Seeds, Sophia, Skynet and talking “trash”
The focus of our June 2015 VFTD was the reasons why we make time to attend investment conferences. The three we cited, namely; access to underlying fund managers, the chance to listen to external – and often – non-industry speakers and the opportunity to share thoughts and ideas with our peers, continue to make our attendance relevant at these events today. We have just returned from one such conference, FundForm International, hosted in Copenhagen. Described as ‘the world's number one global investment management event’; where ‘1,500+ influential global decision makers, innovators and investors gather to make sense of shifting trends in global investment.’ It would also present the opportunity to ‘build new partnerships and platforms - activating a new solutions revolution for people, pensions and planet.’ These were lofty ambitions, so what did we learn?
The event was certainly very well attended, with delegates and speakers from Europe, North America and Asia, representing both the private and public sectors. The broadest set of stakeholders in the fund management industry sat next to, worked alongside or shared an evening meal with policymakers, ambassadors and academics. All had a vested interest in understanding or influencing how international and domestic capital flows are being directed. Several key themes emerged, which we believe are very important for investors to be thinking about today. However, before referring to these, we thought it would be useful to share three, longer term takeaways which will shape our futures.
1. The photograph shows the entrance to the Svalbard Global Seed Vault. Established by the UN-missioned Crop Trust to ensure the conservation and availability of crop diversity for food security worldwide. The purpose of the vault is to store duplicates of seed samples from the world’s crop collections. It is the ultimate insurance policy for global food supply, offering the possibility for future generations to overcome the challenges of climate change and population growth. Feeding the world on an industrial scale, at a time when crops are not able to grow in places they once did in abundance, will require significant financial resources.
2. Meet Sophia – a human-like robot, developed by Hanson Robotics, a Hong Kong firm. She uses cutting-edge tech: symbolic Artificial Intelligence (AI), neural networks, expert systems, machine perception, conversational natural language processing, adaptive motor control and cognitive architecture, amongst others. The potential of AI, together with its applications and implications is a vast topic, way beyond the scope of this VFTD. That said, there is one outcome to consider. Successful corporations are no longer run by a HIPPO (highest paid person’s opinion) but by DDD (data driven decisions). It is estimated 30,000 US manufacturing operations use DDD to run their production lines. The investment industry is no different and the sophistication of AI behind roboadvisers will soon change – beyond recognition – how we deliver, respond to and implement financial advice.
3. Staying with AI, this final picture is the logo for the fictional company, Skynet, which features centrally in the Terminator movie franchise. The storyline being a giant tech company, where the AI becomes self-aware and, in the interests of self-preservation, takes over the devices and networks of the world and sets about the destruction of human-kind. The ethics of technology is moving front and centre for policymakers, given the exponential rate of progress underway, coupled with the dominance large tech companies have on our lives. Regulators and governments will need to rise to the dangers created and not let the ‘market’ dictate the landscape. This may not be easy. One of the speakers hypothesised the creation of Alibabazon – a merger of Alibaba and Amazon. Imagining the implications of this is extremely complex, but it is safe to assume, from an investment standpoint, this would be a profit-making giant, if a little frightening from a social perspective. Moreover, delegates at the conference agreed such a merger should create the ideal platform through which a cryptocurrency would be the universal means of exchange. This could signal the end of fiat money, central banks and monetary policymaking as we know.
That is for the future, what about now?
Returning to our main takeaways for the here and now, these were;
- The pivot to a sustainability-based global economy is firmly underway. Investors should be thinking about positioning their portfolios accordingly.
- The investment industry is recognising the responsibility it has for ensuring the provision of advice and solutions truly meet client needs and support their financial wellbeing.
- The question of liquidity and just how far-reaching the mismatch is between the daily dealing funds and the underlying assets they hold. The most discussed topic of the conference.
Recent headlines around managers struggling to meet fund redemptions have raised a number of issues for the industry to consider, from the role of direct marketing in fund sales, to the effectiveness of the current regulations on unlisted or illiquid stocks. As various parties seek to protect their reputations in the immediate aftermath, it is unclear how this ‘blame game’ will resolve itself. However, we believe investors need to have heightened awareness around these issues.
Understanding what you own is an imperative. As is appreciating the difference between unlisted and illiquid. The former is based on fact, whereas liquidity requires interpretation and changes through time. A small cap stock may develop into a mega cap, an on-the-run bond will become off-the-run and securities move in and out of being index constituents. A further consideration is whether the underlying assets are suitable for daily dealing. Sometimes this is easy to answer – is it really sensible to own an open ended, daily dealing fund where all its assets are invested in physical property? For other investments, the interpretation is more nuanced. Take sectors of the credit markets – such as high yield, leveraged loans, securitised bonds and emerging market corporate debt. At face value many would define these as liquid instruments, however, this classification could alter significantly if holders look to exit en masse.
Implications for portfolios
The above reinforces the requirement for fund analysis and monitoring of positions. It also highlights the value of taking financial advice from an individual or organisation that is suitably qualified and the dangers of simply picking from a platform provider’s list of “favourite funds”. All discretionary managers have an obligation to consider the implications of less liquid holdings in collectives, as well as the potential for increased regulation around the use of the so called “trash bucket”. The latter refers to the current rule restricting UCITS funds to a maximum of 10% of net asset value in unlisted/unregulated securities; with a further 10% permitted in “recently issued transferable securities, with an intention to list within one year”. If regulators seek to implement more controls around the allowable securities and/or reporting of liquidity, there could be unintended consequences. How this information is interpreted will be key and they need to be mindful of triggering indiscriminate redemptions. The industry must put the clients’ financial wellbeing front and centre. Whether, in the future, humans or robots are better at doing this remains to be seen.
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