Global financial markets have been buffeted by elevated interest rate and inflation risk over the last 12 months, creating an even more complex market environment in which to manage and protect investor capital. As the contour lines of today’s risk landscape tighten, safe navigation is paramount. Not only must fund managers and allocators consider market-driven risks, they must also factor in heightened geopolitical risk, cyber risk, ESG risks and operational risks. Only by recognising these can organisations hope to turn them into new opportunities, as they build towards future growth.
It therefore seems entirely apposite that this will be the key theme at this year’s IMpower Incorporating FundForum conference, under the official moniker of “All the risks you cannot see”.
Over two days, an array of 300+ speakers from leading asset and wealth management firms will be discussing the unique challenges facing the industry, commencing with a keynote, “The Era of Generative AI and The Infocalypse”, between Generative AI Expert, Nina Schick and Sanjiv Sawhney, Global Head, Client Coverage, Securities Services at Citi. Other keynote speakers of note include Mark Carleton-Smith, former Chief of the General Staff, Head of the British Army, and one of the foremost geopolitical commentators.
Several panel sessions throughout the event will focus on investment risks and opportunities, including Investment Solutions Leaders: Finding growth in a de-globalised, high interest rate, high inflation environment and the impact on portfolio construction, featuring Norman Villamin, CIO (Wealth Management), Union Bancaire Privée.
Villamin notes that over the last 12 months, “we've been spending a lot of time with clients, focusing on getting them comfortable that we're moving into a new regime. The last decade of near zero rates, plentiful capital…that’s probably gone. Now we need to invest under the umbrella of a new regime.”
CEOs have plenty to contend with managing their organisations as the duel threats of cyber risk – thanks to the incredible advances being made in generative AI – and climate risk are shaping how they approach operational transformation, system and data security, portfolio construction and fund evolution. Both of these bleed in to an even wider risk – namely reputational risk.
Laura Clarke OBE is CEO of environmental law organisation ClientEarth. She will be speaking on a panel entitled The rise of climate and human rights litigation in creating systemic change for good.
Commenting on those who do not take climate change seriously, Clarke says that the risks go “beyond just reputation”. Companies that lack a clear strategy aligned with the goals of the Paris Agreement are, in her view, jeopardising their long-term value.
“They are not planning effectively for a changing world and will be viewed negatively by society and policymakers, who increasingly expect businesses to play their role in ensuring a healthy, sustainable future for our planet. To address this, we use the law to hold company leaders accountable for not meeting their fiduciary duties and transitioning to a net-zero approach, thereby safeguarding their companies.”
Embrace open dialogue
How can companies take such risks into account and turn them into opportunities?
Katja Rieger is the Founder of Ripple Effect, a Swiss-based consulting firm. She notes that in regard to the sustainable performance of organisations, boards of directors have tended to be blind to the unseen risks:
“Sustainability is not a consideration for ‘do gooders’ but a consideration for any organisation. Also, there’s a huge overlap between intangible risks, compliance and ESG: Managing cyber risk, for example, is both a compliance issue and a social responsibility e.g. anti money laundering and protecting customer data.
The only way to manage those risks is to become aware of them through open, critical dialogue in the governing body; i.e. the board, the investment committee. “That will help to identify what other risks are out there but it will depend as well on the availability of data,” comments Rieger.
In Clarke’s view, it is imperative that senior management in all businesses possess the knowledge, technology, and experience necessary to understand the consequences of the climate crisis and recognise the long-term value and advantages of taking swift and appropriate action:
“The next step is to understand the evolving application of existing law, as it relates to climate change. At ClientEarth we have helped guide corporations in their understanding of what the law requires of them. This kind of clarity helps you act in the interest of the planet, deliver value to shareholders and ensure your long-term financial viability.”
Cash, FX and hedge funds
From an investment perspective, Villamin is quick to point out the potential for investors to seek out returns even in this higher rate regime; one in which, further economic growth risks are possible as the ECB (and other central banks) embarks on quantitative tightening. While it might sound surprising, one asset class that has become more attractive to UBP’s clients is cash.
“The idea that you can get a 4 or 5% return in liquid instruments, with reasonably short duration, is fairly attractive to them now,” says Villamin, adding that as central banks diverge on monetary policy, “we think the foreign exchange market is a place where there's a lot of opportunity to exploit that fact.
“We see opportunities in emerging market currencies, where you're getting very high real yields; places like Brazil, Mexico.
“Hedge funds are another asset class that we've been bringing clients back into. The problem they had over the last decade was that everything moved higher together and until recently, volatility was low across FX, fixed income and equities. We've now seen FX and fixed income volatility pick up a lot and we suspect equity volatility will follow. We think that will play well to the hedge fund universe over the coming years.”
For asset managers to successfully scale and seek out new opportunities – whether that be in different geographies or different asset classes – it is imperative that they have the capacity for operational transformation.
As Scott Bevier, Global Head of Investment Operations Services, JP Morgan, points out: “If operations are solely at the behest of the front office, they are likely having to introduce sub-optimal processes and going from a position of delivering operational alpha to supporting operational drag.”
By offering next generation middle-office platform services, JP Morgan is able to help its clients keep pace with product/fund evolution, “across retail products, institutional products or separately managed accounts”.
“Clients further benefit from the investment and pace at which we can change and deliver capability to support their needs. There is no single right answer and it comes down to people, processes and technology. You have to weave solutions together across those three variables to best fit your view of how to manage the biggest operational risks.”
Don't miss out on the opportunity to hear from our incredible 300+ speaker faculty at the event in everyone's calendar. Find out more about IMpower 2023 here >>