Innovation, integrity the focus of CFA Societies conference

Sally Rose

By

11/10/2017

The theme for the upcoming 2017 CFA Societies Australia Investment Conference, to be held in Melbourne on November 1, is “Best and Fairest: Innovation and integrity in capital markets”.

Ahead of the event, Stoxx managing director Shirley Low answered five questions on that theme.

IM: What do you see as the most exciting examples of innovation happening in capital markets?

Shirley Low: For me, the most exciting thing to have happened in recent years is the index evolution that has resulted in the expansion of smart beta index strategies, to the huge benefit of investors. Smart beta products use semi-active strategies in an attempt to increase investors’ risk-adjusted returns while keeping costs very low.

Where do you see the greatest need for more innovation in capital markets?

Asian investors are crying out for innovative, inexpensive products that track smart beta indices. These products lower the costs for investors, many of whom have, for too long, felt short-changed by active fund managers that fail to beat their benchmarks. Passive products such as ETFs also bring much-needed depth and liquidity to markets, by creating new links between investors and foreign markets. ETFs have become a staple of the US and European market landscapes, with about a third of money invested in American stocks nowadays held in passive funds. I see it as my job to help Asia catch up.

What do you see as the biggest challenge to the integrity of capital markets?

One of the biggest hindrances to fostering confidence in capital markets is the dominance of mutual funds that claim to be actively managed but really just hug an index. They track their benchmarks like an ETF would, but for a much higher management fee. The high fees these funds charge can turn off potential investors, and that’s a disservice to markets. Regulators can help solve the problem by pushing fund managers to be more transparent about the costs associated with their investment products.

What are the most encouraging signs that the integrity of capital markets might be improving?

Regulators globally have taken many positive steps since the 2008 financial crisis. Smart rules bring clarity and help investors approach markets with confidence. In Europe, for example, the new [Markets in Financial Instruments Directive] rules that are coming into force in January will hopefully push more over-the-counter trading onto exchanges, bringing accountability and transparency. Despite complaints from some quarters about the expense and difficulty of meeting the new regulations, I really believe this will help narrow the advantage gap between institutional and retail investors and it’s to the long-term benefit of capital markets’ integrity. In the US, I’ve been pleased to see the close eye the [Securities and Exchange Commission] has been keeping on the ETF industry there. We welcome the increased scrutiny, as disclosure and control will bring more confidence in passive investment vehicles, particularly in very innovative products and in regions with less experience with them.

If you could change three things to make global capital markets better or fairer what would they be?

One: Investment products can still do more to increase transparency. In this regard, the disclosures and rules-based methodologies found in index-tracking products are a useful guide. Standardised disclosure rules would boost confidence, and we need to have more transparency also in the fees and the associated risks.

Two: I’d like to see more and varied distribution channels for investment products, so that more retail investors can benefit from access to these low-cost, innovative smart-beta products. With the fintech revolution, we are seeing more fund and robo-adviser platforms that charge the client a fixed fee and offer investors another channel to access these lower-cost investment products.

Three: The fees that are charged to retail investors should be reduced so they’re in line with those paid by institutional investors when the product has reached a certain size.

Stoxx is a sponsor of the 2017 CFA Societies Australia Investment Conference, to be held in Melbourne on November 1. For more information visit the event website.