Who has the best idea? Not necessarily the one with the strongest brand and greatest market power. Let’s make more expertise accessible. We'll explain you how – and present you a powerful tool that asset managers can use effectively.
Conventional, actively managed funds do poorly. We know it's the old, tiresome story, that everybody already knows. However, it’s been confirmed once again by none other than Morningstar and results are interesting anyways. Of course, the world's leading analysis provider and fund specialist, whose awards are among the most coveted in the world, brings a doomed debate back to life. According to the latest "Active/Passive Barometer" (08/2018), the most classical of all investment instruments not only show poor long-term performance but alarmingly weak chances of survival, below 20 percent in parts in the long term. In times of margin pressure and limited growth, it amplifies the dilemma not only for investors, but also for asset managers and financial intermediaries. The reason is that they have a part to play in finding a powerful solution – ideally in form of a suitable tool – to solve several problems at once.
Nothing comes free, …
Is it a question of price? Strange question, one might think. However, Morningstar revealed that fees were a decisive factor for poor results. They came to the point that it is no longer about "active versus passive", but about "expensive versus cheap". Of course, prices play a role, especially for financial products. As far as funds are concerned, passive often beats active – in terms of costs. At this point, we have to say that moderate costs generally contribute to a better result and higher product quality. However, to focus on this argument alone would be too simple. Everything has its price and many are willing to pay a higher price for higher quality. So, let's look at the problem from another angle. From a consumer point of view, everything is about a fair price that one is willing to pay for a realistic price-performance ratio of a product or service. The fact that actively managed investment funds could not convince with their results, simply proves with hard data that customer expectations remained unmatched. Actively managed funds did not live up to their performance promise - for which investors would have been willing to pay.
… but still, price performance ratio seems unfair!
Fund prices let market entry barriers increase even further. The lower the volume invested, the less sense a (high) price makes. Promising theme investments, however typically, attract lower investment volumes due to its limited target group. Such niche products fall mostly victim to required minimum volumes. The high price of big traditional funds generally arises from high initial set-up and running fees. These costs lie mostly in the CHF 50’000.- to 100’000.- range, simply for setting up the fund. In addition, running fees in the previously mentioned range are charged annually to the whole structure. Remember, that many fund solution providers do not leave the choice of broker and custodian to smaller asset managers, potentially leading to to inflated brokerage and custodian fees. Both elements have a direct and indirect impact on the fund costs and its performance. It is widely known that funds running below 50 million Swiss Francs are seriously impaired with the involved translating to lower net performance.
Don't stop with active management anyways, …
What can be done? Shall we decide to stop managing actively and switch entirely over to passive instruments? Certainly, not. Rather, one should consider how the “performance promise” can be kept more frequently. Performance can only be achieved through the application of expertise. Thus, do we have a lack of expertise in the financial market? This is not the case either. Instead, one could ask whether enough existing expertise is being applied. Now, this is the theory: the fundamental, unfortunate mechanism works even worse for financial markets. If supply is scarce, prices rise. As a result, market entry barriers increase even further because lower investment volumes become too expensive. However, if not enough expertise reaches the financial market, another result is a drop in quality. It is true that competition stimulates business. Instead of complete turning away from active management, as many have been demanding for years, one should think about how more expertise can be made available. As a consequence, an increased number of “performance promises” would then be fulfilled. What’s left, is the adequate instrument that can execute all this because classical actively managed funds are unlikely to make it work.
… just apply more quality, enable expertise!
Coming to the point: investment funds remain generally expensive and their setting-up time-consuming. At the same time, enough expertise is available. If you are a smaller or medium-sized asset manager with respective expertise, however, you are most likely not in the position to launch a conventional fund yourself. But, in terms of performance potential, you might be better than “the big ones”. Bringing your own ideas to the market that are both, new and exceptional, is a dream come true. The world seems unfair. But there is good news for you: an adequate framework is already in place. This is because we have entered a new era in which a new trend is emerging across all industries: individualism. It is associated with a move away from blind purchases of products from (formerly) strong brands or fund giants. Most investors have become open to those smaller asset managers who make their own expertise available. Maybe your time has come to implement your white label strategy, and to develop your own brand. New sales concepts and technologies will help you unlock effective product marketing that is in line with potentially growing demand. And the most important thing is that the fitting investment instrument is also there.
Framework and product are in place
Let’s finally get to the tool that makes all this happen. Can the need for more expertise really be addressed by replacing a conventional fund with a new instrument? Indeed, it can. The pioneering investment format has already been existing for some years now. Despite longstanding high barriers to market entry, the so-called Actively Managed Certificates (AMC) have made it a reality. The relatively young segment has succeeded because it took up the idea of an actively managed investment fund – without being a fund. An AMC is a debt instrument issued by a Special Purpose Vehicle as a structured product comprising a portfolio of underlying assets (liquid securities, bonds, funds, shares, derivatives, currencies, etc.). Usually, its pre-defined underlying strategy follows a composition of underlying assets like an actively managed portfolio that changes over the time at the discretion of an asset manager.
AMC are more versatile, quicker to launch and affordable
An AMC acts like a wrapper that allows discretionary management of a wide range of investment strategies. Know-how, experience and personal feeling for market trends can easily be integrated into the underlying strategy. In addition to this, AMC allow an asset manager to react more quickly to market events and upcoming needs than with its "bigger brother". The set-up costs and management fees are much lower. An AMC can be launched within days. In contrast, a fund typically takes several months to set up. Consider, however, that AMC may be distributed to qualified investors only. The fixed rules of an AMC correspond to the general conditions of an investment certificate. The rules to be defined in advance are the:
- criteria for the selection of strategy components
- information on the treatment of income from the underlying
- leverage applicable to the strategy
- asset manager responsible for the strategy and its remuneration
- notes describing the accessibility of the information related to the composition and strategy
Versatility of investment vehicles has never been as essential as it is today. AMC as tools enable the expansion of an investment universe through the possibility of setting more flexible framework conditions.
How a set-up for AMC generally works
A new generation is born, …
But the best at the very end: evolution never sleeps in the financial sector. Even though the “little brother” of the long-established actively managed fund has only been around for a few years, the concept of AMC has already reinvented itself. A year ago, GENTWO launched the next generation of financial products. With that, the use of AMC has become more flexible, more versatile, more purposeful and even more cost-effective. Today’s new generation of AMC, that can only be issued via the GENTWO set-up, are launched off-balance sheet. This means that the issuer risk is eliminated. This issuer risk was the single biggest disadvantage of the certificate segment, especially in the wake of the financial crisis. New generation of AMC have therefore become safer than it was the case with the initial conventional ones. Today, this is an important aspect when managing risks in the context of a portfolio. The use of new-generation AMC make sense even for small and medium-sized volumes because break-even points occur even earlier. This represents an additional opportunity, especially for small and medium-sized asset managers who want to bring their own idea to the market.
… the need for flexibility is fulfilled even further
Get prepared for the future! Financial intermediaries and their clients have an increasing need for flexibility. GENTWO’s AMC solve the problem of time-to-market. The set-up time for an issuance vehicle (SPV) with the GENTWO set-up takes 10 business days and the issuance of the product another 3+ business days. Besides that, asset managers have free choice of custodian and broker. Fees can be applied on each product separately: management fee, performance fee, structuring fee, set-up fee, issuance fee, secondary market spread, entry (sales)/exit fee, etc. More information about pricing and GENTWO’s set-up here.
GENTWO has made “non-bankable” assets “bankable” …
The main reason why GENTWO’s AMC are called the next generation of financial products, however, is that every asset can be securitized now. AMC that are launched through the GENTWO set-up make previously “unbankable” assets fully “bankable”. This example clearly illustrates a complete change in future thinking. The question will no longer be whether one will ever be able to securitize art. In the future, the question will be: Who has the expertise to create a sustainable and promising art investment strategy that makes an investment worthwhile? Any imaginable strategy, asset or project can technically be included in an existing or future investment strategy today. Crypto portfolios, funds, private loans, hotel and machine financing, patents or P2P lending are just a few further examples of possible assets we can mention here.
… and offers even more than "just" innovation
Although GENTWO is an innovative financial services provider and not an issuer, its AMC are not unprivileged, on the contrary. Not only do AMC of the new generation offer the mentioned advantages, processes and partnership are also much less complicated than is the case with most classic issuers such as banks. Thanks to our experts and their wide-ranging expertise, GENTWO offers not only innovation and inspiration, but also all issuer and administrative services. These include the:
- Set-up and running of issuer (incl. director, accounting, etc.)
- Structuring & issuance of products
- Management of jurisdictions
- Asset-liability management
- Collateral management
- Lifecycle management
The latest developments will have a lasting impact on the entire financial market. The future has just begun. Let us continue to work on it together!