Rebooting the global asset management industry

44 Rebooting the global asset management industry The Cult of Active Investing is Alive and Well As we saw in Theme 7 in the Executive Summary, investors’ interest in alpha returns has not waned, despite the rise of passive investing. However, with low-cost passive funds here to stay, active managers need to craft a new narrative on what they stand for and what they can deliver. After all, the investor universe is highly heterogenous: covering foundations, endowments, insurance companies, pension plans andmass affluent retail investors. Many have skill sets and governance structures to target alpha generation. The rest are content with beta returns. Unsurprisingly, therefore, certain investment capabilities are now seen as the distinctive features of the winning business models and where the bulk of the improvements are also being made currently (Figure 4.2). Top of the list is a deep talent pool (61%). Talent is seeing what everyone is seeing, but thinking what nobody is thinking. Investing is an art as much as a science. It requires blending human intuition with data, technology and models (57%). Successful portfolio managers need actionable insights into return drivers and their vulnerability to untoward events (49%). That way, they are able to spot value traps and value opportunities across market cycles (47%). They are also able to exploit time-varying correlations and risk premia (43%). The rise of passive investing has upped the ante in these capabilities and investors are increasingly looking for evidence that their active managers do in fact have them. For their part, active managers are enhancing investment engines that have long relied on published financial data on key variables – such as GDP, inflation, and interest rates as well as company data – as their main inputs into securities selection. Now, these managers are embracing a systems approach that looks at complex, interconnected economic, social, and political systems, and tracing relationships and interactions among their moving parts rather than looking at them in isolation. It is believed that actions in one area can generate ripple effects across the entire system. Long ignored by portfoliomanagers, non- quantifiable disciplines like politics, psychology and philosophy are entering the investment process (see Insights on the next page). With low- cost passive funds here to stay, active managers need to craft a new narrative on what they stand for and what they can deliver. Figure 4.2 What will be the most distinctive features of the winning business models in terms of investment capabilities? Source: Citi/CREATE-Research Survey 2025 % of respondents Having a deep talent pool Blending intuition, data, technology and models Mastering return drivers and their hidden risks Spotting value traps and value opportunities Exploiting time-varying correlations and returns 57 49 47 43 61 “We can’t compete in the core asset classes in highly liquid markets, so specialism has been necessary in non-core areas.” “Active managers, like us, who deliver excess returns net of fees have been relatively immune from pricing pressures.” Interview Quotes