Adapting For Success In The Next Decade Of Asset Management Growth

Asset Managers See Global Investors Demanding More From Derivatives Solutions – Event Notes And Replay

In the latest EQDerivatives virtual forum, in partnership with Nasdaq, a panel of asset managers discussed how increasingly sophisticated institutional investors are expecting asset managers to provide more effective derivatives solutions for a gamut of challenges ranging from improving the 60/40 portfolio to building environmental, social and governance-focused strategies.

Eddie Cheng, head of international multi-asset portfolio management at Allspring Global Investors, Keir Livesey, multi-asset portfolio manager at Schroders, and Daniel McNeill, managing director and head of AM derivatives at JPMorgan Asset Management, discussed innovations in derivatives products and tools for efficient asset management. The panel was led by Nasdaq’s Seth Raphaeli. Attendees also heard insights from John Black, head of index options products at Nasdaq, and Dan Corcoran, chief executive officer of Volos.

The event replay is available below the summarized notes. For more details the time code is included to easily access each point in the video.

[01:32] Corcoran started with a presentation on where he sees asset managers’ focus being over the next decade. He discussed the historical narrative before highlighting a broad set of trends he expects to see moving forward. Trends included U.S. investors’ use of index derivatives, ESG and corporate social responsibility, and the accelerating impact of technology.

[11:20] McNeill said JPM AM’s institutional clients are becoming increasingly sophisticated. The demand for derivatives within their portfolios is also growing, he said. “There’s simultaneous increasing in complexity and sophistication, but they’re also looking more and more toward us as the asset managers to be able to bridge the gap between liquidity providers and the banks and the end-users, pensions and insurance, etc.”

[12:27] Cheng said the view on derivatives from U.S. investors compared to European-based investors and even Asian investors is very different. He highlighted U.S. institutional investors as being the most sophisticated.

[13:55] Livesey agreed with the panelists, adding that the fiduciary responsibility that asset managers have is growing wider and wider. That covers not only expertise in different market exposures and market instruments, but also an approach across how we use those within portfolios, he said.

[15:23] From a retail perspective and a regulatory requirements perspective, there is a much bigger restriction when it comes to using derivatives, Cheng said. This is starting to change, however. He highlighted seeing products with option-based downside protection being welcomed by retail investors, as well as derivative-based strategies to enhance income.

[17:49] McNeill said there has been a shift in the perception of the word leverage across the institutional landscape. As an example, he referred to the uncertainty around a standardized 60/40 portfolio. “One of the ways that you can enhance and increase your allocation to growth assets while still maintaining that overall 40 [in] fixed income, per se, is to incorporate leverage into your portfolio… in an efficient way.”

[19:35] Livesey said the view and the understanding of what risk management is, has evolved substantially. At [22:25] McNeill said in the past the end client would buy their equity or fixed income strategies and then they would be left to do the derivatives by themselves. Possibly because asset managers didn’t have good knowledge about derivatives, he said. Now, there has been an increase in the sophistication of asset managers’ understanding of how derivatives can complement the existing traditional portfolios. McNeill said there has been a shift from derivatives being a product to them being tools for a solution.

ESG

[27:10] Cheng said the industry as a whole is heading toward ESG and sustainability. The trend is clear, and clients are asking for it, he said. At the moment he said a lot of the innovation in ESG is coming from the cash instruments side and derivatives need to catch up. “So, this is an important direction that as an industry we should work on,” Cheng said. The other side of the argument, which Cheng understands, is standardization.

[28:50] Picking up on the note of standardization McNeill said it is clear how ESG can be incorporated in long-only equity or fixed-income funds, but it gets more complicated when it comes to things like synthetic investments. McNeill raised interesting questions such as, What do you do about short positions in equities and fixed income? Does a short position counteract ESG?

[30:10] Livesey added that derivatives have been used for many years as a way to bring standardized approaches to risk transfer.

[30:20] Livesey thinks about ESG in two different pillars: what are we trying to achieve as a fund? And how are we running the fund? And these are implications for how Schroders thinks about derivatives in the portfolio. From an impact perspective it is understanding what happens to the capital and from the how perspective, that might mean replacing an S&P500 future with an S&P500 ESF future.

[32:47] Cheng said the industry needs to cooperate about what would be the standard. At [35:13] Livesey said he would expect one of the key sources to drive ESG further would be accounting standards. And the more this happens, that will allow some ESG metrics to be more standardized and regulated which Livesey said would be helpful.

[36:05] Livesey said there is a long way to go for derivatives in an ESG-context. It will be complicated, he added. As a starting point, he suggested considering how to “not do any damage” with the derivatives from an ESG perspective before solving how to create positive ESG outcomes.

Technology/ M&A Activity

[42:09] Historically, the asset management industry has been focused on operational gain, Cheng said. But now we can see new technologies moving into a revenue-generating business. The developments happening in the derivative space play into the advantage of this new technology because everything is about efficiency.

[44:19] McNeill said you could see some more acquisitions around technology solutions moving forward. While Livesey said he expects to continue to see people “buying in” knowledge – especially on the ESG side.

[46:50] Moving forward, the panelists said it is difficult to say whether asset managers will start to act as data licensors providing digital, quantitative data. McNeill said there is plenty for asset managers to be doing in traditional asset management. While Cheng said as a by-product, you could see this happening in some cases, but he can’t see it being a core business.

[48:48-54:00] Post-pandemic, McNeill expects the demand on asset managers to grow. He expects to handle larger volumes, larger-sized trades, and then report on them and provide risk analytics in a more detailed way. Livesey agreed, adding more operational transparency and efficiency. Both speakers said the traditional uses of derivatives will remain important. Cheng expects to see a shift relating to technology. He referenced the use of machine learning and advanced analytic techniques.