If you’ve worked in global asset management over the past few decades you’ve had a great run. Steady economic growth, low inflation and loose monetary policy have generated double digit investment returns, with the pool of savings growing every year as the global workforce expanded and the wealthy kept getting wealthier.
Even in South Africa, where we’ve had mixed fortunes in terms of economic growth, the asset management industry has continued to churn out decent profits on the back of chunky margins and great asset returns.
The future, however, looks very different. It’s hard to see the past repeating itself in terms of investment returns. All while assets and profit margins are coming under pressure from an ageing society drawing down savings and competitive forces driving down fees.
Global asset management giants, such as BlackRock, Vanguard and Legal & General Investment Management (LGIM), have already made significant progress in positioning themselves for this shift. Based on these and other global industry leaders, we see four key areas that will ultimately separate the winners from the losers in South Africa’s asset management industry, too.
First, across the US, Europe, and now also Asia, index-based strategies account for a large, ever-growing share of investor portfolios. The reasoning is relatively straightforward. Often, for active managers, a large proportion of their return is the market rather than the active views. By allocating to index strategies, investors can free up their budgets to allocate to high-conviction active managers in areas of the market where there is real value to be generated.
Let’s not forget that none of the world’s largest and most successful asset managers got there by focusing on active management. South Africa’s large asset managers, on the other hand, are still heavily geared towards active management, with index-based investing being largely driven by newer, smaller competitors.
Second, global asset managers have invested heavily in technology – both to automate key processes and to improve the client experience.
Automation greatly reduces frictional costs, creating savings that can be passed on to the customer. Even more exciting is the enormous potential of technology to break down barriers to investing by creating tools that are easy to engage with. Think Google Maps for a second. When we take the bespoke journeys the tool creates for us we don’t even think of the artificial intelligence behind it. Imagine the same in saving for your future?
Over the coming decade, machine learning, blockchain, etc will reduce costs and provide accessible, bespoke and easy-to-understand platforms for consumers. The asset managers that don’t invest now will be left behind.
Third, the most successful asset managers will be those that move away from the old product-pushing approach towards delivering outcome-focused solutions for clients. Traditional asset managers were set up to develop and sell products, not to create individualised solutions. Teams at these businesses still tend to operate in siloes and have no real connection to customers.
Fourth is integration of the next generation of sustainable investing, or ESG (environmental, social and governance). ESG initially emerged as a risk management tool, or found its way into portfolios that excluded certain sectors, such as oil and gas. Over the coming decades, ESG 2.0 will transform the role of asset management in the allocation of capital to companies that genuinely solve some of mankind’s biggest challenges, from tackling climate change to providing access to energy and education.
Investment managers that do not take this trend seriously enough will lose out on investment flows – particularly as millennials and ‘Gen Z’ consumers start to account for a larger portion of the savings pool.
These future owners of capital want to see their investment portfolios driving positive impact – a metric that will be just as important as risk and returns when comparing the performances of asset managers. They also want to work for organisations that operate responsibly and do good, meaning firms that prioritise purpose and positive impact will be best placed to attract talent.
Make no mistake, investing with impact does not mean sacrificing returns. As the world transitions to a more sustainable economy, the companies that win will be those that drive positive change. The same will apply to the asset manager of the future.
The investment industry has attracted some of the brightest minds. It’s a fascinating job trying to work out how the world is changing and where the opportunities lie. However, historically, the industry has not been particularly good at delivering an outcome that is good for the customer.
The fees have been too high, the products can be confusing and its often very difficult to access and understand what you’re investing in. South African asset managers score poorly on all these measures.
Globally we’re witnessing significant change in the asset management industry. It’s driven by the same forces that are transforming all industries – a transparent and competitive environment that is enabled by exponential technological developments and growing awareness of the sustainability of our planet. Every market and every industry is different, but this is a global truth. We either embrace that change and build the Amazon of the financial industry or risk becoming the last Blockbuster video.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250).
