Which asset management trends and topics might dominate in the second half of the year — and beyond?
Money Management Executive reached out to several industry leaders to get their take on key issues, including technology advancements, the increasing focus on ESG investing and developments in ETFs.
Guggenheim Investments President Jerry Miller weighs in on the ever-present active vs. passive debate — and says passive may see some challenges ahead. "Cracks are beginning to appear in the case for passive investing, especially in the fixed-income world," Miller notes.
Wells Fargo Asset Management CEO Kristi Mitchem says the rise of a new generation of investors "requires that we rethink the world of asset management."
Reality Shares CEO Eric Ervin sees blockchain spurring transformation: "With even traditional asset management firms embracing blockchain technology, we expect others to swiftly follow suit."
Here’s what Miller, Mitchem and four other executives foresee.
Wells Fargo Asset Management CEO Kristi Mitchem: A new generation of clients
The asset management industry is facing major socioeconomic and demographic forces that are transforming the investor experience for all stakeholders — including institutional investors, Main Street investors, advisors and employers.
Moreover, expectations for what they want and how to obtain it are now influenced by a confluence of technology, the need for human guidance and increasing lifespans.
The magnitude of this generational transformation requires that we rethink the world of asset management, focusing the entire organization on solving key challenges facing our clients and the industry.
Consider the number of factors at play: the influence of millennials and women as lead investment decision-makers; the horizon of the boomers' significant generational wealth transfer; the changing nature of workforce management; the tension between high-tech solutions and the desire for human interaction; and the demands placed on institutional investors to refocus their desired outcomes and portfolios.
This generational shift represents the industry's biggest challenge — and opportunity.
Investors today expect more. For individual investors, their definition of prosperity has changed. Across generations, prosperity is being redefined as longer-term, inclusive and goal oriented.
Investors are also more informed, and perhaps most crucially, they will likely live longer than previous generations — and they expect their assets to support the life they want to live well into retirement.
For the institutional investor, approaches and goals are shifting.
Investors are eying outcomes beyond returns, including social impact and longer-term needs, such as helping employees address longevity risk and increasing their financial well-being.
Asset managers and advisors must embrace creative problem-solving, innovation, collaboration and adaptability to truly meet the needs of today's — and tomorrow's —investors.
Guggenheim Investments President Jerry Miller: Reconsidering active
The shift out of active management into passive has been one of the most profound changes in the history of investment management. Over the past decade, investors have taken trillions of dollars out of actively managed funds and poured them into passive funds, lured by lower fees and, in some cases, better performance. But cracks are beginning to appear in the case for passive investing, especially in the fixed-income world.
Most actively managed intermediate-term bond funds outperformed their passive peers on average over one-, three- and five-year periods through 2017, according to Morningstar.
Investment-grade bond returns as measured by the Bloomberg Barclays U.S. Aggregate Bond Index have steadily declined over the past five years, and dropped about 1.5% year to date. The market repricing for a longer and steeper path of Federal Reserve rate hikes has been a key source of the negative return. The upward shift in forward rates has also resulted in higher equity market volatility and wider credit spreads.
Investors looking to manage risk may reconsider the benefits of actively managed fixed-income strategies.
Active managers can adjust duration and curve positioning in anticipation of rate and yield-curve shifts. They can identify value beyond benchmark indexes and avoid troubled industries, and can better analyze risks posed by lax underwriting standards that have prevailed during this bull market. These advantages allow active managers to be better-positioned to navigate the challenges that arise from a changing investment landscape.
Nuveen Managing Director Jordan Farris: Time for responsible investing
The trend toward responsible investment has grown rapidly during the past several years.
Since 2010, assets in funds categorized by Morningstar as socially conscious have nearly doubled.
Increased awareness of responsible investment, as well as more useful products within which to invest, has driven more investors to incorporate their personal values into their investment decisions.
Investment managers are also incorporating ESG factors into the investment selection process in an effort to lower stock-specific risks.
As an example, managers may select companies that achieve higher ESG ratings in areas such as health, safety and board diversity in an effort to reduce stock-specific risk within a portfolio.
Effective health and safety programs can mitigate unexpected costs caused by workplace injuries.
Additionally, a more diverse board with a wider range of competencies, knowledge and perspectives may lead to better decision-making and more-effective corporate governance.
Investment managers may also seek to reduce exposure to companies with very low ESG ratings.
These firms may be more vulnerable to the kind of tail risk events that can lead to increased volatility. (Security breaches at Facebook and Equifax are two notable recent examples.)
Stronger corporate governance structures, for example, may reduce the likelihood of controversies such as corporate fraud or abuse. Whether branded as "socially conscious" or not, an increasing number of investors, both individual and professional, are incorporating ESG criteria into the investment decision-making process.
Exponential ETFs CEO Phil Bak: Embrace the index
The operational and legal requirements around calculating and disseminating an underlying fund index serve as a small pebble in the shoe of our ETF business. Yet I come today in praise of the index, not to bury it.
Just about 90% of the 2,145 U.S.-listed ETFs track an underlying index. Actively managed funds account for less than 2% of total ETF assets under management. For index-tracking ETFs, there may be a handful of name-brand indexes out there. But for most ETFs, it is unclear whether the index or the fund came first, and which one was created out of necessity of the other.
Here are a handful of requirements the index rules bring along for the ride:
- Exchange listing diversification and inclusion requirements
- Intra-day calculation of underlying index values
- Dissemination of all index values to a major market data vendor
- Public disclosure of index rule set, which includes all reconstitution and rebalance implementation and timing schedules and contingencies
- Real-time calculation and dissemination of IOPV/iNav.
These requirements were created for a good reason. They also bring a cost and an operational burden.
But these burdensome rules are forcing fund companies to codify and crystalize their strategies, and to present them open-book to the world.
Any active fund manager will have a specific process they follow. But they also have emotions and pressures to meet performance benchmarks while catering to the whims of their investors.
As investors increasingly turn to ETFs and modern investment strategies, the advent of the self-indexed fund is removing those mapping-error risks from the equation. More so, the index requirements are instilling a transparency and discipline of process that is transforming financial products.
Systematic investing is the new active management, and, as asset allocators increasingly look to rules-based, process-driven strategies to try to provide alpha for their clients, the index requirements protect managers from themselves, and ultimately protect fund investors.
Viteos CEO Chitra Baskar: Innovation in tech needed
A common conversational topic for most hedge fund COOs and CFOs these days is that of complexity.
The asset management industry has moved from long/short simple equity listed products to more-complex offerings, and this has made things trickier for funds.
As investors have started to demand higher returns, funds have had to devise complex products in order to beat benchmarks and create alpha.
To address the increasingly complex layers of these products, funds have also had to build their own technology solutions.
Managing this library of complexity requires strong domain and technology skills that must scale with business volumes.
Finding and retaining people with the skill sets to address this complexity is another challenge. Then increasing regulatory oversight completes the picture.
So what are the critical success factors that are needed to reliably manage this overall complexity?
This is a game where the winner is decided by high-end domain expertise, technology prowess and the desire to always get smarter through best-practice learning and industrialization.
As funds push the limits of products and strategies, they must also keep pushing themselves when it comes to innovation.
This means funds must proactively track industry trends, build IP assets around them, industrialize best practices, promote timely transition and accurate execution for complex funds, re-imagine business models with a digital focus, balance customization with standardization and always question the status-quo.
This is not an easy task, and many funds may not take these steps. But the ones that do are more likely to thrive — because today's complexity will be tomorrow's de rigueur.
Reality Shares CEO Eric Ervin: The rise of blockchain
Blockchain technology is transforming industries across the globe, and the asset management industry is no exception.
The implementation of blockchain solutions presents the opportunity for asset management firms to increase speed and efficiency, cut costs, improve security, enhance the client onboarding process and much more.
Large financial services firms have already begun to test the waters in the blockchain arena. Late last year, Vanguard announced they're leading an effort to streamline the index data sharing process using blockchain technology.
Currently, most index providers have to share information with the fund issuer manually, resulting in emailed spreadsheets going back and forth every night after the market closes.
Vanguard's decision to put their index providers on the blockchain will reduce these email communications, ensure the secure transfer of classified information, diminish costs and virtually eliminate the risk of human error.
With even traditional asset management firms embracing blockchain technology, we expect others to swiftly follow suit.
Not only will blockchain continue to revolutionize and simplify how financial services firms operate, but it will offer an opportunity for investors to potentially profit from this transformative technology.
Since January 2018, six blockchain-related ETFs have launched. Within only months, the funds have collectively attracted over $400 million in assets. In addition, there's an arsenal of cryptocurrency funds pending SEC approval.
In 10 years, we expect asset management to be a vastly different industry, as financial services firms adopt blockchain solutions to enhance their business operations.
Investors will simultaneously demand increased exposure to this disrruptive technology.