Conference Presentation, Panel
What's Driving the Asset Management Industry Today?
Milken InstituteKaren Tso, Michael Freno, Michele Gesualdi, Rick Lacaille, Gregory Williamson, Greg Williamson, Rick Lakai
- Developing markets, below investment-grade credit, and less liquid segments are expected to remain somewhat resistant to passive investing for the foreseeable future, though this is predicted to change as data and technology evolve.
- Active managers must continue to demonstrate alpha to justify their existence; without it, these segments are expected to shift toward passive strategies, while technology and indexing techniques pose an equivalent challenge to mainstream active management.
- The industry is forecast to polarize into a blend of passive investments and alternatives, potentially reaching 50% market share within this combined category.
- A bull market is expected to continue for the next 18 months to two years, driven by approximately $300 billion monthly additions to central bank balance sheets and positive economic growth, despite potential volatility.
- Market conditions are anticipated to shift from current supportive trends to a correction phase where winners and losers emerge, potentially slowing passive market share gains and increasing risks due to reduced capital available to bet on recoveries.
- Financial engineering is expected to enable investors to access specific price drivers via factors with daily liquidity and swap market access at low costs, forcing active managers to prove true alpha generation.
- Significant structural changes are predicted within five to 10 years, including the emergence of new custodians like technology firms, the elimination of traditional consultants in favor of knowledge advisors, and the radical transformation of the industry by big data, AI, crypto, and blockchain.
- A continuum between private and public markets is expected, with companies remaining private as long as capital is available and potentially holding private securities similarly to public ones through blockchain applications.
- Fee compression is inevitable due to oversupply and technology, with expectations that management fees will eventually return to a 20% sharing ratio from current levels of 30% to 35%, and performance fees may shift toward a structure combining limited management fees with substantial performance fees.
- Asset managers will need to differentiate through specific security selection and alpha generation rather than scale alone, with survival likely dependent on innovation, thoughtful acquisitions, and merging with growth strategies.
- Solutions that blend different pockets of alpha and beta are expected to grow as a market segment, addressing the need to package portfolios effectively.
- Risk premiums are described as having negative skew characteristics that rise slowly but feature significant down periods, raising concerns about their adoption by the wider public.
- Regulatory hurdles currently prevent widespread use of Bitcoin or crypto securities, though future market developments, such as free exchanges offering Bitcoin futures, are anticipated within a year.
- Manager compensation models are expected to shift away from high fee structures, with the "1 in 3" model deemed unsustainable compared to a "1 in 30" viable model.
- Tech companies are expected to return to the public market once legacy valuation impacts clear out, while venture capital relationships will remain inverted, requiring strong connections to access deals.
- Future markets will likely see a focus on dispersion opportunities and active investing once central banks cease reinflating the economy, as investors seek to identify specific growth drivers beyond broad beta.