Rebooting the global asset management industry

Rebooting the global asset management industry 23 Instead, their net inflows have simply coincided with other negatives (Figure 2.1, lower panel). These include the acceleration of fee compression hitting the bottom line (57%). For many, organic growth has been conspicuous by its absence, since market performance has been the key driver of top-line growth, as net inflows have been markedly lower (50%). This is occurring at a time when alpha generation by active managers has been hit by a macro policy regime in which markets have been influenced more by hard-to-model top-down macro factors than bottom-up fundamentals (48%). In the meanwhile, business costs have been rising faster than revenue (52%). This is because end-investors are becoming more demanding as they expect good returns while securing social and environmental benefits (45%). Furthermore, digitally savvy investors also require a superior client experience that has raised costs (42%). Finally, as risk has become personalized, regulatory oversight has increased and, with it, compliance costs (44%). Inmitigation, product innovation has accelerated in order to boost inflows. But fewer products are surviving: investors continue to gravitate towards low-cost options like ETFs, which can slice and dice the investment universe in pursuit of emerging opportunities over themarket cycle (36%). This changing fortune of the asset management industry is happening alongside two opposing trends in parallel: the rise of geopolitical risks of a dynamic nature and the emergence of new structural growth drivers. The new trends are set to redefine the asset industry in this decade by turning the spotlight on the prevailing operating models: markets alone can no longer be relied upon to deliver top-line growth. The new trends are set to redefine the asset industry in this decade by turning the spotlight on the prevailing operating models. Insights Clients chase returns, not investment strategies “The rise of passive investing is a foundational trend gaining traction after the 2008 Global Financial Crisis, as central banks responded by resorting to easy money policies. They dampened market volatility and effectively put a floor under asset values, making passive investing virtually a one-way bet. These policies also disconnected asset prices from their fair value, making it harder for active stock pickers to beat the markets. For our clients, however, active/passive is not a binary choice: both will coexist in the evolving core–satellite model. Growth in passives has catapulted them to the core portfolio, alongside global equities, US equities and sovereign bonds: all trading in deep liquid markets that are informationally efficient. In contrast, the satellites cover items trading in less liquid (or illiquid) markets that are not so efficient and thus amenable to alpha generation. In this decade, ever more items have been shunted to satellite status as a part of alpha–beta separation. Historical experience shows that the traditional 60:40 equity/bond portfolio only works in periods of low inflation, like the first two decades of this century. With geopolitical tensions between China and the U.S. likely to remain high for the foreseeable future, our clients are now using multi-asset class strategies as satellites. Such strategies blend active and passive funds, liquid and illiquid funds, and developed market and emerging market funds. The implication is that active investing still retains a place under the sun, so long as it meets clients’ goals.” A U.S. index manager “Fee compression is now severe, as clients see costs as a key source of outperformance after compounding over time.” “The current plight of our industry underlines the need to find new growth engines that are creating new and different needs.” Interview Quotes