The asset management industry is accelerating the adoption of new technologies. Firms with long and traditional histories are re-examining their approaches with the latest technological innovations, including new and alternatively sourced data sets to support and drive investment processes. This briefing will examine how shifting technology trends are impacting research processes, what practical steps are being taken to capitalise upon these new opportunities and how they will develop over the coming years.
When the FCA concluded its asset management market study in December 2017 it found that competition was weak in the industry. This might not be how it seems at the sharp end, but a combination of the FCA’s remedies and market forces may force many changes in 2018 and beyond.
In the light of this, we see some developments which will have an impact:
Margins going down… The primary evidence for weak competition that the FCA found was “evidence of sustained, high profits over a number of years”. Other research featured in the Financial Times found that active fund managers took three quarters of all the value they created in fees, while beating the market by only 16p for every £100 invested. Therefore, the FCA will push for more comparability between funds, among other measures designed to create more fee competition and transparency. Add increased costs of regulation, and widespread high profits might not be sustained much longer.
… And passivity going up. PwC predicts that by 2020 25% of assets under management will be in passive funds. That’s up from 17% in 2016. In 2018, investors in active, underperforming funds will want something to change, whether it is their returns or their fees. It will force asset management firms to decide what they do well: offering low fees and reliable returns from passive management, or consistent market-beating ability. The middle ground will be squeezed.
Data science becomes innovative. Technology will increasingly become fundamental to the ability to beat the market. Following big data, automation and machine learning are at the forefront of the search for alpha. In data science, a bright creative idea (often borrowed from another discipline) is more useful than mountains of data, so there will be an increasing emphasis on the quirky, creative or seemingly barmy. For example: S&P Global Market Intelligence has found that earnings calls that feature complicated and polysyllabic language can predict stock declines, and that executives who took the fewest number of questions from analysts on calls had stock that underperformed by 2.14% over the following two months. Meanwhile a group of economic historians have dusted off original sources and found the surprising result that, over multiple business cycles, the global rate of return on property assets has always been as high as for equities, but with a volatility as low as bonds.
Asset management will be summoned to save the world. The sector is increasingly involved in the solutions to social problems, for example climate change, healthcare and providing for an ageing population. This means transparency is not just a buzzword. Sovereign wealth funds, for example, will be looking to diversify their assets, but increasingly are under pressure to do so along ethical investment guidelines. The ability to combine transparency with efficiency, for example to calculate a portfolio’s carbon footprint, will be increasingly valuable.
There you have it, 2018 is set to be an interesting year for the Asset Management industry at the very least.