Act Now, Or Regulators Will

August 03, 2012

Asset management firms should simplify fund structures to regain investors' trust, says Diana Mackay.


[This interview originally appeared on our sister site,]


Diana Mackay, joint CEO at asset management consultant Mackay Williams, tells editor Paul Amery why the onus is on fund managers to regain investor confidence in the products they sell. How has the financial crisis affected the funds business?

The crisis has had a profound impact. Retail investors have basically disappeared as buyers of funds in most European countries. The UK and Sweden are slight exceptions, but in most of Europe, fund investing is now the province of high-net-worth individuals and wealth managers, plus institutions. Retail investors have largely gone back to holding bank deposits or to making direct investments in bonds, depending on the country.

This is partly because banks have been attracting deposits to boost their liquidity ratios, but it’s also because investors are just scared and don’t really trust anything to do with financial services. I think things will stay like this for a while. Is this a good or bad thing?

For banks, it doesn’t make too much difference. Customers’ funds have largely moved to where the banks want them. But bank-owned fund managers have been suffering, particularly in countries like Italy and Spain.

For cross-border, independent fund managers, this has arguably been a healthy development. All the people buying funds now tend to be sophisticated investors, who are willing to do their own research and invest via boutique managers.

Since the Madoff scandal, the value of regulated funds has risen and the value of independent, specialist asset managers has also gone up.

The recent appeal of emerging markets has also helped boost the appeal of funds, as it’s typically more cost-effective to invest in them in such markets via funds than by buying individual stocks. What do you make of John Kay’s recent comments? After conducting a
review of UK equity markets and long-term investing, he says that we need fewer toll-collectors and more stewards—fewer intermediaries involved in the investment chain, in other words. Should we all go back to buying stocks directly, rather than via fund managers?

There’s been so much focus on regulating investment products that the distribution structure—how those products get sold—has tended to go by the wayside, and I think that’s where many problems have arisen, particularly in continental Europe. In the UK, there’s traditionally been more regulation of the selling process.

But even in the UK, the costs of funds are still an issue and whether the Financial Services Authority's Retail Distribution Review (RDR) will address them adequately is still an open question. Of course, simply by highlighting costs RDR will have some beneficial effect by making the end-investor more aware of how much he’s paying.

It’s important to remember, though, that there’s a push towards more cost-effective fund structures, independently of what’s happening on the regulatory front. Vanguard’s recent decision to launch a series of low-cost retail tracker funds in the UK is very significant, in my opinion. The firm has been looking at Europe for two decades but has chosen now to step in, and via the UK.

Other independent fund managers, whether active or passive, are also launching low-cost products, as well as simplifying what they offer. So you don’t think there will be a big move back towards direct individual ownership of stocks?

No, for most people I think that’s a scary prospect. But the average retail investor will be looking at low-cost, simpler funds, and in many cases I think those funds will be index trackers.


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