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How millennial minds are re-shaping fund selection

How millennial minds are re-shaping fund selection

We are edging towards peak millennial, according to Google Trends data, which measures the popularity of a theme based on how many times the specific term is logged into its search engine.

Since 2004, when analysis began, ‘millennial’ has gone from a fringe topic to one that has reached a 99% interest rating – which means the term is being searched at its greatest ever level – and has now slipped into day-to-day usage.

But what does this seemingly ubiquitous word actually mean from a selector’s perspective? Where better to start looking than at fund buyers across Europe who either sit within the prescribed age range or openly describe themselves as millennials?

Laurent Cattin (pictured), a 32-year-old fund analyst and portfolio manager at Gonet & Cie, certainly counts himself as one and says he ticks many qualifying boxes.

‘Besides my age, I share several characteristics with the ideal ‘millennial’. In comparison with my older colleagues, I tend to be more comfortable using social media and digital technology,’ says the Geneva-based selector. ‘Also, I must admit, I am addicted to my iPhone.’

Fund selector Julien Brun of Swiss group Mirabaud has just turned 30 and sits towards the middle of the typical millennial age range, which generally includes those born between 1981 and 1997, according to Pew Research.

‘As I read about this generation, I can easily identify myself,’ says Brun, who works within Mirabaud’s Paris arm. ‘Millennials are mainly born and raised in middle-class Western families. They witness big events like wars through the media, and are aware of climate issues and the impact of mankind on the planet within an increasingly digital environment.’

Another self-proclaimed match with the millennial mind set is Khaled Boudokhane, who knows about digital innovation first hand. The 30-year-old portfolio manager and fund analyst focuses on thematics at Candriam Investors Group, along with Peter Boelaert, and has noticed that many fund houses have latched on to the millennial trend.

While companies such as Swiss boutique Decalia and French company CPR have focused on the older generation through so-called ‘Silver Age’ funds, which invest in sectors such as tourism and healthcare, the millennial bracket is also being increasingly targeted.

Here, both independent investor Athymis and, again, Decalia, are among those offering millennial-branded funds which invest in sectors tied to the demographic group’s interests. Goldman Sachs also launched a fund aimed at this market as far back as 2012.

‘I have looked at some millennial funds and our team has already selected one of the Silver Age strategies, which is an interesting trend as longevity increases,’ Boudokhane says.

‘By comparison, a millennial fund could be one that looks specifically at disruptive technology and most of these strategies are focused on similar areas. We are looking at selecting a disruptive thematic fund at the moment.’

They’re leveraging social media platforms and mobile apps to do stockpicking and fund selection - Khaled Boudokhane, Candriam

However, despite the prevalence of these dedicated funds, Brun says there are other ways to tap into millennial thinking as generalist managers are aware of the changes and are adapting their funds accordingly.

‘Most fund managers are factoring in this changing lifestyle. This includes shifting consumption patterns, such as usage rather than ownership. There are also exciting possibilities which may see globalisation come to an end, along with new technologies that could turn out to be the next growth drivers.

‘The financial industry is exploring these trends, mainly through thematic products and some IT innovations. For example, Alipay raised more than $93 billion for its money market funds in 18 months through its app. This doesn’t necessarily mean we need to reinvent our products, but we may have to rethink how we distribute and market them,’ Brun says.

Boudokhane says firms that are willing to move with the times when it comes to technology are likely to attract more attention from the younger generation. ‘Their love for anything tech-related is not really a surprise and I think it is an advantage for them. It also allows them to be make more demands on the way they invest.

‘This is because they are leveraging social media platforms, social networks and mobile apps to do everything from stock-picking to fund-picking and this throws down a challenge for fund selectors. They are more loyal to brands which are technologically up-to-date.

‘Those under 35 are more likely to take advantage of online tools to access their investment, read reports and review portfolios, rather than waiting for quarterly reports by mail,’ he says.

Millennial investor

While they may be looking to access their investments in new and innovative ways, what do millennial clients actually want to invest in? ‘They are more risk averse,’ says Daniel Knörr (pictured below), senior portfolio manager for active equity and multi-asset at Talanx Asset Management in Germany.  

‘Today you can’t sell a fund or an insurance policy without some sort of insurance or risk overlay. In the 1990s we sold all these relative benchmark approaches, such as balanced portfolios that were half equities and half bonds, but you couldn’t do that today. Younger people are becoming more responsible and more risk averse.’

Knörr considers himself a bit of an outsider, having just turned 40 and identifying more with Generation X than millennials. He says research shows millennials tend to drink less, smoke less and get into less trouble.

‘Maybe it is because of protective Gen X and helicopter parents?’ he laughs. ‘Maybe we are telling them it is better to have more cash or older values. Perhaps it is the economic environment we are living in but the younger generation seems very risk averse.

‘They are also very cost conscious. They wouldn’t buy a fund with management fees of 150 bps, for example, but would like to access equity beta via ETFs and digital applications. It is the first generation which is growing up with digital mobile and tech and there is a clear preference for quant strategies.

‘Pure alpha managers are taking up a smaller slice of portfolios every year, while the proportion of passive and smart beta strategies is growing. I guess they are quite cautious on alpha managers as there is increasing evidence that these investors fail to deliver.’

Boudokhane says millennials may be more conservative and cost-conscious because they have witnessed the dotcom crash and the global financial crisis and have therefore learned to live in a world where risk is viewed negatively.

‘Having endured two major financial crashes, I don’t think millennials really trust public markets with their investments, so they tend to be a bit more cautious than older generations. They also believe business success should be measured by more than financial performance.’

This, he says, has led to a much keener focus on SRI/ESG criteria for funds. ‘Candriam has been at the forefront of SRI for about two decades.

‘Along with classic asset classes, we also have SRI-specific strategies. In addition we select specific thematics focused on innovative and disruptive technologies within this space such as clean tech, which promote sustainable, healthy living and respect the SRI standards.

‘It is really important to discuss SRI, because this has become a big driver in how millennials are investing as they feel this is a way to express their values. This could mean financial investing becomes more aligned with their social and political views.

‘Millennials are more likely to favour SRI strategies and less likely to believe such strategies will negatively impact performance,’ he says.

Cattin agrees. ‘Millennial investors are keener on the use of ESG/SRI factors in investment strategies. In my relatively short career I have noticed a significant shift from active to passive investments, but also a rise in sustainable and impact investing products, which looks set to continue.’

This emphasis on ESG is a common thread. Standard Life Investments’ 2015 study, entitled The rise of the millennials, highlighted social awareness as one of three major impacts millennial investors will have for the business community. An SLI poll found that investors aged 18-24 had the strongest inclination towards investing in companies achieving a positive environmental impact.

Millennial investors are keener on the use of ESG/SRI factors in investment strategies - Laurent Cattin, Gonet & Cie

Brun has experienced this effect first hand when meeting investors. ‘They need information and younger investors increasingly need to understand why and how their money is invested. So ESG/SRI funds are a real fit for millennials.

‘They are seeking performance with a positive impact and are confident that responsible investing and performance go hand in hand,’ he says.

Cattin concurs: ‘I am also much more sensitive to ESG factors when reviewing investments and I myself don’t own a car and go to work by bus.

‘Also, for example, I have just met one of our “millennial” clients to update him on the funds he owns in his portfolio. He was indeed a little bit more focused on ESG/SRI criteria, was more risk averse than the average investor from the baby boomer generation and was keen on using technology to manage his investments.’

Size and shape shift

Cattin believes the shape of the asset management industry is changing, with younger selectors and fund managers having a subtle, yet significant, influence on thinking. ‘I do notice younger managers and selectors at events, for example. But, I think this is just the beginning of a more pronounced trend.

‘In the cost-cutting, low-margin environment which is now the norm for banks, younger and often “cheaper” employees have an advantage. The average age in the industry should then continue to fall in coming years.’

Boudokhane (pictured above) is also encountering younger peers. ‘The average investor profile is changing and will shift dramatically over the next decade as the older generation ages and the millennial generation takes on more senior roles.

‘They form the next wave of investors for the asset management profession. As more and more millennials come into the industry we are likely to notice radical shifts in behaviour and client expectations.’

Cattin says part of this behavioural shift will show itself in more innovative thinking and a move away from traditional ideas. ‘Younger fund selectors are more likely to challenge the consensus and the so-called “experts”. They are less afraid to recommend new approaches to investing, like Big Data or artificial intelligence.’

Younger people are becoming more responsible and more risk averse - Daniel Knorr, Talanx AM

Knörr says demographics are changing but not necessarily for the better. He says there are fewer millennials seeking financial sector jobs due to the supposed limitations of working within big institutions and the industry is therefore becoming top-heavy with older investors having fewer successors in place.

‘I think we have a problem recruiting young talent,’ says the Cologne-based investor. ‘When I finished university, I got into finance and investment banking, that is where everyone wanted to be, but that has changed.

‘The top talent is going to Amazon, Google, whoever, but they are not going into banking. If they go into finance then they go to backyards and garages in Berlin or robo start-ups, which is a more attractive environment for them.

‘They no longer want to be in these giant buildings in Frankfurt or London working inflexible hours. They want to sit in a Berlin café with a MacBook, inventing new robo-advisers and participating in the success of the company as a whole.’

Sitting with a five-strong team of varying ages, Boudokhane disagrees, not only because he is an example of the younger generation coming through but he believes the blend of younger, innovative minds with established selectors is a winning combination.

‘The older generations have their experience in the markets and have lived through different environments. The younger generation can use technology, algorithms and so on, which can help us to be more efficient, but it’s the combination of the two that counts.

‘For example, when I first joined I used to develop quantitative tools to help make reports and analysis more efficient, but I also got help from older colleagues’ experience of financial markets overall.

‘Millennials who graduated after the crisis have also seen regulation coming in, I remember reading about it during my master’s, so we are used to that,’ he says. ‘This means the new generation can help the older one on this side but real experience is valuable too. You have to live through markets to know what to do and when,’ he says.

Out with old?

So millennials aren’t taking over just yet? Boudokhane laughs. ‘No, I think different generations are really complementary because this difference does not create friction. You have specific market conditions and you need advice from people that have already been through that’.

While the media portrayal of a ‘millennial’ is a young professional obsessed with cutting-edge technology, craft ale, healthy eating and political activism, Cattin believes the catch-all terms has its own pitfalls.

‘I think this generation is very diverse and evolves quickly, so one has to be very careful when using definition and numbers.’

This is backed up by Brun (pictured above), who is also wary of oversimplification. ‘I think it’s more appropriate to look at the context in which millennials are growing up, rather than wanting to assign common traits that tend to become caricatures.

‘Not all millennials are Facebook addicts with a strong aversion to authority, who dream of starting their own business. Our desire to categorise individuals risks of losing sight of the essential.’

Boudokhane says a lot of writing about millennials is rooted in truth but it can generalise. ‘We are said to be idealistic, for example. We care a lot about experiences more than possessions and want to make a difference in the world. For me it is a natural thing for young people to have this kind of mentality after they have graduated. Young people want to conquer the world.

‘If I look to my parents and grandparents, or older colleagues, when they were graduating and in their 20s they were also idealistic. Growing older makes you realise life is much harder than you expected it to be. That doesn’t leave much room for idealism.’

So, is the idea of a millennial flawed? Boudokhane doesn’t think so. ‘In the modern world, I think there is much more room to pursue idealism because we have an easier way of life and the technological tools to implement that.

‘Older generations don’t have what we have now and weren’t able to do what we can today with all the technological innovation. It is perhaps over-hyped as a description of young people growing up in a more technologically innovative society but I get more annoyed by people my age who insist they are not millennials than the term itself,’ he says.

This article originally appeared in the November edition of Citywire Selector magazine.

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