Jun 12, 2018, 10:06 PM ETConference Presentation, Panel, Fireside Chat

Asset Management Outlook

Global Assets Under Management (AUM) are projected to reach $145 trillion by 2025, an increase from $85 trillion, according to a late-year PwC study.
Growth drivers include retail investing, Exchange Traded Funds (ETFs), and alternative assets like real estate.
Passive management is expected to outpace active management growth, though active management will still expand.
Two Sigma CEO David Heinke estimates current passive management represents ~25% of global assets and foresees it growing, but not reaching the 80% threshold.

The active management sector is experiencing a bifurcation between "true alpha" (rare) and "risk premium collection."
Two Sigma predicts a shift in the definition of alpha, beta, and passive investing as asset allocators gain more transparency and control.
David Hunt (PGIM) notes a convergence of public and private securities, with alternative asset valuations (P/E ~11) now matching long-only public securities.
Former State Street CEO Ron O'Hanley predicts a continued shift from traditional active mutual funds to ETFs used as building blocks for managed portfolios.
Small, long-only public securities firms face significant challenges, while large firms are diversifying across all asset classes.
MetLife CEO Steve Goulart notes that consolidation will continue, driven by the need for capital to invest in technology, regulation, and workforce needs.

Two Sigma operates with a 2/3 research/technology and 1/3 finance staff ratio, founded on the premise that data and technology would dominate investment management.
PGIM is blending alternatives and private investments to create products suitable for meeting long-term liabilities.
MetLife directs over 50% of its new money investments into private or illiquid assets (commercial mortgages, private infrastructure debt, real estate equity) due to compressed yields in public markets.
Logan Circle Partners ($38 billion AUM) was acquired by MetLife to expand its specialty fixed income capabilities.
The Ontario Teachers' Pension Plan (OTPP) utilizes "active management" by directly acquiring companies and infrastructure platforms (e.g., Cadillac Fairview) to drive operational EBITDA growth.
OTPP reports a 1.5–2% annual outperformance against benchmarks over 27 years through direct ownership and platform building.
OTPP maintains a defined benefit plan surplus of $10–15 billion with a real discount rate of 2.75%.

OTPP views ESG integration as critical to fiduciary duty, balancing the need for returns with environmental, social, and governance risks.
The "social" pillar of ESG is identified as the most difficult to navigate due to intense pressure from captive stakeholder groups (e.g., teachers demanding exclusion of weapons manufacturers).
Ron O'Hanley (State Street) frames the evolution of ESG from "thou shalt not" (exclusionary) to "thou shall" (positive) to integrating ESG into the formal investment risk framework.
State Street emphasizes that effective governance requires strong, independent boards, noting conclusive evidence that gender parity on boards correlates with better long-term performance.
State Street commits to voting against board candidates who fail to move toward gender parity, acknowledging that passive portfolios cannot simply divest from specific companies like the S&P 500.
MetLife's Steve Goulart warns against the "slippery slope" of ESG, advocating for a focus on risk factors that impact investment viability over a 10–30 year horizon.
The U.S. Department of Labor recently issued guidance suggesting 401(k)s need not necessarily be ESG-focused due to uncertain returns, a point of contention regarding evidence and definitions.

2017 market quietness is described as abnormal; 2018 volatility is considered more normal for long-term investors.
David Hunt argues that volatility is not risk; the primary risk is deploying capital at richly priced levels, making pullbacks potentially beneficial.
PGIM warns of potential liquidity shocks in illiquid OTC products and fixed income, exacerbated by post-financial crisis regulations reducing bank balance sheets.
Half the number of publicly traded companies in the U.S. exist compared to 15 years ago, with IPOs at near-record lows and private equity raising record capital.
This "de-democratization" of markets limits individual investor access to high-growth technology firms that formerly went public.
Regulatory burdens (e.g., Sarbanes-Oxley) and quarterly earnings pressure are driving more companies to stay private longer or go private via private equity.
Private credit has boomed, filling a void left by reduced bank lending, effectively pushing systemic risk into the shadow banking system.

Two Sigma has productized its internal optimization and execution technology as a service, now installed with 60 institutions in the U.S. and Europe.
Two Sigma emphasizes a "scientific mindset" over simple technology investment, warning that AI expectations are currently "way ahead" of actual delivery capabilities.
David Hunt and others describe the current state as "man and machine," where technology assists human decision-making rather than replacing it.
Two Sigma warns against "overfitting" and spurious correlations in machine learning, advocating for rigorous scientific research to eliminate human bias.
State Street's digitization effort is running ahead of schedule, targeting $550 million in cost savings by 2020.
Blockchain technology is being explored to reduce settlement times for illiquid assets (e.g., bank loans) to match the speed of liquid ETFs.
Steve Goulart describes AI as "overhyped" in broad terms, noting its success is currently limited to narrow fields like machine vision and speech recognition.

Demographic shifts in G7 countries (more people over 60 than under 20) pose a long-term risk to talent attraction in the asset management industry.
Competition for top data scientists and engineers is intense, with tech giants (Google, Apple, Netflix) capturing the majority of graduating MIT classes.
U.S. public plans struggle more than Canadian counterparts in attracting and retaining high-quality investment staff and technology talent.
OTPP attributes its success to a mission-driven culture ("helping people realize hopes and dreams") and a broader, diverse talent pipeline including international locations.
The industry's value proposition is shifting from traditional trading roles to data science and research, requiring a new cultural DNA of innovation.
State Street utilizes global talent pools (China, Poland, India) to mitigate domestic immigration and labor constraints.