Rebooting the global asset management industry

Rebooting the global asset management industry 27 The second cluster aims to capitalize on new secular investment themes that are likely to remain the key return drivers in the global economy while overriding market cycles for the foreseeable future (52%). For buy-and-hold investors, thematic investing will likely continue to hold strong appeal in private markets in response to the 4D-RESET now in progress and likely to attract huge investments over the next ten years (see Insights). They are likely to offer wide scope for exercising the stewardship role, while hardwiring the associated thematic metrics into investment mandates, especially since ESG investing and fundamental investing are expected to converge (43%). Turning now to the second cluster, this envisages a continuing rise of passive strategies, in line with the trend in this decade (53%). Since the onset of Covid-19, interest in ESG investing rocketed to fresh heights and saw rapid innovation around the traditional cap-weighted index funds and ETFs. In particular, ETFs based on the EU’s climate benchmarks, green social and sustainable bonds, and smart beta funds took off. However, with the recent reversal in the policy stance on ESG in the U.S., interest there has diminished. The same cannot be said about Asia Pacific and Europe, thanks to a raft of legislation enacted in the past three years. For example, key stock markets in China nowmandate listed companies to disclose policies and practices on corporate social responsibility. Another example is the EU’s Sustainable Finance Disclosure Regulation that mandates big companies to report on the impact of ESG risks on their business and also how their own operations, in turn, impact wider economic and social systems. This interest in ESG investing is likely to be reinforced by the latest innovation: direct indexing (34%). It aims to unlock the potential for personalized products at scale for affluent investors. It carries the opportunity to adjust the portfolio mix during periods of big drawdowns while also offering greater tax alpha than normal ETFs. Thus, the power to create value will likely shift from asset managers to their clients. Interest in ESG investing is likely to be reinforced by the latest innovation: direct indexing. Insights Geopolitical risks are encouraging extreme pragmatism in asset allocation Geopolitical risks have come to the fore in the wake of the Russian invasion of Ukraine and the latest China–US tariff dispute. Managing them involves the near-impossible task of predicting the reaction functions of politicians as events unfold in real time. The market meltdown in early April when the U.S. announced its first set of reciprocal import tariffs showed all too clearly that investors are now in an era of radical uncertainty. Our institutional clients are reacting by blending opportunity with caution. Opportunity, by taking tactical advantage of the bargains generated by periodic market ructions; since sticking rigidly to their strategic asset allocation benchmarksmeans leaving too much return on the table. Caution, by focusing on four established secular trends with big value creation potential from the so-called 4DRESET – powered by decarbonization, deglobalization, demographics and digitalization – now in progress worldwide. Our clients think it prudent to deal with geopolitical risks as and when they arise, whilst using secular themes as portfolio ‘shock absorbers’. In this regard, private markets are well placed with their preponderance of pure-play companies focused on secular themes. The interest in private markets is likely to intensify as retail investors enter the fray with the tokenization of assets, which can enhance their liquidity by enabling fractional ownership of assets and reducing management costs. Boston Consulting Group estimates that the size of the tokenized illiquid asset market could reach US$16 trillion by 2030. This is set to be reinforced by new sets of regulation across Europe that aim to relax regulatory caps on liquidity and fees for the DC pension plans, where daily liquidity rules have long eroded returns. A UK asset manager “AI and GenAI will make markets more efficient while also making alpha more achievable by harnessing the power of data.” “ESG risk in portfolios has not gone away just because ESG has fallen out of favor in the U.S. under political pressure.” Interview Quotes