Eric Pan: “The rise of ‘unicorns’ has led mutual funds to increase their private investments”

Eric Pan, President and CEO of the Investment Company Institute (ICI), discusses the US markets’ rebound from macroeconomic challenges, AI regulation hurdles and the limitations of sustainability-focused policies, while sharing ICI’s priorities going forward.

It has been a challenging year for asset managers as revenues have fallen significantly across asset classes. How has the industry coped with these challenges so far and what strategies have proven effective in navigating this turbulence?

The markets are always up and down and it’s hard to predict the cyclical nature from day to day. Our data shows that total estimated flows into US long-term mutual funds and ETFs were US$15 billion in the week ending on September 13, 2023, followed by US$9 billion in outflows the week ending on September 20. September has frequently been a challenging month in the markets. Yet US money market fund assets are hitting record highs – up more than $900 billion this year – and we know that, broadly speaking, the US markets have bounced back from 2022. Fund managers take a ‘steady as she goes’ philosophy, given that our investors are here for the long haul.

Many are eagerly awaiting a market rebound. When do you expect this to happen? As the industry emerges from this period of turmoil, do you foresee any significant reshuffling of investment strategies?

It’s been encouraging to see a bounceback from 2022, although we remain off 2021’s historic highs. Despite the recent fall back, the US equity market is up significantly year-to-date. The investors we serve are ‘buy and hold’ people, not day traders looking to make a quick buck in the latest fad. Fund managers will keep doing what they’re doing – buying quality securities with a good track record, looking for growth where they can, and working hard to get good results for their investors.

In the competitive quest to win customers, especially in the aftermath of recent shocks, what strategies do you believe would yield better outcomes for asset managers seeking to attract and retain investors?

It depends on which investors you’re talking about. For example, someone saving for retirement has different goals from those of someone looking to put capital to work for the near term. One trend we have certainly seen is falling fees across the industry; mutual funds have seen fees fall consistently for the last 20 years, ICI research shows, as have UCITS products for the past decade. When it comes to individual strategies, our members work hard to show investors the latest and greatest and to keep offering great products at reasonable cost. Their flows and performance will speak for themselves but there have certainly been some notable successes.

Let’s focus on artificial intelligence, particularly AI co-pilots, which are the talk of the town. Do you see AI playing a significant role in asset management? If yes, in what ways?

AI will play an important role in our industry – but it remains to be seen just how significant that role will be. AI will have an impact across entire organisations – from creating operational efficiency in the back office to augmenting data analysis in portfolio management. I think the technology will amplify human work and capabilities, rather than replace humans. From a policy perspective, we have significant concerns in the US right now about the Securities and Exchange Commission’s (SEC’s) proposed rules governing advisers’ and brokers’ use of AI (and other technologies) in their investor interactions. The SEC proposal would impose onerous rules on the use of technology, discouraging its use. This is despite those very technologies having lowered costs and barriers to advice for investors for the past several decades. ICI will be weighing in strongly with the SEC here.

Switching to sustainable finance, the strategy adopted by policymakers in both the US and the EU is to pressure financial institutions to redirect capital toward greener companies and technologies, which inevitably affects ICI and its members. What are your thoughts on these sustainability-focused policies? Are they fit for purpose?

Different jurisdictions will take different approaches. In the US, the approach taken by California’s legislature is very different from the one pursued by some Republican members of Congress and state officials. And the US SEC is still working on disclosure rules for funds focused on ESG-related investment strategies, and public company climate-related disclosures. We don’t know how those federal rules will shake out – for example, there’s lots of debate around whether public companies should be required to disclose their Scope 3 greenhouse gas emissions, and whether the data exists to make this standard a viable part of disclosure at this time. We do see a renewed push in the EU for greater availability of sustainable products. Similarly, they are working towards improved disclosure and classification regimes that retail and institutional investors all understand. What we have learned from the EU experience is that there are limits to what regulation can do to direct capital. We question whether the regulation of investment products is the appropriate way to accomplish the policy goal of achieving net-zero investments. Fundamentally, it’s up to individual investors to decide how they want their money to be invested. ICI members provide a range of options, from renewable energy strategies to investments with a social impact focus, to investments that track very broad indexes. The investor will choose.

On the investor side, retail investors are facing challenges in accessing opportunities, particularly as more companies remain private for longer periods and early-stage startups remain elusive; it also affects mutual funds. Do you see this as a real problem, and if so, what steps should be taken to address it?

Remember, registered funds are sophisticated investors and can invest in privately offered securities, including private funds. For US mutual funds and ETFs, there is a 15% limit on illiquid investments, which these offerings tend to fall under. As you say, more companies are remaining private for longer. The rise of ‘unicorns’ has led mutual funds to increase their private investments, as Morningstar notes. Registered funds all have strong investor protections, mitigating many of the concerns that regulators have raised about private investments. They are a valuable way for retail investors to gain exposure to private markets. And our capital markets in the US are deep, liquid and vibrant. There’s plenty of opportunity in our capital markets, despite what the headlines sometimes say about the public markets. In the large countries of the EU, we’re trying to get more people investing for their future rather than parking their life savings in an interest-bearing bank account. We’re supportive of much of the recently released Retail Investment Strategy – an effort to engage and empower the retail investor – so watch this space!

Looking ahead, what are the top priorities for the Investment Company Institute in advancing the interests of its members and addressing the evolving needs and challenges of the asset management industry?

ICI is proud to represent regulated investment funds and work for the ultimate benefit of the long-term individual investor. Next year is the 100th anniversary of the mutual fund in the US! It’s a great time to talk about the benefits of this trusted investment vehicle and the other products we represent. Our top priorities include expanding access to and choice of regulated funds for younger people, encouraging them to take greater control over their future economic security. Also, looking at how technology will enhance the investor experience, as well as working to lower regulatory barriers that prevent the provision of asset management services across borders. Finally, urging policymakers to recognize the importance of market-based finance in promoting economic growth.

This interview first appeared in the October edition of GOLD magazine. Click here to view it.