Author: Tim Hodgson, ASIP
Imagine we are living five to ten years in the future. Tim Hodgson, ASIP, gives his views on what the industry will look like then.
Business Model
1. Purpose of the industry
A debate over the purpose of the industry grumbles on. Opportunities for ‘capital allocation’, the funding of new investments and creation of new wealth, are still largely restricted to private markets. A new consciousness has emerged regarding the industry’s role in intertemporal (investment) risk management for end savers. There is also greater emphasis on the stewardship of client wealth, and being joint stewards with investee company managements of the wider environment.
2. Financials
Back in 2018-2020,there was a period of rapid experimentation with alternative fee models. Various models emerged as alternatives to the ad valorem fee basis – including PaaS (portfolios as a service) - with a per-use fee –and fixed-dollar retainer relationships. The main consequence was that the established trend of a decline in average fees gathered pace.
3. Consolidation
Very much as a consequence, the industry saw extensive merger activity between asset managers. There was a temporary pause in activity as concerns over culture and compatibility surfaced, but the brute fact of financials and scale regained the ascendancy.
There was also consolidation and growth in scale amongst asset owners, but at a slower rate than for asset managers.
Operating model
4. Technology
After a slow start, technology brought significant change to the industry. Portfolios are now built by robots (algorithms) – whether systematic (factors) or ‘new active’ (relative return). Hand-built portfolios are still available on the margins of the industry – for a price. The back-office has been ‘blockchained’, and the basis of competition has shifted to the production of customer interfaces. The overall shift can be described as away from product (building portfolios) and to platforms (connecting products/solutions with savers; crowd-funding; dis-intermediation).
5. Regulation
Asset owners – and asset managers wishing to (re)connect with the end saver – now face more onerous investor protection legislation. GFC2 was followed by further regulation aimed at promoting systemic stability.
People model
6. Leadership, culture, diversity and inclusion
The “it’s about return” generation of leaders retires. While financially comfortable, it is an open question as to how much satisfaction they feel – the rise of a more purpose-orientated generation led to the vilification of past poor leadership practice. A new generation of leaders prioritises cultural renewal, aligning their organisations to delivering social and customer value. On diversity and inclusion there is shift from talk and box ticking to deliberate action - it is now possible to find non-dominant race/gender, medieval historians in investment discussions.
Investment model
7. Commitment to sustainability
The old paradigm of managing risk and return was replaced with managing risk, return and impact. The prize was a stronger social licence to operate and growing trust.
8. Winners and losers
The main areas of growth turned out to be private assets and systematic investing (smart beta / factors). Within systematic ETFs continued astonishing growth to now represent a significant share of the market. The losers were seen in traditional active and a significant shrinking of hedge funds – the highest quality ones survive, some as departments within consolidated asset management organisations.