Conference Presentation, Panel
The Asset Management Outlook
- The asset classification system is expected to evolve away from arbitrary categories to improve efficiency, with current categories like the 10,000 hedge funds facing attrition; only 100 to 200 funds are projected to merit institutional capital, and net fund numbers are expected to decline within five years as firms unable to deliver alpha or diversification exit.
- Over the next decade, active management will undergo a massive shift where strategies previously viewed as alpha may be re-categorized as risk premium and command lower fees, while pure uncorrelated alpha remains scarce and insufficient for most large institutional investors.
- The beta business is projected to become a winner-takes-all market driven by brand, scale, and efficiency, with fees declining in aggregate due to increased efficiency and asset owner power, though fees for the few consistent alpha generators may rise; overall fee dollars are expected to grow approximately 6% driven by asset growth and asset mix rather than basis point increases.
- Investment strategies will increasingly rely on operational improvements in real estate and management changes in private equity, necessitating a talent shift from financial risk expertise to operating and engineering skills to manage the global influx of capital into illiquid assets like real estate, infrastructure, and private equity.
- Technology is anticipated to be the single most powerful force over the next decade, surpassing regulation, by leveling the playing field for smaller allocators, eliminating information asymmetry, and enabling quantitative portfolio construction from sovereign wealth funds to mass affluent investors, while retail participation in illiquid assets carries a risk of poor timing and market impact.
- Political risk is considered the new normal globally, and while immediate elections may not alter long-term equity risk, a potential future shock could occur if investors fail to achieve 7-8% returns over 10 years, leading to societal impacts such as reduced medical research and fewer scholarships.
- The market is expected to remain efficient with low volatility until an unexpected shock accentuates return dispersion, while family offices in Asia, particularly China, will emerge as major capital pools bidding up prices in illiquid markets and competing for limited selection talent.
- U.S. public pension plans face structural impediments regarding talent depth and compensation models viewed as expenses, requiring a rethink of the talent model to avoid poor outcomes and to generate the 6-7% returns needed, whereas Canadian plans serve as a contrasting model; the business will consolidate into fewer firms with global capabilities to absorb high fixed costs of technology and brand infrastructure.
- Investors lacking the skill to identify talented managers are expected to face disappointment if they remain active, with a recommendation to opt for passive strategies unless they can effectively disaggregate returns into alpha, risk premium, and beta; the next generation of wealth creators will be more globally minded, comfortable with technology, and focused on impact investing.
- A flood of capital from family offices and global institutions is expected to compete for the same talent pool, while large institutional investors currently hold record cash levels awaiting market corrections; political shifts like NAFTA renegotiations are not expected to radically alter outcomes due to supply chain interconnectedness.