1. Evolution of sustainability offerings: from products to advice
A growing array of regulators are forcing the pace with environmental and other environmental, social and corporate governance (ESG) disclosure requirements for financial players. Forward-looking asset owners have made ambitious commitments (e.g. Net Zero Asset Owner Alliance, One Planet) which will require action. Asset managers whose own ESG ambitions have driven significant efforts to augment their investment processes, will be able to support these clients by becoming ESG advisors, not just ESG product providers. Climate and sustainability are rapidly becoming key differentiators: the most advanced managers will cultivate partnerships with leading climate research institutes and hone their proprietary tools and service offerings, that can help their clients make more climate-aware investment and portfolio construction decisions.
2. Diversity in the front office…maybe
Firms will be tempted to think that the new flexibility provided by remote working is going to lower one of the traditional barriers that prevented more women from taking on front office roles, but it’s not a given. As the workforce heads back to the office, there is a risk that those who are able to be there in person will be at an advantage in terms of career progression opportunities, as compared to those who are not “in” all the time. Firms serious about achieving lasting diversity in the front office will take concerted management action to redesign people and governance practices and challenge age-old shibboleths that COVID-19 has exposed.
3. Diversification, not just diversity
While diversity initiatives may be accelerated by the increased flexibility provided by remote working, firms looking for a sustainable edge will commit to going beyond traditional dimensions of sex, race and ethnicity to diversify their talent pool by hiring talent and building investment teams that look different than the “same-old” mold of science, technology, engineering, mathematics and economics-types that fill up positions today. Entrepreneurs, business operators, and even artists who can bring a true diversity of thought and cognitive approaches will be increasingly embraced. Firms will struggle with their integration efforts at first, trying to fit “round pegs into square holes”, but there are success stories outside financial services and they will emerge within FS, shifting the mindset of what a successful diversified portfolio of talent looks like.
4. Beyond alpha
In an industry that is increasingly commoditized and investors focused so intently on cost, asset managers will look to create more differentiated products and focus on delivering better experiences. Firms will take a fresh look at how they interact with clients and begin redesigning end-to-end client journeys not just to showcase functional competence but to elicit senses of purpose, community, and even joy. Innovative products will reinforce the experiences, by appealing to these higher order needs; for example, by offering funds that commit to “Every $X invested reducing carbon footprint by Y tons.”
5. What’s in a brand promise
Many brands have earned clients’ trust this year, with responses to the pandemic applauded, and their embrace of ESG rewarded by both ethical accolades and financial outperformance. This happy alignment won’t last. Sustainable investment brings inherent tensions: unintended consequences, competing goals, a disconnect between the already-green assets investors favour and the brown-transition assets the world needs to finance, and decarbonized portfolios that don’t actually decarbonize the economy. Navigating this territory will test who has a meaningful brand promise that truly serves as a dependable guide for them and their clients.
6. Rise of tech and fall of operations
Roughly 50% of middle and back-office (MBO) costs are still linked to personnel. However, we believe leading firms will be able to reduce this figure to 20% over the coming years – increased adoption of automation, either deployed internally (e.g. machine learning) or through third party solutions, will reduce the need for human intervention across the MBO. We expect vendors to widen their SaaS offerings with expanded services that address some of the most acute pain points for AM COOs (e.g. security master enrichments, compliance checks or index data harmonization). This will reduce the need to maintain large operations departments as asset managers leverage API-enabled infrastructure to integrate with partners and delegate the operational burden to them.
7. Smaller firms bend the laws of scale
While the traditional benefits of scale (fixed cost leverage, investment capacity and distribution heft) will continue to accrue, it doesn’t mean that small and mid-sized managers can’t succeed. Given the increasing ease of outsourcing large parts of the activity chain, technology-enabled smaller players will be able to thrive too. Smaller managers who can stitch together best of breed components to create hyper-efficient operating models will achieve lower operating costs and greater operational flexibility and, by freeing up resources, the ability to focus on differentiating core investment capabilities. These players will be able to bend the old rules around the need for scale.
8. Reinvention of insurance asset management
Insurance company businesses have transformed in recent years but their asset management models haven’t yet changed, despite insurance-owned asset managers representing 20% of industry Assets Under Management (AuM). This will be catalyzed by a combination of continuing low yields impacting insurers’ own assets and fee pressure on their retail platforms. New asset management archetypes will emerge to optimize for either capital efficiency or operational efficiency or third-party business growth. The primary axis being a sharpened internal vs external focus: at one extreme the investment capability will be integral to the insurer’s business and at the other the insurer will support asset manager independence to enable it to pursue external clients unencumbered. This in turn will accelerate outsourcing of insurance mandates for third-party managers.
9. Managers dismantle their data silos
Most attention has been paid to sourcing external data, particularly unstructured data that AI/ML algos can process to generate new trading signals. But for many firms with broad ranging investments across asset classes, the real data opportunity may be right under their noses. Data silos that have been allowed to proliferate across teams (especially public and private markets teams) are going to be dismantled to ensure that valuable information flows freely (subject to appropriate data sharing restrictions) across the enterprise. Firms won’t wait years until all the data is harmonized and stored in an easy-to-access, robustly permissioned database; they will find some narrower, shorter-term wins to prove the business case and to sustain the investment required.
10. 2021 sees peak mutual funds
The recent spate of acquisitions in this space (Eaton Vance/Parametric by MSIM, Aperio by BlackRock, Motif by Schwab) are further warning shots over the mutual fund’s bow. As technology continues to improve and reduce costs, use of direct indexation, fractional shares and overlays to customize portfolios will allow for improved tax efficiency, customized ESG overlays, and low-cost thematic baskets, thus accelerating the mutual fund’s path towards obsolescence. It will also lead to greater convergence between asset and wealth management, allowing asset managers (with strong brands) to serve the Retail space without intermediation. While initially this will impact public market investments, we see the trend percolating into the private markets space and hastening the democratization of private investments as well.
For more information or advice about any of the trends in asset management outlined above, contact a member of our dedicated team.