Panel, Conference Presentation
The Evolution of Asset Management
- The asset management industry is projected to grow its customer base and revenue over the long term if it delivers products at the right price, with short-term revenues driven by market conditions and long-term revenues determined by organizational performance and customer acquisition potential.
- Costs are expected to decrease significantly through technology, data analytics, and blockchain automation, allowing savings to be passed to customers and operating profits to shrink to sustain margins amidst fee compression.
- Industry returns are projected at 5-6% over the next 5-10 years, falling short of the 7.25% required target, which will likely drive a shift toward private equity, private debt, and alternative asset classes like venture capital and real estate to generate alpha.
- A structural shift is occurring from defined benefit plans, particularly in Northern Europe facing de-risking pressure, toward defined contribution and individual investor-driven wealth management, with potential for DB plans to resurface as corporate savings portfolios within five to ten years.
- Distribution models are transforming from large-scale institutional sales to one-on-one individual interactions, driven by the need for transparency, liquidity, and the ability to avoid herding problems through client heterogeneity.
- Investment strategies will increasingly blend fundamental and quantitative approaches, with factor benchmarks replacing broad asset classes as sophisticated investors seek specific factor exposure, while the number of alpha models is expected to surge from 100 in 2007 to 10 million signals.
- Operational functions will evolve through the adoption of artificial intelligence, large data, and distributed ledgers, with middle offices becoming more automated and internal asset management practices emerging at institutional investor organizations to enhance control and transparency.
- Fees are expected to decline generally, shifting from fixed bases to sharing ratios to align interests, as investors will pay for alpha but not for beta or factor exposure, with significant pressure from low-cost competitors such as Amazon Finance.
- Emerging markets represent a significant source of growth for customer acquisition, characterized by sovereign wealth funds and individual investors willing to diverge from the traditional US-Western European models.
- The sector faces regulatory challenges requiring fiduciary behavior and prudential safeguards, particularly in the 401k space, with potential legal liabilities for sponsors if promised returns are not met or if bad actors destroy the path forward.
- Global connectivity and talent matching are becoming essential, with organizations operating across 22 offices to leverage statistical global talent distribution and exponentially growing computing power.
- Systemic risks are anticipated to decline due to data diversity and methodology differences, though liquidity mismatches remain a concern if players over-leverage; however, ETFs and arbitrage mechanisms are expected to mitigate some of these risks compared to mutual funds.
- The industry will experience a "shape-shifting" product evolution where offerings bifurcate and merge into forms like smart beta, while the business relationship with clients undergoes dramatic changes in a very quick timeframe.
- Shadow banking and private investment are expected to expand to track purchases and provide portfolio impacts as traditional banking systems face continued regulation, potentially filling the void for unregulated capital provision.
- A generation of workers retiring under defined contribution schemes may face return shortfalls, leading to lawsuits where sponsors must cover differences, while the need to accumulate retirement wealth remains unchanged despite longer lifespans.
- The industry will see heavy investments in data access and technology, with diminishing returns on data becoming a function of the algorithm used, and most large managers increasing internal capacity for risk management and passive index trading since 2009.