// . //  Insights //  10 Asset Management Trends For 2024

Welcome to the seventh edition of 10 Ideas in Asset Management. As we stand at the end of 2023 looking back, the upheaval the industry has endured over the last several years is remarkable, from the end of the 15-year bull market, to higher rates and inflation, rising geopolitical tensions, and the revolutionary impact of generative artificial intelligence (AI). As 2024 approaches, asset managers—like all of us—can set resolutions to chart a different course in the coming year. In charting that course, it is helpful to have a view on just what might be in store, which is why it is our pleasure to offer our top 10 predictions for 2024.

10 Ideas In Asset Management For 2024

1. The golden age of private credit keeps on shining

Private credit funds have blossomed by meeting the voracious financing needs of the post-Covid private equity deal boom. Going forward, new bank regulation (for example, Basel III endgame) will catalyze even more “de-banking” to private credit funds, as financing becomes less lucrative for banks. Private credit funds will expand beyond leveraged finance into broader corporate lending and asset-backed finance. The latter will require significant enhancement in asset origination capabilities or partnerships with banks to source deals, a reduced financing role that banks will accept to maintain client relationships. While favorable for private credit players in general, the biggest beneficiaries will be those that have (or can build) the operational scale required to compete, as speed and certainty of execution, larger deal size and ability to bring more value to partnerships will play into the hands of bigger firms.

2. The $2 trillion mad dash for cash

As yields plateau, asset managers will have a massive opportunity to lure investors away from cash, which will require developing new (or tweaking existing) products to compete effectively across a range of different needs. Those in retirement, or soon facing it, will favor income-generating products that replace and augment the stable cash flows that tightening rates created. Macro calls on rate dynamics will underpin a revitalization in active fixed income management, appealing to investors looking to diversify into non-equity sources of alpha. Equity managers will add more downside protection, gently reacquainting still-skittish investors with risk. Structured notes and bond ladders will come back into fashion, and group-owned asset managers will design systematic investing programs that push cash-rich clients into new investments.

3. Insurance, everything, everywhere, all at once

Alternative managers will continue their aggressive pursuit of different “plays” to enter the insurance asset management industry — whether that be buying insurance platforms outright, investing in and then managing sidecar assets, or enhancing their operating model infrastructure to better service insurers, including offering holistic outsourced chief investment officer (OCIO) solutions. The outsized successes enjoyed by trailblazers, however, will be difficult to replicate as early movers dominate new business opportunities in “asset intensive” liabilities like fixed annuities, capital or tax arbitrage plays become less differentiating, and the private or alternative asset yield “uplift” is competed away. Exploration into new types of liabilities, less penetrated geographies and (even) higher-yielding assets will increasingly become part of the playbook.

4. Knowing where the “good” and “bad” costs are

After years of trying to rein in costs to address the fragility in operating models, managers will focus less on cutting overall costs, but instead look to invest in the “good” costs and rigorously root out the “bad.” Managers will embrace the “good” costs that create differentiated client value (for example, honing the alpha generation engine, up-tiering the distribution delivery model, expanding functional service capabilities), and ruthlessly prune costs that do not (for example, exiting subscale business lines, reducing “optionality,” outsourcing trading, streamlining product offerings). Simply classifying what’s “good” or “bad” won’t be enough, however. Firms will double down on efforts to understand the details of their cost profile, which will mean developing fully allocated, front-to-back views of costs across organizational, product and client silos. Armed with this transparency, managers will take bolder actions to align their spend with where and how it delivers client value.

5. Japan's rising market potential

Japan is transforming into an asset management-led nation as the government begins an ambitious reform to introduce competition to the domestic market. Japan is a huge opportunity with $5 trillion in assets under management (AUM) and trillions of dollars locked in low-yielding bank deposits despite record market highs. It can also serve as a strategic onshore location for serving Asia amidst the geopolitical challenges with China. The opportunity for alternative managers is particularly attractive, not only as a new source of originations, but also as a place to take their insurance playbooks and tap into local insurers’ needs to enhance their reinsurance strategies, address asset-liability mismatches, and support underwriting growth.

6. Tale of two ESG camps

The anti-ESG backlash, underperformance, enhanced regulatory scrutiny, and persistent fund outflows have raised questions about the “sustainability” of current ESG products. To better meet evolving client needs, those committed to ESG products will bifurcate into two clear camps. The first and bigger will move further towards broad integration of ESG factors into existing mandates and a high degree of customization based on client preferences (for example, using direct indexing). The second camp will increase focus on real world impact through differentiated offerings such as sustainable thematic investing and impact funds that more clearly define and track desired outcomes for investors. This latter camp will benefit from favorable demand trends (for example, average net flows for climate-specific funds were 19% versus 2% for all ESG funds over the last year), increasingly taking share in the market.

7. Ramping up product research and development

Chronic inattention to innovative product development has left asset managers drowning in dormant back books of investment strategies no longer suitable for 21st century investor demands. Product research and development groups, better organized as stand-alone functions bridging portfolio management and distribution, will arm themselves with new talent — including strategy, finance, corporate development and technology practitioners. Data and AI will help these new teams measure demand and assess potential rivals, rapidly narrowing ideas to the most launchable, scalable and profitable strategies, allowing them to generate “innovation alpha.” The thinking will also shift from traditional funds to developing offerings based on newer technologies like tokenization, direct indexing and other innovative fund structures that can broaden the applicable investor base.

8. Personalized models go upmarket

Model portfolios have long been a solution for US affluent investors but have met advisor resistance for being too tax inefficient, simplistic and “retail” for high-net-worth (HNW) clients. This stance will soften as advances in chief investment officer (CIO) office sophistication, optimization engines, separately managed accounts (SMA) model delivery, unified managed account (UMA) reporting and alternative investments technology, usher in the age of “Models 2.0.” These models will finally deliver customized, HNW solutions from standardized parts at scale, creating opportunities for asset managers to compete with wealth manager home offices. While the US leads this transition, it will increasingly serve as a useful template for other geographies to follow.

9. Let’s trade private markets

Innovation in semi-liquid structures (business development companies — BDCs, interval and tender offer funds, ELTIFs — Europe long-term investment funds, LTAFs — Long-term asset funds) and fund administration technology has democratized access to private markets in the wealth channel. All signs are pointing to this “liquification” trend gathering pace in the institutional market as well. Most notably, interest in limited partner (LP) secondaries and the emergence of net asset value (NAV-based) lending has exploded as return of capital slows and investors seek liquidity. Market infrastructure providers will turbocharge the “liquification” of private markets further by partnering with asset owners, secondary fund managers and general partners (GPs) to create marketplaces that overcome historical data concerns, making private markets transactions more transparent and efficient.

10. Deal-making and integration playbooks get bolder

In the past, achieving scale was often the motivating force for mergers and acquisitions (M&A); more recently the rationale has shifted to filling capability gaps, particularly in private markets. We expect this to continue, but the new era will be marked by two key trends: wider-spread private equity-led consolidation and bolder post-deal integration playbooks. On the latter, firms will eschew the old “hands off” dogma stemming from fear of “upsetting” the acquiree’s principals. This will mean more intentional integration of the operating platform and the distribution engine to drive efficiencies, more unification of branding strategies, and a greater focus on working with future generations (not just past owners) to underpin the long-term success of the acquisition.

Originally published in December 2023. Our authors would like to thank Christian Edelmann, Adam Khadra, Jasper Yip, Vlad Gil, Bradley Kellum, Kristin Ricci, and Anuj Gupta for their insightful and thought-provoking contributions.