What does the economic downturn mean for the asset management sector and how should we respond?
The asset management industry is facing uncharted territory as it grapples with the impact of COVID-19 on business models and the challenge of integrating technology into their existing business models.
In addition, they have to develop investment solutions that align with client values. These changes pose significant implications for investment professionals, whose current roles are likely to change in the next five to ten years.
Business models may have to change to adapt to the economic implications of a lasting impact of COVID-19, which could erode returns and put pressure on the asset management industry to adapt in order to protect client investments in the face of declining returns.
The asset manager of the future can be grouped in three broad categories: innovative solutions, sustainability and people.
The winning asset management business models of the future have the challenge of positioning themselves as:
- distribution powerhouses – granting clients’ access to a variety of products, distribution channels and investment options
- solution providers – developing innovative solutions based on their multi-asset and portfolio construction expertise
- beta factories – companies that can achieve high operational efficiency through robust product pipelines and leveraging scale
- alpha shops – specialists who have deep expertise in either traditional or alternative asset classes
The asset management industry is moving to a point where they offer a broad scope of investment options or focus on niche areas to have a competitive advantage. Those firms that fall in the middle of these two models are going to struggle as the market shifts.
For asset managers that want to remain competitive it is not about active or passive but a combination to achieve portfolio outcomes.
Passive investing in the US has grown at the expense of active management; part of this shift has been investors increasing allocations to smart beta.
Another characteristic of a successful asset manager in the future will be the use of technology to develop innovative solutions – allowing them to optimise their products, gain economies of scale, and improve the overall solution construction.
Continuous investment in artificial intelligence-enabled data solutions will help asset managers innovate, improve services and reduce costs.
Artificial intelligence is reshaping distribution and enabling asset managers to launch their solutions to new markets and customer segments which have been previously underserved.
Members in pension funds increasingly demand that all parties in the investment chain take into account the broader long-term interests of investments, considering their impact both now and on future generations.
Society is demanding that environmental, social and governance (ESG) factors, sustainability and climate change become key considerations in the investment process – and their combined voice refuses to be taken lightly.
Climate change is a growing and significant priority to investors globally. The causes of climate change need to be addressed timeously to avoid spiralling into dangerous temperature levels, and the investment industry has a critical role to play in solving this.
The world of work is evolving, and the investment industry isn’t exempt from the change. In South Africa, the asset management sector doesn’t reflect the participants in the market and lacks the diversity of views needed to further develop the sector.
Looking at transformation trends in the South African asset management industry, we have not seen a significant shift in the share of assets managed by black-owned asset management firms.
An imperative to the sustainability of the asset management industry in South Africa means that firms need to reflect the demographics of South Africa and contribute to the establishment of an equitable society by providing accessible services to black people and directing investment into targeted economic sectors.
The future presents a world in which artificial and human intelligence complement each other, allowing people to leverage the benefits of technology while enhancing transparency, ethical consideration, communication and knowledge sharing.