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Asset managers have ESG, AI and ETFs top-of-mind for 2020

Hartford Funds' head of sustainability, Anita Baldwin, and Conor Platt, founder of Confluence Analytics, are among the industry executives who weighed in on industry trends to expect in 2020.
Hartford Funds' head of sustainability, Anita Baldwin, and Conor Platt, founder of Confluence Analytics, are among several industry executives who weighed in on trends to expect in 2020.

Asset management executives are focused on AI, ETF rules and various other trends as the new year begins. Of the eight execs who spoke with Money Management Executive, two tagged the further proliferation of ESG as a key topic to watch in 2020.

"It's going to become increasingly more important for financial professionals to understand the potential benefits of sustainable investing," says Hartford Funds' head of sustainability, Anita Baldwin.

Conor Platt, founder of Confluence Analytics, says, "Investors who are clamoring for ESG solutions are quickly discovering that ... off-the-shelf investment strategies fail to deliver."

For more of what Baldwin, Platt and six other execs have to say, read our special report.

The renaissance of active management
Unigestion Group CEO Fiona Frick
Active managers, with their focus on fundamentals and ability to dynamically manage risk, are better positioned than passive strategies to ensure downside resilience and deliver returns in volatile markets. Looking toward 2020, we see a number of attractive strategies that could help investors remain competitive:

  • With factor investing and ETFs providing investors access to specific asset classes or segments, active managers are increasingly adopting them into their playbook. As a result, there has been a shift in demand from bottom-up to top-down active management, using passive strategies as building blocks to capture the desired exposures.
  • In the current low-yield environment, the need for new sources of return and diversification is driving the development of innovative alternative risk premia strategies. For example, investors are allocating more to private equity to gain a broader exposure to the economy.
  • Embracing new technologies will be another way for active managers to outsmart passive ones. There is robust potential for asset managers to use machine learning and AI to support their investment decision-making and deliver better outcomes to investors, especially if backed up by human experience. In the new decade, asset managers will play a wider role in society through their investments. This is particularly true of active managers, who can allocate capital responsibly to finance growth, encourage proper governance and improve sustainability efforts.

As we enter the next phase of the cycle, market conditions are likely to become more favorable for asset managers, with a renewed focus on fundamentals and risk management.

It will remain essential for active managers to embrace change and adapt to investors' evolving needs in order to deliver more sustainable and repeatable outcomes in 2020 and beyond.

Educating investors on sustainable investing
Anita Baldwin, head of sustainable investing, Hartford Funds
Sustainable investing strategies have become much more prolific, and their momentum is going to continue to pick up in 2020.

Despite the speed at which this trend has been adopted, there is a lack of clear-cut guidelines around sustainable investing, which can create confusion for investors.

It's going to become increasingly more important for financial professionals to understand the potential benefits of sustainable investing and to educate investors on the topic.

Financial professionals need to understand the types of investing that fall under the broader sustainable investing umbrella. There are three distinct areas: socially responsible investing; environmental, social and governance investing; and impact investing.

Sustainable investing is a continuum. While SRI is associated with avoiding investments in particular industries, impact investing is associated with making investments in companies that are seeking to positively impact society.

Understanding the range of options and how they differ will be crucial to helping investors determine which type of sustainable investing may be right for them.

It will also be important for financial professionals to dispel myths around sustainable investing. The most prominent misconception is that sustainable investing is concessionary — that investing in this space means having to sacrifice returns. There have been research studies around sustainable investing that suggest that it may offer comparable returns to traditional strategies.

There may be an uptick in the adoption of sustainable investing strategies in 2020, presenting a massive opportunity for financial professionals to educate investors on this fast-rising trend. Now is the time to learn about sustainable investing, understand the options and be prepared to dispel myths.

Reconsidering distribution models
Broadridge Principal Matthew Schiffman
It's no secret that asset managers are facing a number of disruptive forces, which are pressuring margins more than ever before.

As a direct result, asset managers have been forced to reconsider their distribution models and the impact that data and digital are having on them.

For some time, the industry has been awaiting a "coming of age" for digital channels and data-driven analytics. Some in the industry are wondering if that time has come, and what its impact on wholesaling will be. After all, the disintermediating power of data and technology have become a prime focus for many industries.

Machine seems to be hyped more than human. But through our work with both managers and advisors, and a number of surveys carried out over the past months, we've learned the human element can't be totally eliminated.

Data informs segmentation, allowing asset managers to figure out exactly which advisor subsegments they should be targeting with which products. Advisor reliance on asset managers — for product information, model building, and more — is still strong. So managers need to prioritize who to engage with and how.

That's where digital shines. Fund performance will always be a key consideration for advisors and investors, but managers and advisors can remain sticky for more than one reason. Digital channels — including websites, emails, social media and even paid advertising — now allow managers to reach the right advisors with the right messages, ensuring consistent touchpoints throughout the distribution funnel and encouraging asset growth and retention.

2020 isn't shaping up to be the year where wholesaling ends. Instead, it will be the year where distribution evolves, necessitating action from managers across multiple mediums to better engage with advisors.

Clear direction for oversight and contingent NAVs
Milestone Group Chairman Geoff Hodge
With market-leading fund managers incorporating solutions into their global operating models, the trend of embracing an effective backup NAV capability as part of a modern, automated oversight function is consolidating into a standard approach.

There is no doubt that regulators globally have sensitized fund boards to the need to move to an evidence-based model for ensuring oversight of outsourced operations, with fund accounting and NAV accuracy getting particular attention.

While regulators have been vocal about the need to raise the bar, they haven't been prescriptive as to approach. After a period of exploring alternatives, the market has stepped in to provide clarity. There is a strong sentiment that the key characteristics of these functions is the need for independence, the ability to span multiple third-party provider relationships and, in the case of the backup NAV, the ability to operate in the face of a complete multi-day service provider outage.

This trend has sharpened focus on selection criteria when considering oversight and backup NAV solutions to ensure there is a clear statement of what business scenarios and what level of insurance against a business interruption are being sought. We are certain to see a continuation of accelerated activity in the take-up of robust and automated oversight and backup NAV capabilities as standard infrastructure, along with the emergence of independent services that can shoulder this responsibility on behalf of fund treasurers, while providing real-time transparency into oversight activities undertaken on their behalf.

Will AI diminish the need for human intelligence?
Procure Holdings President Bob Tull
Artificial intelligence adoption in the asset management industry has proliferated in 2019.

As asset managers continue to seek new ways of bolstering operational efficiency and generating alpha, we expect this trend to continue in 2020 and beyond. A primary concern for many in asset management is whether AI will diminish the need for human intelligence, and ultimately, stunt job creation in our field. Our belief, however, is that AI will not only improve the way staff is organized today but will actually lead to a growth of staff overall.

With big data analysis and machine learning, research will expand beyond quarterly report data and provide a means to explore new avenues of market and asset correlations across the global capital markets. What we call wealth today will be redefined to include education, age and natural resources, both mined and in-ground.

New data points will be developed as assets migrate from OTC trading markets to listed markets under asset wrappers, such as ETFs. New interactions between asset classes will force the market into new frontier product models where correlations are "capped" through the use of new listed derivatives. AI will create new, exciting jobs as this tool is used to digest big data under a new set of rules determined by the current and new research staff and investment managers.

Machine learning can only go as far as the rules programed into them. Perhaps in the future the machines will write the rules, backtest them against the captured data and create their own output solutions, but the refinements needed to structure the interpretations can only be supplied by members of our community.

New ETF rule good for the end investor
Marc Zeitoun, head of strategic beta, Columbia Threadneedle Investments
Despite the growth in ETFs, the pace of new fund launches has slowed year-over-year (220 vs. 248) as firms increasingly focus on product rationalization. But this could all change in 2020.

Recently, the SEC took steps to streamline the approval process and harmonize some of the trading mechanics of ETFs. The new ETF rule is expected to increase the number of ETF entrants by making it easier for asset managers to launch and manage traditional passive ETFs.

For example, under the new rule, all ETF issuers will have the ability to use custom baskets on creation/redemptions, which will enable them to further provide tax efficiency and improve portfolio optimization, especially with fixed-income investments.
This is good for the end investor.

At the same time, recent approvals for non-transparent ETFs, which generally rely on proxy portfolio technology to "mask" some of their prized stock picks, will likely invite new active asset manager entrants. Much of this active ETF success will depend on professional buyer/gatekeeper reactions, and their willingness to become early adopters.

As asset managers expand their offerings to accommodate the expected flurry of passive and active ETF activity, investors and advisors would be well-served to identify who is managing the funds, and who developed the rules that passive ETFs are charged with tracking.

Benchmark investing may be popular and cheap, but how do the rules align with clients' objectives and preferences? According to a recent survey conducted by Columbia Threadneedle, 72% of advisors still expect their asset managers to infuse all their portfolios (even the passive ones) with their best thinking - a comforting reminder that professional insights still matter to many.

ESG/big data + lower trading costs = customized indices
Confluence Analytics Founder Conor Platt
The combination of more ESG and alternative data with a dramatic decline in trading and execution costs should bolster the nascent custom indexing trend. Investors who are clamoring for ESG solutions are quickly discovering that typical, off-the-shelf investment strategies fail to deliver on either the values represented or the performance desired, or both.

Investors of all stripes have sometimes highly different priorities when it comes to ESG. One investor may demand his portfolio contain no fossil-fuel production companies, while another wants only to invest in firms with at least three female board members. The need to customize to specific values or constraints is apparent. Meanwhile, asset managers cannot take their eyes off their most important goal: generating quality performance.

Consistently meeting or exceeding market benchmarks is extremely difficult, especially if one attempts to pick only a handful of stocks. Thus, management firms have been exploring building their own indices to reduce risk and create benchmark-like return profiles through broad diversification.

This form of passive indexing certainly works, and voluminous research suggests it is a superior way to invest, especially over the longer term. However, if an investor also wishes to incorporate ESG considerations, they are essentially asking for a non-passive investment strategy that must react to the constant changes in ESG factors.

Custom indexing therefore offers a hybrid form of investing that lies between passive and active management. It is also just now readily implementable, given that trading costs and administrative burdens have been sufficiently reduced in recent years. Investors wanting to outperform benchmarks while addressing their unique ESG values should consider custom indexing as their best possible solution.

The new generation of fixed income
Wavelength Capital Management CIO Andrew Dassori
Factor-based methods of equity investing have been prevalent in academia for decades, and in recent years, products backed by these concepts have disrupted the conventional stock picker's business model.

In the fragmented world of fixed income, however, systematic approaches have taken time to develop. With increasingly available data, these strategies are now set to showcase their advantages as bond markets undergo a similar transformation to what stocks experienced years ago.

Bonds have historically offered an opaque marketplace of over-the-counter transactions with no centralized exchange or source of price information. Up until recently, most trades were made over the phone within a clubby network that let some participants artificially maintain an information edge.

The status quo and any advantages it provided are now disappearing with the electronification of bond trading and new regulatory requirements around pricing. Modernization is rapidly bringing bond markets out of the shadows, leading to greater transparency and the growth of new datasets in fixed income.

These changing conditions have mirrored the prior experience of equity markets by opening new avenues for data-driven strategies. And with a global market worth over $100 trillion and more than 20,000 securities in the Bloomberg Barclays Global Aggregate Bond Index alone, the opportunity set for systematic approaches in fixed income is massive.

Systematic strategies use technology to process data and make investment decisions. Their key advantage comes from the ability to perform deeper analysis on a wider set of securities than what would be humanly possible. With the increasing amount and quality of bond market data available, investment advantages are organically shifting toward asset managers with the capacity for systematic analysis.

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