Capital Markets Corporate

August 10, 2018

Our Weekly Newsletter

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Across Instinctif Partners’ Financial Services team, we are always keeping an eye on the key developments taking place across the sector to evaluate their impact on the many businesses we work with. Here we share our picks of the week’s most interesting news, and our expert views.

Into the future at quantum speed

Fund houses creating algorithm-driven hedging products now point to data harvesting being the 21st century’s ‘gold rush’ – as firms scramble to better understand the markets and human behaviour. Quantitative analysts typically trawl through vast data sets to find signals that they can trade, and are now looking to the most populous financial services sector – China – to learn about the smarter markets of the future. (From Financial Times, 2 August 2018)

Economists detached

Research has shown that universities are producing “a cohort of economic practitioners who struggle to provide innovative ideas to overcome economic challenges or use economic tools on real-world problems”. As economics-driven reasoning backs political decisions, and economists are unable to communicate ideas to the public, the result is a large democratic deficit. It falls to the communications industry to play an important role to ensure everyone gets a better understanding of the decisions that impact their future. (From The Guardian, 4 August 2018)

Programme your own robo-adviser

A number of newly launched ‘robo-advice’ services, such as Exo and Tiller, are targeting more experienced, knowledgeable investors by offering them the chance to be more involved in the decision making – effectively letting them programme their own robo-adviser. These services may suit investors who are engaged but don’t want to spend a significant amount of time picking their own funds. A welcome market addition? (From The Daily Telegraph, 5 August 2018)

Capitalism gone wrong?

Researchers from Princeton and UCL believe that companies have too much power over consumers in Western economies. Last year, they reported that mark-ups on goods and services in the US, defined as the amount above cost at which something is sold, had jumped from about 18% in 1980 to 70% in 2014. They suggested that this rise could account for many of the problems in the US economy, from inequality to fewer start-ups. In 2018, this has turned into a global phenomenon. (From Quartz, 13 July 2018)

An insurance identity crisis

Insurance companies have often struggled with the way their industry is perceive, as by their nature they tend to deal with customers in negative circumstances. To counter this, some in the industry have come up with a solution: stop being conventional insurance companies and become “services” groups instead. Insurers are increasingly creating a market rife with disruption by offering psychologists and trauma services, gym memberships and mobile doctors. (From Financial Times, 7 August 2018)

What will the future hold for passive investing?

The passive investment industry is huge – so much so that ETFs have grown 17-fold since 2003 and are forecasted to double again over the next four to eight years. A reflection of this trend is Vanguard S&P 500 ETF flows, which expanded by 178.73% over the last five years.

Regardless of the current size of the passive investment industry, the industry is likely to be supercharged by Fidelity’s recent announcement that it is cutting the cost of its entire portfolio of passive, index-tracking mutual funds.

This is a sure sign of what is to come: fee-free investment funds for all! Competitors in this space such as BlackRock, Vanguard and Charles Schwab will likely have no choice but to follow in these footsteps, in what is one of the most competitive sectors of the financial services industry.

While the market continues to balloon, many have raised flags over what the future holds for this trillion-dollar automated industry. Some commentators have noted that index investing and stock picking are by nature highly cyclical, arguing that these passive strategies perform best during speculative bull markets or in the final stages of extended bear markets. However, it has been noted that there is almost no telling how these passive funds will respond and trade in a bear market – leading to a cloud of uncertainty.

As such, it has been argued that the rush into passive investment might lead to a painful end in the event that the markets turn. It has also been debated that there are various likely structural trends that could create an unfriendly environment for index-tracking funds.

Therefore, the rapid growth of ETFs and the passive fund industry is undeniable and unlikely to put its foot on the brakes any time soon. This does beg the question of what will happen to this mammoth of an industry when the market inevitably shifts, and also whether investors are prepared for the potential unsavoury consequences.

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