucts, but to inte­grate ESG risk fac­tors and con­sid­er­a­tions into its entire invest­ment process across the firm.

“We believe that com­pa­nies which demon­strate sus­tain­able busi­ness mod­els, organ­i­sa­tion­al sta­bil­i­ty, and the abil­i­ty to dri­ve change where nec­es­sary are best placed to deliv­er long-term val­ue. In its sim­plest form, the con­sid­er­a­tion of envi­ron­men­tal, social and gov­er­nance fac­tors, along­side finan­cial infor­ma­tion, allows us to build a holis­tic pic­ture of the risks and future return prospects of any invest­ments we make. In a more tar­get­ed way, it also allows us to select invest­ments that can help achieve spe­cif­ic out­comes when and if desired. These prin­ci­ples have long been inte­gral to our invest­ment approach, but we recog­nise the need to evolve along­side a grow­ing focus by clients and reg­u­la­tors on cli­mate change risks, green tax­onomies and the­mat­ic oppor­tu­ni­ties. We con­tin­ue to enhance our capa­bil­i­ties, ana­lyt­ics and ESG inte­gra­tion in this regard,” Ring says.

Because of that broad approach, the firm has been able to sig­nif­i­cant­ly ramp up the num­ber of Arti­cle 8 and Arti­cle 9 funds it is able to offer.

“We feel very com­fort­able with that because our invest­ment process already embraces and utilis­es those risk fac­tors as an active con­sid­er­a­tion,” says Ring. “At the same time, we have to acknowl­edge that not all clients nec­es­sar­i­ly want Arti­cle 9 full impact funds. So, we still need to offer a spec­trum of invest­ment propo­si­tions, par­tic­u­lar­ly as a glob­al invest­ment man­age­ment firm. In the US or Asia, for exam­ple, we haven’t seen the same bot­tom-up or even top-down reg­u­la­to­ry trac­tion dri­ving investor behav­iour.”

Bespoke investment solutions

As well as demand­ing a greater focus on ESG mat­ters, end investors are also increas­ing­ly expect­ing a more per­son­alised ser­vice. That is prompt­ing wealth man­agers to offer more bespoke invest­ment propo­si­tions or mod­el port­fo­lios to dif­fer­ent cohorts of clients with­in their over­all client book, says Ring.

“Maybe five or 10 years ago, wealth man­agers were just buy­ing a range of pooled funds off the shelf that were offered by us or our com­peti­tors, depend­ing on what prod­ucts they want­ed,” he adds. “Now wealth man­agers are tak­ing own­er­ship of the process and say­ing we’re going to devel­op the invest­ment propo­si­tion or we’re going to hire you as a sub advi­sor. That means they’re not just buy­ing the pooled fund off the shelf; they are able to work with us and nego­ti­ate the exact details of the man­date they want. So that’s cre­at­ing per­son­al­i­sa­tion in terms of their propo­si­tion to clients.”

That is an advan­tage for firms such as Colum­bia Thread­nee­dle who have vast expe­ri­ence offer­ing seg­re­gat­ed man­dates to insti­tu­tion­al investors.

“We are used to work­ing with clients to devel­op bespoke invest­ment solu­tions, with bespoke report­ing on the back end,” says Ring. “In this case, it’s going through to a wealth man­ag­er ver­sus going through to a pen­sion fund or a sov­er­eign wealth fund or who­ev­er it might be.”

While asset man­agers need to ensure they are respond­ing to these evolv­ing glob­al trends, they also need to bal­ance that with main­tain­ing strong invest­ment per­for­mance across their funds. For Ring, this means mak­ing sure fund man­agers have the nec­es­sary resources to do their jobs prop­er­ly, while also invest­ing in new tal­ent and new sys­tems to be more effec­tive and organ­ised. That includes invest­ing in the firm’s data sci­ence capa­bil­i­ties to ensure fund man­agers have the infor­ma­tion they need to bet­ter under­stand what is going on in the world.

Understanding client value

Fund man­agers also need to bet­ter under­stand exact­ly what their clients want, par­tic­u­lar­ly in light of the Finan­cial Con­duct Authority’s Assess­ment of Val­ue ini­tia­tive, which requires asset man­age­ment firms to con­sid­er the over­all val­ue of an invest­ment beyond its per­for­mance, such as the qual­i­ty of ser­vice, costs and com­pa­ra­ble mar­ket rates.

“The assess­ment of val­ue mech­a­nism is real­ly impor­tant for our clients, for both wealth man­age­ment firms and their under­ly­ing investors, because it is a for­malised and sys­tem­at­ic process that looks at the over­all propo­si­tion,” says Ring.

This is espe­cial­ly impor­tant because invest­ment per­for­mance can some­times be over­sim­pli­fied, says Ring. Take an income fund, for exam­ple. If a client buys such a fund, what they are look­ing for is an income stream, and cap­i­tal growth is less impor­tant, he says. So, when con­sid­er­ing per­for­mance of an income fund, you need to con­sid­er the income stream and not just the cap­i­tal.

“We’re always look­ing at the over­all propo­si­tion that we’re mak­ing to our clients, and then ensur­ing and val­i­dat­ing that we’re deliv­er­ing on that with invest­ment per­for­mance at the heart of it,” Ring says.

Despite the grow­ing demands clients place on wealth and asset man­agers, com­pa­nies that act strate­gi­cal­ly to meet their needs will be able to pro­vide greater val­ue to clients for the long term.

To find out more, vis­it columbiathreadneedle.com

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Pro­mot­ed by Colum­bia Thread­nee­dle