The first postcard represents the financial markets after a year of strong increases: is the Bear around the corner? The second portrays the behavior of fund investors: the future is low-cost? The third breaks down European managed assets: are the alternatives at the end of the race? The fourth outlines the growth of attention to socially responsible issues: will sustainability become a dominant trend? Finally, the fifth is dedicated to the protection of savings: will MIFID II succeed in the enterprise?
Overheated market
Photography. The financial map of the globe is overheated. According to Morningstar statistics, about 60% of stocks trade above estimates fair value (i.e. the value that can be considered fair based on fundamentals). High profits and optimism in the stock market have pushed valuations to levels so high, they are only lower than the Internet bubble and the 1920 bubble.
Price/Fair Value Ratio by Country
The prospects. A recent analysis by Damien Conover and Richard Holt, respectively director of equity strategy and head of global equity research at Morningstar, suggests that these "exceptional" profit margins may not disappear completely when the cycle reverses course. “While we expect valuations to partially return to historically more normal values,” they say, “we believe the strength of the larger companies' competitive advantage will keep profitability above typical mid-cycle levels.” In practice, the Economic moat represents a defense against growing competition and rising costs.
Invest low cost
The photography. Investors often get the timing of entering and exiting a financial instrument wrong, and the cost of these mistakes is less than potential return. A Morningstar study, over a ten-year horizon, revealed that theinvestor return (ie the gain that takes into account the flows into and out of the funds) of subscribers of low-cost products was better than that of customers of more expensive sectors.
The prospects. In Europe, passive managements, including Exchange traded funds, represent just under 16% of the savings industry's total assets (excluding monetary). Although the percentage is growing, it remains small compared to the assets of active products distributed in the Old Continent (84%). In the United States, the index funds they represent over 35% of total assets and have higher growth rates than in Europe and other countries active funds stars and stripes (theorganic growth rate of the latter was around 0% in the US in 2017). However, the Mifid II directive, which will enter into force on 3 January 2018, introduces greater transparency on the costs borne by investors and will be a field on which competition between management houses will be played out. With it, downward pressures should increase.
Alternative trends
The photography. In 2017, the interest in funds that use similar strategies to those of hedge funds has eased compared to previous years. After the financial crisis, they have become very popular in Europe, as evidenced by the growth in assets, which rose from 143 to 438 billion euros in the last five years. Their success is linked to the search for solutions that are uncorrelated with the stock markets and therefore capable of producing a positive return even when stock markets enter a bear phase. However, they have often disappointed expectations, partly due to the high commissions, partly due to the misuse that has been made of them and partly due to the expectations of an always and in any case positive return.
The perspectives. Will these strategies be able to hold up when stock markets reverse course after a period of growth? This is the main question to ask when choosing an alternative fund, especially for products that have been launched in recent years and have never experienced a financial shock. In an adverse environment, the ability to complement and not replace a truly active equity or bond strategy will make the difference. Alternatives are not risk-free: they can improve a portfolio's risk/return profile, but don't assume that they always will.
Sustainable finance is making its way
The photography. According to Morningstar statistics, around 2017 socially responsible funds were launched across Europe in 150 (up from 2016 in 132), in addition to twelve ETFs (Exchange traded funds). Also for the latter the number is increasing compared to the previous year. Based on funding estimates, among funds that Morningstar classifies as “socially conscious”, those that have received the most flows are distributed in northern Europe, even if there is no shortage of products available in Italy (see table). Among the top 10 there are no ETFs: the first is twenty-first: iShares MSCI World SRI, which debuted in October 2017 and raised around 145,6 million euros.
The perspectives. 2017 began with concerns that Donald Trump's anti-environmental policies could deal a serious blow to sustainable finance. However, this didn't happen. On the contrary, says Jon Hale, director of topic research at Morningstar, the "trump effectwas to galvanize these investment strategies. Surely there is still a long way to go before it becomes a widespread trend both among institutions and savers, but the awareness-raising work done in Italy in the last year has been great and should bear fruit over time.
The protection of savings
The photography. The protection of savings is enshrined in article 47 of the Italian Constitution. However, cases of "betrayal" of this principle are still the news these days due to the events involving the subordinated bonds of Banca Etruria, Marche, the savings banks of Chieti and Ferrara, Veneto Banca and Popolare di Vicenza. Not that there was no lack of investor protection regulations, which, on the contrary, were strengthened after the financial crisis. However, they weren't enough. According to the Anac (National Anti-Corruption Authority), requests for access to the Solidarity Fund by the holders of subordinated instruments issued by credit institutions in liquidation would amount to 79,4 million euros. Will the EU Mifid II directive, which came into force on January 3, be able to guarantee greater protection?
The wheel of Mifid II
The prospects. Mifid II obliges intermediaries to put investors' interests first, therefore to build portfolios that are consistent with the latter's objectives and not dictated by the seller's commercial logic, to monitor them over time and to provide adequate advice and appropriate products for the customer. A reflection must certainly be made on the supply side, especially of those products that are more opaque, but also on the demand side. Profiling assumes that the customer is aware of the risk that he may run. But the 2017 Consob Report on the investment choices of Italian families reveals that 40% of the interviewees do not know how to indicate the risk of stocks and bonds.
