Asset Management – the next 10 years
What will asset management look like in 10 years-time?
Well despite the headlines you may read, what it won’t look like is –
One global player using an Artificial Intelligence driven algorithm to invest passively on a rigorous ESG basis and doing it all for nothing.
Change in investment management is incremental . Think back 10 years ago and compare today to see how nuanced changes can be in asset management. Neither the past nor the future is a thoroughly different country.
But there will be change.
And there have been a number of very solid forward looking thought pieces recently notably from PWC and McKinsey which look at this.
Where are we most likely to see changes?
The Firm
Fewer names? Probably. It’s hard not to see consolidation continue and mainly due to, on one side, the cost of the regulatory infrastructure necessary, coupled with pressure on fees. In asset management it’s not just large acquiring small, but industry leaders are also very open to corporate activity – viz Standard Life and Aberdeen. Regulators globally are very focussed on the systemic risk of asset management. And the industry hasn’t been doing itself any favours recently with high profile cases around issues such as liquidity and closet indexation.
But the reason for the “probably” above is that we may also see a wave of pure investment-
only firms emerge. The “hub and spoke” model with the centre providing finance and compliance functions to a wide number of stand-alone boutiques has much to recommend it. Where investment firms do look to outsource functions such as compliance or governance it will be very important that roles are clearly demarcated and responsibilities fully carried out.
Income
Fund management fees have come down – and will continue to do so. In the US as an example, headline fees charged dropped by 25% in the past 5 years. There are two seismic forces driving this. Firstly the increasing availability of, and choices within the whole area of indexed funds, ETF’s etc. As volumes and competition grow we will see further price pressure.
And on the other side we have the increasing role of financial regulators who are rightly demanding transparency, value for money, and clarity around fees. Both the Central Bank of Ireland and the FCA in the UK have expressed concerns here – specifically on performance fees. Today there is still too wide a range of fees being charged especially at the retail level and we should expect average fees to fall further. However we shouldn’t confuse price with volumes. The asset gathering industry will see significant growth over the next 10 years, and for the winners this will offset any pricing pressure.
The Product
Will investment managers be manufacturing the same product in 10 years-time. Based on the trade press you would be forgiven for thinking all the demand and attention will be on alternatives, passives and ESG strategies. Certainly the clamour around ESG is deafening and practically every manager seems to have an offering. New government directives on ESG for pension funds will support the market’s attention span. I believe this is more than a passing phase, and we will see more investment following the ESG theme. However there needs to be a winnowing out amongst all the current offerings, greater consistency in what actually determines an ESG process, and greater scrutiny of performance amongst providers.
Does this imply the end of what has been a core asset class of many funds – active equities? Recall the BusinessWeek cover from 1979 entitled ‘The Death of Equities”. Well once again any obituaries might be premature. McKinsey estimate that in 5 years-time, active equities will still represent the second largest component of investment management revenue. Active will have to be active, with no hint of closet indexing. And be demonstrated through high active share, concentrated portfolios and……..performance.
So where will the change be….?
So definitely we will see incremental change across most aspects of investment management, but where are we likely to see the greatest dynamism? The PwC study, which looks at the alignment between what managers deliver and what customers want, provides clear direction. Where managers fall short of investor expectations is in the retail side, rather than the institutional arena. The large institutional investors typically have partly designed the offering, negotiated fees and are focussed on operational issues. Retail investors would like managers to go further – more focus on advice, greater ease of transacting, aligning fees with performance and greater transparency. Technology can help with some of these issues but will require investment.
The role and importance of platforms in the selling and distribution of product will grow. As recent events in the UK have shown the nature of a platform whether promoting funds or simply facilitating sales may need clarity.
All of this has implications for the skills needed in the industry. It will also lead to the continued “rise of the financial planner”, model portfolios and independent advice.
It is perhaps this retail arena that will have the greatest “look” of change in coming years. Elsewhere change will unrelenting but familiar.
Tradewinds 