Murray Bender: RBC Investor & Treasury Services is pleased to present insights on the future of asset and payment services across the globe. Today’s podcast features Stuart Alexander, Founder and Group Chief Executive Officer at London- and Dublin-based GemCap, discussing some of the key opportunities and challenges facing asset managers. Thanks for joining us, Stuart.
Stuart Alexander: It’s good to see you, Murray. I hope you’re well.
Murray Bender: To start, Stuart, can you please tell our listeners a bit about GemCap?
Stuart Alexander: Well, GemCap was founded in 2009 originally as a distribution business, a third-party marketer, as you might say. We worked on behalf of a number of fund managers. And in those early days, we basically found a lot of fund managers we really liked. We loved the performance. We liked the people. Everything was great, except the way the fund was created or structured. And it became a necessity if we were going to continue doing distribution, to create a funds platform. So we created that in 2011 and it converted into a management company, or we then launched a management company on top of that in 2016. And the fund platform itself has around about 20 different funds, about 10 different managers, and is growing very, very nicely. The ManCo does what we’d all describe as oversight, so we do distribution oversight, we do financial oversight, legal, compliance, you name it. And we basically allow a fund manager just to focus on what they do best, which should be running money. We’ve got, I’d say, a number of fund managers ranging from fixed income to global equities, to structures, to all sorts of interesting and innovative ideas.
Murray Bender: So, based on your experience, what do you consider to be some of the key opportunities for the asset manager sector?
Stuart Alexander: The opportunities. It’s a long word and we probably could talk all day about this. The reality is the opportunities are featured around product and distribution, and to a certain extent the structuring of fund managers. So, if you look at product, then obviously you need to create product, which is bespoke to a particular market, let’s say China or income stories; you need to have unique products for those things. You might want to look at the, obviously, the ESG and cryptocurrencies, which are very, very in vogue at the moment. Particularly ESG. In fact, in many cases if you don’t have an ESG overlay then that becomes quite a challenge from a distribution point of view. And talking of distribution, the opportunities really lie in new markets, new distribution ideas. I’m afraid the good old days of taking a client out for lunch and pouring a glass of wine down his throat and hopefully getting a ticket when you got back from that meeting, so they’ve gone. You’re now looking through strong due diligence, and it means a lot of knowledge is needed about your business and your products and you as a business for an investor to look through. So performance is key, clearly, but you also need to be able to present the strategy in a way that makes you different. And it has to be a differentiated product. You can’t just be a me-too product. You’ve got to have something which challenges what the current situation is or balances with the current situation.
And when I talk about that, I’m saying if you go out with a global equity mandate, well guess what? There’s thousands of those. You need to have something with your, say in the UK market, where you’ve got two big market leaders. I won’t mention their names for obvious reasons, but two big market leaders. You need to have a product which either competes directly with them and takes them on head-on or is a counterbalance to them. So they’re growth. Maybe you want something which is a little bit more value-added, rather than growth. Something like that. So you differentiate from them. So it enables a fund selector who, to be fair, only has 10% of his time looking at new products. It gives him or her the opportunity to identify your products very quickly and then to almost put them into the box that they want those funds to go in.
And thirdly, the issue with new managers coming into the market is a key area, whether or not they go and register themselves directly in Dublin, or Luxembourg, or London, or they sit on a platform. I’m not making a pitch here for GemCap, but I assure you that it would be fool hardy for any manager, unless they are of a significant scale, to go down the direct authorization routes. The economies of scale with a management company and a funds platform mean that you can launch a fund very quickly, very efficiently, and much cheaper than launching it yourself. So you save significant amount of dollars and pounds. And you can save a lot. We talked with a manager last year, and we saved them, literally on day one, like USD 700,000 on legal fees alone. So that sort of scale means that you can create lots of efficiencies, both from a financial point of view, from a regulation point of view. Basically, the regulator is sending so much down the pipe to us that if you’re not within a fund platform or on a ManCo, then you’re really going to be up to your ears in a lot of regulation and dealing with that. So those are the opportunities. So it’s very simple, unique products, looking at distribution model, and finally making sure you’re in a cost-efficient funds platform, rather than going direct.
Murray Bender: On the other hand, what do you see as the greatest challenges faced by managers? And how are these challenges being met, in your view?
Stuart Alexander: There’s lots of challenges for fund managers, I’m afraid. More so than the opportunities. The biggest issue, certainly talking from my own experience as a management company, is people. I mean, this is a thing that is happening right across the world right now in this sort of post-pandemic environment. Finding the right people for the right price is becoming more and more difficult, particularly in the likes of Luxembourg or Dublin where you’ve got a limited talent pool, so their prices are going up. And then making sure you got the right talent on board becomes even more of a challenge. So that is a huge issue. And again, the regulators pushing more and more down, down to us, which means we need to have more oversight. And that means more engagement with investment managers, more due diligence with the fund managers, more due diligence on everything about the distribution business. Talking to the third-party marketers, talking to the distributors directly, making sure that they are promoting the funds in the correct manner, in the correct markets where the funds are registered, and so on. It’s a huge amount of regulation. I never thought—I mean, as a distributor myself for 30 years, I know I don’t look it, but 30 years doing distribution I never saw myself as a risk manager. But that’s effectively what I am and what’s what we are as a business, a risk manager, protecting the fund managers.
And managing that risk is managing the costs as well. So the future climate and regulation means that costs are going up and up and up. Costs of labour, costs to automate, adaptability with future disruptors. If you’re going out there with different demands in the marketplace, you need to make sure that you can actually deliver to that.
And then obviously when it comes to the other side of the equation, it’s about product again, so you need to have new products, you need to have value-for-money products. You’re up against, you know, the likes of ETFs, which I appreciate are funds, but they’re deemed a stock. But you’re against low-cost product, so you need to add the value for that. If you’re selling your fund out at 75 or 100 bps and your competitor is selling out at 25 bps you need to understand why you are that price and what differentiation on that price is.
And then, when it comes to distribution, the challenges really are, the fact is face-to-face meetings become more challenging. It is very difficult to get a meeting as a new provider. If you’re BlackRock or you’re Fidelity, or you’re, I don’t know, Vanguard, not a problem. But if you’re a new manager to the market, getting in front of those fund buyers is really, really challenging. And then you got issues linked to that, which is does the fund stack up? Is that investor, potentially, going to own the fund? Is there concentration risks for that part? Some fund selectors won’t buy a fund if it’s less than $50 in size. And in some cases $100. So you really need to come to market with something of size, to avoid that concentration risk. And that in itself is a moment, where do you get the seed money from? Seed investors are like hen’s teeth, they’re very difficult to find.
And then when it comes to differentiating your product you’ve got to make sure it does stack up and it’s differentiated. You’re not just saying, oh, it’s a little bit different because, I’ve had investment managers who’ve said, oh, because I’ve got a 25-year track record at Goldman Sachs. Irrelevant. It doesn’t matter. It’s what you’re doing today, what’s differentiating you today is what matters. Not what you did yesterday because that’s irrelevant. Because if you were at Goldman Sachs, you have 1,000 people behind you, supporting what you did. When it’s your own boutique, it’s your own business, you look around you, there’s probably only four or five people in the business supporting you in your job. So you’ve got to get that across.
And then obviously when it comes to oversight, the challenges of oversight, particularly when it comes to knowing your client, knowing your distributor, and MiFID, dealing with MiFID II in particular, that becomes a challenge. Knowing who your distributors are and who you’re selling to becomes very difficult. We had a situation recently where I was having a conversation with some people and I said, well we need to see who the underlying investors are. And they turned around and said, well, we rely on the Patriot Act. We don’t care about MiFID II. Well, as a European business, because your fund will be a European fund, you need to be able to see who those clients are. And note, you can’t rely on the Patriot Act. So those are the sort of challenges.
Murray Bender: So finally, Stuart, if you could gaze into your crystal ball for just a moment, how do you see the asset management business evolving, going forward.
Stuart Alexander: Nothing’s really changed, to be honest. The future, I mean, I’ve been saying this for years, to be honest. I remember saying it back in the ‘90s. You’ve got to go big or you go small. You go boutique niche, or you go significantly large. I mean obviously everyone wants to be large, but reality is you’re not going to be a trillion-dollar manager in the next five years. It’s going to take you a lifetime to do that. And that may well be an aspiration for a lot of fund managers. But reality is that most new managers coming to market are boutiques, by definition, in the European space. If they’re in U.S. or they’re in Asia, they may be significant. They may be 50, a 100 billion manager, but in the market they’re targeting they may well be a niche boutique. So if you’re going to be a boutique in that space, you’ve got to differentiate yourself very, very quickly. And again, that’s looking at thematic funds or going down the ETF route, creating a niche situation that people go, yeah, that’s where you need to be. So I do see that separation in the market where you’ve got boutiques and you’ve got the large asset managers. We’ll always need boutiques because that’s often where the knowledge comes from. It’s where the technical, the bones, come from because they can afford to do it. Don’t be in the middle. Being in the middle is like being between a rock and a hard place. You don’t want to do that.
I think in another thing for the future, ESG obviously is critical right now. You know, how to build something around the ESG proposition, again to differentiate, that will be a big challenge. But it will also be an opportunity because we all know that the world needs to have ESG engagement. And then on distribution, I think the challenge will be ensuring that you have a situation because the platforms dominate. The distributors dominate. So you need to be on those platforms. So they will continue to grow and grow and grow, so you need to make sure your distribution strategy is aligned with them. So you need to be on Allfunds. You need to be on MFEX. You need to be talking to Clearstream, and so on. And Pershing in the States. Because they are the key drivers, or should I say they are the key reflectors of the market. They don’t drive business, they might say they do, but they don’t. They reflect what the market is, so you need to be on those platforms, so that’s really, really important. And that’s why I see the future being dominated by those.
Relationship management will be pivotal when the dynamics have changed. Salespeople are more operators now, they’re not the social relationship managers that we had in the good old days. And more pragmatic in the way they approach their—you need to ensure that you’re—if it’s a TPM you’re using or your own salespeople, that they understand the difference between their products and the competitors’ products. So having that ability to differentiate your product definitely will be the same. So in the past, you’d launch a global fund, it wouldn’t be a problem. Today, you’ve really got to stick out. And that to me is what I see the distribution model changing.
Murray Bender: Thank you very much for sharing your insights, Stuart. We really appreciate your time today.
Stuart Alexander: Yeah. It’s been a pleasure. I look forward to catching up with you next time I’m in Toronto.
Murray Bender: Thanks, again.
Today’s podcast has been brought to you by RBC Investor & Treasury Services, and we hope you found it useful. For additional insights on the future of asset and payment services, including our previous podcasts, visit rbcits.com/insights. I’m Murray Bender. Thanks for listening.
This content is provided for general information and does not constitute financial, tax, legal, or accounting advice and should not be relied upon in that regard. Neither RBC Investor & Treasury Services nor its affiliates accepts any liability for loss or damage arising from use of the information in this podcast.