IS THIS AN ARMS RACE OR AN APOLLO MOMENT?

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I was disappointed to see a headline the other week on a social media post that shouted out about a so-called Arms Race taking place between fund managers and fund selectors/buyers. What I found, and continue to find disappointing, is that if this is true, we have somehow fallen into some pathetic world that sounds more like “Trumpland” with division at its core. Here one side takes a moral high ground without looking at itself first and the other side is there fighting its corner defending “fake news” from all quarters. This is in stark contrast to a cohesive and joined up industry that works together to deliver the benefits to investors and shareholders alike. Surely the industry, and I mean the whole industry within financial services, should be looking at opportunities to come together to develop solutions for investors. We want the children of today to look at what we do as an industry to aspire to, just as children of the 60’s and 70’s aspired to be scientists after man landed on the moon following the Apollo launches.

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I recently had the great pleasure, albeit with some trepidation, in being allowed a bar stool at the Octo Members Virtual Bar on a particular Wednesday evening. (Strongly recommend by the way if you want to know what is really happening in the value chain!) I was invited/coerced by the Chair, a certain Lee Robertson, into allowing one of my “rants” to be aired to a charming bunch of financial practitioners who must have relished the idea of listening to my dulcet tones (sic). One person with whom I’m well acquainted, 27 years and counting, knows I love a good rant and the audience were very respectful as I put forward the case for Fund Managers and the fees that are charged.

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Now I know that some managers take the proverbial mickey, but they are not all out there to rip customers off. In fact, over the years, I have met very few who I would consider absolute charlatans. Maybe I’ve been lucky, but the truth is that the funds industry, whilst it isn’t perfect, is trying its very best to deliver the returns that it believes investors are looking for. It is however only human; humans can make poor decisions at times and the performance can suffer.

However, the point of my discussion wasn’t about performance differences but actually trying to get across the true cost of running a fund to my audience. In short it isn’t cheap. After many years of funds being run with relatively simple structures, support and requirements, in more recent years a huge amount of extra work has been created and as a consequence extra people have been getting involved in actually running a fund. If investors actually knew what goes into managing a fund today, I believe they would be shocked that it is no longer a simple process of choosing a stock, buying it, making sure it does what you expect it to and then selling it. The holy grail of straight through processing (STP) has yet to really take place despite a huge investment by administrators, custodians and fund managers alike.

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The reality is that most fund buyers have little or no idea about the challenges of actually running a fund. The act of choosing a stock for a portfolio may be deemed the easiest bit, if you consider the research easy. The huge amount of administration support to produce a NAV every day and to ensure the fund is run in a compliant manner is eye-watering and to be fair not something that can be done easily. Economies of scale help with the costs associated with running the fund but you need to ensure you have enough assets to keep the overall costs down from an OCF point of view. It would be fascinating to see how our industry would change if everyone knew what went into actually running a fund. The list of operational functions is eye-poppingly long. Policies and procedures are everywhere with more coming every day. Administering a fund is all about risk management; in effect we have become risk managers and our job is to mitigate the risk for investors. It helps when investors/fund buyers appreciate how a fund operates in a particular environment; it is enhanced when the buyers further understand the operational aspects that go into delivering the fund for them. This all comes back to managing expectations and that links with in building a positive relationship over time.

At GemCap we operate two businesses. The largest part of our business is our Dublin operation, Gemini Capital Management (Ireland) Limited which is a fund management company. Basically, we host fund managers on a platform that allows them to create a fund that our other business in the UK, GemCap UK, then advises on and helps them to build a distribution platform with distributors across Europe, Asia and the Americas. During my career I have always found that there are certain firms/people who are just argumentative for the sake of it whilst there are others who are more inclusive in their conversation. Nothing strange there and I am sure many others have observed that in their day-to-day work/life. I naturally turn to those who are more inclusive and offer a modicum of challenge, as they are the ones who help us to move forward. A number of friends on both sides of the conversation have been brilliant in helping GemCap understand the requirements of both fund developers and fund buyers. They help with what asset classes are required, what’s missing and what isn’t needed any more. They help us develop the right pricing, the right positioning and help to manage the expectations of what is required from the fund manager. It’s a cooperation that works for everyone; however, there are times we agree to disagree, and the fund never gets to launch. Then at other times we know it’s a “worker” and that investors will benefit from the work put into the planning before launch.

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Many years ago, when we first started, I sat down with a particular fund manager and asked what they wanted. They said Cayman listed, closed ended, quarterly liquidity and to be sold to IFAs across the UK. As my laughter receded, I was greeted by some very stern looking faces who clearly didn’t understand the reason for my mirth. When I pointed out the obvious issues, they said “now what?” Easy, let’s get a dozen fund buyers in a room and develop the right product for them and their investors. 10 years later they continue to win awards and assets in profusion and all because they listened and worked with their clients. I am not suggesting “focus groups” but I am suggesting that fund developers and other financial services providers work with the marketplace to ensure they are creating the right product for the market.

If we could stop this so-called Arms race between fund managers and fund selectors that was opined recently and move to a more collaborative approach, then perhaps we will get to an Apollo moment when all things come together. A situation that fund managers don’t launch into a vacuum leaving fund buyers wondering where to look for the right products for their investors. A miracle may be needed but hey, it’s almost Christmas!

Have great week……

Stuart Alexander

Gemini Capital

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