Federated Hermes head of business development, UK & Ireland Dan Churchouse discusses where the firm is anticipating demand from wealth managers, ESG integration and how asset management could look in 10 years
Where – and why – are you anticipating demand or fund flows from UK-based wealth managers and their clients over the next 12 months?
Last year was marked by ‘US exceptionalism’, which led to demand for US funds, while Asia and emerging markets funds suffered a challenging 2024. This year we are seeing a reversal of this trend following the fiscal stimulus in China and a softening in US economic sentiment.
With clients trimming their US exposure from historical highs and re-evaluating how they play what remains by far their biggest equity allocation, active managers should benefit from the volatility. Fund selectors will need to look to stockpickers to determine who will be the winners and losers in this changing landscape.
Persistent inflation concerns are also calling into question the speed of interest rate cuts as central banks aim to reconcile stagnating growth and inflation concerns. As such, I expect money markets and short-duration bonds to continue to garner wealth manager support.
How are you planning to address and serve that interest?
At Federated Hermes, we are fortunate to have a well-established reputation among wealth managers for Asia and emerging markets strategies – particularly for our Asia ex Japan fund, which is widely held across wealth manager buy-lists. We hope to see greater interest in these strategies as investors re-evaluate their portfolios.
Also, with money markets offering an attractive yield to bank deposits, our reputation as a leader in cash management strategies combined with broad platform availability should see us continue to gather assets from the wealth channel.
For those continuing to play the US market we have our US SMID Equity fund investing in around 50 smaller and midcap US stocks. This provides investors with quality-oriented access to US domestic companies with the potential to benefit from Trump’s proposed policies of deregulation and government efficiency. We are also looking to bring other US capabilities from our parent, where we believe they can add value for our European clients.
Are you seeing a divergence in the demands of UK wealth managers versus, for example, their peers in Europe or on the institutional side in the UK?
The UK wealth market is a bit behind other European jurisdictions in the adoption of private markets with fund platforms as yet unable to accommodate evergreen structures. The growth in private markets demand from other jurisdictions is phenomenal and I do not think the FCA will achieve its desired democratisation unless something changes here. DC schemes are expected to dramatically increase their private markets exposure and as the weighting of DC to DB assets continues to increase, you are likely to see a parallel increase in aggregate risk premium in pension books.
As a business, how do you define ‘alternative’ and ‘private’ assets and to what extent should asset managers be looking to service investor demand here?
I think of alternatives as anything beyond equities, bonds and cash. This is a term that encompasses non-directional public markets strategies – such as uncorrelated equities and fixed income – real assets, private equity and private debt.
The FCA is keen to see the UK pensions and wealth markets embrace the democratisation of the private markets story, creating an opportunity for asset managers who can deliver attractive investment capabilities in evergreen structures. The expected pooling of local government pension schemes also creates an opportunity for asset managers who can deliver private-market solutions at scale – particularly those with capabilities that are aligned to UK domestic growth.
‘ESG is dead – long live ESG 2.0’ – your thoughts as a distributor, please?
‘ESG’ means different things to different people and tends to be used interchangeably with ‘sustainable’ when defining investment approaches. ESG integration makes good investment sense and is part of delivering superior risk-adjusted returns for clients. Properly assessing systematic risks within a business model and acting as an active steward of client assets is part of an active manager’s fiduciary duty.
What drives your approach to client communication? And is there a case for focusing on attracting the ‘right’ type of client?
Our approach has always been to focus on sophisticated fund buyers and the players who continue to benefit from the outsourcing of investment decisions away from financial advisers to discretionary wealth players. Our pension scheme heritage has served us well as wealth managers expect institutional-grade client servicing.
Our goal is to provide clients with timely market commentary from the managers they are invested in, in a digestible format. We are making increased use of social media and video to bring this to life. We are also using sales enablement tools such as market data providers to ensure we are contacting the right people at the right time.
Outside of work, what is the strangest thing you have ever seen or done?
I was employed as a Father Christmas by Hamleys during my university days and paraded the streets with other unfortunate students who needed some holiday cash.
May we have two book recommendations, please – ideally, one with an investment connection?
Fictional: The Book Thief by Markus Zusak.
Business: Richer/Wiser/Happier by William Green
Gazing into your crystal ball, what does the asset management sector look like 10 years from now?
On both the wholesale and institutional sides, I expect further consolidation at all levels of the value chain, with fewer wealth clients driving a larger proportion of overall flows and consolidation in the local government pension scheme space in line with the chancellor’s goal to increase efficiency and get UK pensions investing for UK growth. I believe these trends call into question the historic delineation between institutional and wholesale distribution channels given the process by which clients select investment strategies, and the structures by which they access them, are becoming increasingly aligned.
Across Europe, there are signs of clients consolidating the number of asset management partners they work with, meaning groups with breadth of investment capabilities, who are able to offer an increasingly globalised client base solutions across jurisdictions and structures are well placed.
Client relationships are becoming more partnership-based rather than purely transactional, with clients turning to asset managers for value-adds beyond the strategies they invest in. Asset managers will need to have a clear brand identity with the client experience at the heart of how they present themselves to clients.
While the mainstream UK wealth market has been slower at adopting evergreen private market structures than other jurisdictions, private market allocations are set to increase substantially on the defined contribution side, creating an opportunity for pure-play private market managers to diversify their defined benefit client book. We are also seeing traditional asset managers enter the space, acquiring investment teams, private market firms and reshaping distribution to establish dialogue with potential buyers. Expect more M&A to this effect.
“With clients trimming their US exposure from historical highs and re-evaluating how they play what remains by far their biggest equity allocation, active managers should benefit from the volatility.
