Aperture’s Lahlou: AM fees must change
Anis Lahlou is chief investment officer at Aperture Investors in London. He believes that asset managers must change the way they charge fees to their investors, by only charging them for market-beating performance.
Before joining Aperture Investors in September 2019, Lahlou worked at JP Morgan for over 20 years, rising to become a managing director within the US bank’s asset management division, responsible for running multiple long and long/short European equity and technology funds.
Aperture Investors was founded in 2018 by Peter Kraus, the former chief executive of AllianceBernstein and former co-head of investment management at Goldman Sachs, and by Generali, the Italian insurance giant. The asset manager is attempting to shake up the way fees are collected in the industry, by charging clients according to performance-linked fee structures, rather than a fixed percentage of their assets under management. The fees are intended to be comparable to the low cost exchange-traded funds (ETFs) that have provided active managers with such fierce competition over the last decade, and they only rise if the fund manager outperforms their benchmark, up to a cap.
The different fee structure aims to address an existential problem for the asset management industry — very few active managers actually manage to outperform their benchmark, and passive funds, such as ETFs, offer exposure to markets at a cheaper cost.
GlobalCapital: Active management had a very tough time since the financial crisis, given that stock markets only went in one direction — up. How much of an opportunity does the return of serious volatility and a global economic crisis represent for active to show its qualities once again?
Excellent question, since the “proof is in the pudding” as the saying goes. Some truly active funds have managed to extract significant alpha in times of volatility — so the opportunity is definitely out there. In my opinion, Aperture’s fund complex is proving itself to be part of that story, and an example of what can be accomplished when the incentives of managers and their clients are aligned.
GlobalCapital: How much potential is there for the asset management industry to overhaul the way clients are charged relative to the performance of their investments?
We believe there is huge potential here. We still exist in a world of fee compression, in which ETF and passive products are a threat to many active incumbents. We see it as an opportunity, however, by trying to remove the impediments to active fund ownership: Aperture funds charge prices competitive with passive ETFs when returns are at or below the benchmark, and only charge more when they deliver out-performance.
GlobalCapital: ESG and sustainability is now dominating conversations in financial markets. Is a lot of renewed interest in ESG just lip service while carrying on as before? Or does it represent a serious sea change in the way investors go about investing in companies and securities?
The trend is anything but lip service. Of course, “green-washing” and lip service happens, but that does not mean that ESG is a fad. Far from it. The world is changing rapidly, and regulation is playing a big role, but markets are also starting to behave pragmatically. We can no longer disregard greenhouse gas emissions, social impact and governance when looking at the risks associated with investments. With balance sheet risk, a company can carry on with a huge pile of debt on its balance sheet but at the slightest cash flow wobble it can go bankrupt. The same is true with ESG: bad ESG behaviour — such as pollution, employee dissatisfaction or poor governance — is a liability that can turn into a serious negative for a firm’s stock price at any time.
GlobalCapital: The equity markets are quite far behind the debt markets in terms of their adoption of green securities. Do you think that they can catch up, particularly if more money gets allocated to green funds?
It’s only a matter of time. Regulation in Europe, the leading continent for ESG, especially the ‘E’, is progressing fast. The EU environment taxonomy has now been adopted and fund managers following ESG criteria will have to comply by the end of 2021. It will bring harmonisation of definition, approach and reporting. As we have clarity, I believe that more and more money will flow to ESG and it will likely become the norm rather than a trend.
GlobalCapital: Earnings multiples of stocks have become stretched during Covid-19, particularly in the US. How worrying is this, or is it just the new normal, given the interest rate environment we are now going to be living in for years to come?
Part of the answer is inherent in the question: what should be the market price to earnings ratio if interest rates are at zero? We see some market participants who are not discounting future earnings anymore, but are simply adding them up. Is this the new norm or are we going to revert to historical rate levels? This is not an easy thing to answer, especially within the short term as central banks globally are not offering any reason to think that higher rates are in the near future. Of course, inflation could change that.
GlobalCapital: European equities finally seem to represent a serious value opportunity versus the US again due to the pandemic. Given that we are seeing some meaningful policy convergence from the EU around tackling the economic fallout from Covid-19, how constructive are you on the region?
I am extremely positive on Europe, for many reasons beyond just value. There are indeed some really big catalysts for this value to be unlocked. Firstly, as you mention, the EU seems to have learned a trick from previous crises responses, and we can see that policy response this time, both monetary and fiscal stimulus, is more coordinated and meaningful in size. Secondly the EU Green deal is a big deal. For example, some €750bn has been put aside for the emergence of a clean hydrogen industry in Europe, and this is something in which Europe is now leading. Given existing leadership in renewables, there is an exponential acceleration in green energy and technology in Europe. Thirdly the anatomy of European markets has historically been heavily weighted by banks, fossil fuels, and coal and gas. Utilities are rapidly changing however — renewable is a good example, but the same is true for new innovations and technologies across many sectors, including manufacturing and B2B, where Europe has some very interesting leaders.
GlobalCapital: Covid-19 ended the IPO plans of many companies this year, before something of a revival in Asia and the United States. Europe remains very quiet. Are there any opportunities you are excited about and sectors where you would like to see more new listings?
Yes, IPOs slowed but we have seen a flood of primary raisings from companies looking to opportunistically shore up their balance sheets and emerge stronger from the crisis. The IPO market is also re-opening gradually as investors and issuers are getting more comfortable with virtual roadshows: we have seen this with JDE Peet, an $18bn coffee producer in the Netherlands, and also smaller companies like Italian capital goods company GVS.
GlobalCapital: Biopharmaceutical companies seem to be emerging as the new tech stocks during the pandemic and have been huge drivers of performance. How excited should investors be about this sector? Are there reasons why we should be cautious?
There is the hype associated with Covid-19, vaccines and ventilator equipment, but the growth in biotech is far from just a short-term phenomenon, and there are very good reasons to be excited about the long term. Increasing share of life science, automation and digitalisation of drug manufacturing, is what Moderna is essentially doing with mRNA to accelerate vaccine discovery, and more are all applicable to the entire drug discovery industry and these trends can accelerate FDA approval and time to market.
GlobalCapital: Aided by a relaxation of the rules around preemption, London-listed companies have led the way in raising equity capital during Covid-19 to repair their balance sheets or take advantage of the opportunities that it has created. Should more European jurisdictions look at giving companies greater flexibility around preemption?
Yes, this is often discussed. Relaxing rules always creates additional flexibility. It would help many markets and companies. This is a widely debated topic, but I think there is also more conservatism on the continent when it comes to equity raisings.
GlobalCapital: Given the rise of PrimaryBid in the UK, how much of a role should retail investors play in recapitalisations? Should recaps be mainly left to the professionals?
This is a very interesting topic, and, of course, one that’s hard to answer. They do have the backing of some large and respectable institutions which understand retail and high net worth individual investor involvement, but where you draw the line and how much retail participation is healthy before becoming toxic is an open question.
Another difficult issue is the fact that non-professional investors will have a tougher time understanding the risks they are underwriting. I am watching this trend with great interest and curiosity.
GlobalCapital: There have now been several serious accounting scandals this year, such as NMC Health, Wirecard and Luckin Coffee in the US. Many questions have been raised about the role of auditors and regulators. What do you think fund managers can do in the future to try and prevent such scandals?
I think there is a huge amount of work going on between regulators, auditors and lawyers to codify some lessons here. Scandals and fraud are always going to be around and it is true that they tend to unfold more often than not during times of crisis. If we want to shorten the time period in which these frauds take place we need to raise the bar of transparency for auditors and corporates. For me the lesson from Wirecard is that the whole saga could have been a lot shorter if the company had been forced to provide more transparency earlier on, rather than being protected by a short-selling ban. Trends in ESG investing should be helpful with things like this.