The quest for returns in a zero-rate world

While the pandemic has had a major impact on the whole financial sector, the asset management industry has weathered the storm with growth in assets under management. According to a report by Willis Towers Watson, the volume among the world’s 500 largest asset managers grew by 14% in 2020. The reason is clear says Faller: “It is still a good time for the industry because there’s no easy way of making money when rates are at 0%. It is no longer an option to leave money in cash, as it was in the past.” 

This begs the big question, asked by anyone involved in managing wealth, whether their own or other people’s: What kind of strategies can help to achieve profitability in this environment? Nicolas Faller cites three.

Investment opportunities in a zero interest rate environment

The first is investing in equities, although he specifies that not everything goes. “There are companies that have managed to hold up very well during the crisis, but the stocks selected must have a quality bias,” he says. 

The second area is alternative fixed income because this is the way to achieve the profitability that government debt no longer provides. And within this segment, he highlights convertible bonds as an example.

And, of course, the quest for returns also involves incorporating private assets into a portfolio, especially for institutional investors. “Private markets are set to keep growing as institutional investors have to look for alternatives with longer duration and better returns. You have to bear in mind that these markets are not liquid, so you are less tempted to do marked-to-market operations, but in terms of balance it is a positive thing,” he says. He also argues that these markets currently offer illiquidity premiums of between 3 and 5 percent, which is a lot compared to 0% rates. And he warns:

“If you don’t want to sacrifice risk in your portfolio, you have to sacrifice liquidity.”

Talent has to be paid for

That is why he does not rule out undertaking corporate transactions in private markets. “In Asset Management, we are studying the possibility of acquiring a boutique with a stand-out offering in private markets, while in long-only we are betting more on organic growth,” he says. 

He does not, however, plan to devote time to the other major area that has grown the most in recent years – passive management. Because “you can’t be Catholic and Protestant at the same time, and we are a relatively small asset manager committed to active management.” 

He stresses that active management requires talent. Therefore, although he does expect to see further cuts in commissions and a resulting squeeze on margins, he believes there is a limit to how far they can fall. “There is a fee level you can’t go below because it’s not only about good security-selection, but also about investing responsibly, which means engaging with companies to make sure they increasingly integrate ESG criteria, and for that you need talent that you have to pay for,” he explains.

No longer-term inflationary dangers

As for the risks facing the market, and thus the industry, Faller does not fear rising inflation so much as the geopolitical risks that may continue to emerge with China as a major player. “We don’t think inflation upside will go beyond the next two or three quarters as it is very much driven by booming commodity prices and supply chain issues,” he asserts. He argues that, in fact, in a globalised world like today’s, companies will not be able to raise prices across the board: “Globalisation is disinflationary,” he says.