Leif Schönstedt discusses current challenges faced by asset managers, adapting to new technologies and regulations, and how, despite digital offerings becoming a new norm in a COVID-19 world, you can never underestimate the significance of direct contact with clients.

Interview Leif Schönstedt

Christian Boeth (CB): In which of your business areas do you see the greatest need for innovation?

Leif Schönstedt (LS): Cost sensitivity along the entire value chain for institutional clients (IC) remains important. IC margins are tight/getting tighter and must withstand intense competition, therefore, innovations are needed in all business areas of the IC factory. Product-related cost blocks in fund management (securities and real estate) and fund services, as well as non-product-related staff costs must be maintained and reduced through innovations. We’re talking about innovations such as platform solutions that are tailored by the specialist departments themselves; new technologies such as blockchain/DLT for processing, customer communication, and contracts; and the ability to become more flexible and connected to customers’ systems. Modular product standards can reduce service costs in sales. Plus make-or-buy decisions in the expansion of the asset class range (e.g. alternatives: private debt) or the introduction of technology (e.g. DLT) must be taken into account.

CB: Do you see FinTechs as competition and are there areas where you can learn from them?

LS: Currently, FinTechs are not (yet) competition for institutional business. Regulated customer groups (e.g. banks, pension funds, insurance companies, foundations) rely on the stability of the ownership structure and stability of the infrastructure due to their own outsourcing and regulatory requirements of the regulatory systems. AI and solutions such as Robo Advisor still play a subordinate role in institutional business.

However, FinTechs provide very good service solutions (e.g. reporting, contracting, customer communication, platform programs, DLT solutions) that can be built on top of traditional products (fund solutions, asset management solutions) and help us with make-or-buy decisions. It is therefore conceivable to outsource the technological implementation of new solutions and, as an asset manager, to contribute our own USP, the customer relationships. 

CB: What are/were the biggest challenges you faced during the COVID-19 crisis? How have you dealt with or will you deal with these challenges?

LS: The technology and stability of the systems were not a challenge. The lack of direct customer contacts (at home and abroad) was problematic. Digital solutions in communication are not optimal solutions in institutional business and, in my view, can only lead to success as a supplement. As our relationship managers were very busy with our existing clients, we benefited from the efficiency gains from switching to digital communication for a while, but as soon as the opportunity arose, personal client contacts were revived. The same applied to internal cooperation. What used to be discussed through short office channels now took several digital appointments. Even random encounters that led to creative solutions were made more difficult digitally, but were partially compensated for via the newly created digital workplace with agile working methods. Managers were challenged not to "lose" the team, regular exchange formats were implemented across business units, and even the onboarding processes of new employees were partly digital. Cross-functional teams worked cross-business hybrid (digital/on-site) on the most important topics and projects. At the same time, the clients' need for information increased sharply—here, our reorganization of digital events (fortnightly capital market forums) and the reorganization of the social media strategy on LinkedIn helped in a client-oriented way. Digital communication channels will continue to be used in the future, such as for the pure transfer of information. However, personal customer contact cannot be replaced by a digital offering.

CB: How do you want to position yourself in the future with regard to sustainability-related products and topics?

LS: In the past, sustainability was considered as a separate issue—which was important in order to look at the subject in its entirety and identify the challenges. Sustainability also existed in parallel with risk management—our USP in institutional business. In the future, the topics will be more closely integrated— sustainability will be an integral part of everything we do—on the portfolio management side as well as in our internal processes at UIG. This means that the integration of sustainability processes and thinking in portfolio management, product development, marketing processes, settlement, and reporting processes will undergo an evolutionary stage. We want to accompany the transformation process of the economy and direct the capital flows to the right areas within the framework of the transformation. We also will apply our proprietary sustainable transformation ratings in portfolio management. In my view, this will be an important USP for us as an active fund manager.

Sustainability is therefore no longer a state for us, but a process. In order to achieve the sustainability goals of, for example, the UN PRI or the Paris Climate Agreement, more companies and states must participate with even more ambitious efforts. In managing sustainable mandates, Union Investment therefore combines a best-in-class approach with the idea of transformation. This means that for corresponding products, we not only invest in securities that are already sustainable according to our ESG criteria. Rather, we also include securities in which the issuer is pursuing a credible, ambitious, and verifiable transformation strategy in order to be among the best issuers within a defined timeframe.

Our goal: On the one hand, we want to achieve a higher impact by supporting issuers in transforming their business model. On the other hand, we want to participate in the value growth that arises in the event of a successful transformation—and thus generate an attractive return for our investors.

CB: How do you deal with the issue of "greenwashing" in view of the current media coverage?

LS: Irrespective of the accusations made against our competitors, we are convinced of our sustainability approach and the established processes. For us, sustainable investing is based on three instruments: exclusion criteria, data analysis, and engagement. The investments we manage can be grouped into three categories from a sustainability perspective:

1. General exclusion filters apply to all investments (total AuM volume in the Union Group) such as the prohibition of participation in the production of outlawed weapons, in derivatives on agricultural commodities, or in companies with a share of turnover of more than 5% in coal production. Our engagement activities also cover all investments in principle. However, the data necessary for the application of serious, adequate, and beneficial ESG analyses are not available for all securities—yet. It is an ongoing process to gather all relevant data. Therefore, we are currently not (yet) ‘fully ESG integrated’.
2. Wherever the necessary data is available, we apply the ESG integration approach in the management of our funds. Here, ESG risks or factors are also systematically included in the fundamental securities analysis across all asset classes.
3. In addition, a volume of around €74 billion is managed according to even more comprehensive, explicit sustainability criteria. Proprietary ESG filters (adapted to special and mutual funds) are used for these sustainable investments.

Currently, a complete integration of ESG criteria across all investments is not possible due to the poor but also more complex data situation. ESG data is currently being collected in order to gain full integration , but data is the bottleneck, as it is not always easy to obtain or process, for example due to the monopoly position of data providers.

CB: How are you positioning yourself in the area of digital assets and how relevant is the use of AI or alternative data in your investment process?

LS: As asset managers, we work with large amounts of data that need to be processed. This is not just return data, for example, but also information data. We are already using AI for this purpose. Robots are used at many points in the value chain (front to back) to help us process this data or carry out quality assurance. This is already the industry standard today. In the future, this process will be successively expanded, for example by combining AI and robots or via the blockchain. Solutions such as cloud, AI, and blockchain are currently being discussed and questioned at our company as to what is the right fit for us. In some places we have to start first; in others it makes more sense to wait and be smart followers.

With regard to crypto or digital assets, however, we notice that demand from institutional clients is still very low. This is probably due to uncertainties that still exist, but more and more issuers are looking into issuing digital assets. We have already participated in test transactions and therefore feel well-positioned. However, this does not mean that we see ourselves as capable of connecting to, for example, DLT solutions; this topic will challenge us over the next years.

CB: What expectations do you currently see among investors that you have to satisfy?

LS: A sustainable return must be realized that adequately pays for the risks I take with my capital investment. This is no longer possible through working exclusively with the traditional asset classes, but increasingly through the alternative or real estate asset classes. As asset managers, we must therefore be in a position to cover these asset classes. It is possible that crypto will also be one of these asset classes in the future. At the moment, there is a demand for options such as private debt that used to be done by banks to be realized by investors themselves without the involvement of intermediaries.

In addition, the regulatory framework is becoming more and more complex and is a great challenge for our clients if they want to invest in such asset classes. Therefore, as an asset manager, we not only offer the asset class, but also the associated services such as regulatory reporting and direct connection to the clients' systems. This is an important experience for us. When we offer a new asset class, we must also be in a position to offer the associated services on a customized basis. Only the two together ensure investor satisfaction.