The Future of Asset Management: The Fall of a PM Super Star

The challenges for the asset management industry may never have looked greater, but neither has the opportunity for success. With the global pension shortfall now estimated at $41 trillion¹, continuing changing demographics and evolving requirements for increasingly tech-savvy investors are forcing the industry off the starting blocks in its digital transformation.  The growing accessibility of unstructured datasets and advancements in technology in other industries is leading to the digitalisation of the investment process itself as subsets of AI technology create opportunities to intelligently connect the right content with the right analyst.

The assumption that fundamental active asset managers can no longer compete with the super tracker funds oversimplifies the wider challenges facing the asset management industry today.  The downward pressure on fees and squeeze on profit margins is exacerbated as the current investment cycle matures in a period of radical geopolitical change where it is becoming progressively challenging for active managers to consistently deliver alpha. As traditional pension schemes fail to keep pace with liabilities due to increases in life expectancy and declines in interest rates, a generational change in investors is emerging; different both in requirements and investment appetites, as well as demanding more accountability and transparency from their managers in the process. 

Matching liabilities to the balance sheet as defined benefit schemes make way for more flexible shorter-term investment horizons is problematic, added to which gains are progressively being taken as soon as returns are generated so that managers can demonstrate performance.  Industry moves towards greater consolidation to benefit from scale of operational efficiency and breadth of distribution can solve some of the current industry challenges but not all.  Relying on star analysts to consistently make the correct call is an increasingly risky strategy given the global nature and complexity of the market today. The level of information overload makes it challenging to read through the noise and hone in on what matters to ensure the right investment is made at the right time.  Rather than waiting for the production and distribution of an analyst’s report, increasingly fundamental asset managers are looking at ways to uncover alpha opportunities earlier in the investment process to compete with more quantitative managers (see Exhibit 1).  This matters as understanding whether there is unnecessary bias, or how to maximise an investment team’s strong suit is becoming increasingly important as firms struggle to retain assets as well as attract new investors.

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Unbundling the traditional relationship between the sell side and the buy side has already led to the need for greater adoption of technology to redefine workflows to adjust to the new market eco-structure, whether uncovering untapped sources of liquidity or improving execution performance. Now the growing accessibility of unstructured datasets and third-party aggregation tools are creating opportunities for firms to leverage data and analytics more effectively for investment as well as execution purposes. While leaving in place the trading discretion of PMs and the value of corporate face to-face meetings, use of technology such as natural language processing (NLP), machine learning (ML) and robotic process automation (RPA) will facilitate the incorporation of richer unstructured datasets to improve modelling on a more scalable basis and maximise the alpha opportunity or minimise disruption.

The need to adjust investment strategies to meet the requirements of future investors will also demand a change in tracking performance. Longevity matters for active management so monitoring fund performance on a daily, weekly or quarterly basis may be an ineffectual way to continue to assess performance. Yet as the focus moves to more specialist, bespoke strategies based on value growth, the repositioning of the asset manager as a financial intermediary between savers and users of capital opens the door to new products and services from ESG and RI to private debt and infrastructure projects, moving the focus from short-term performance to longer-term investments which better match pension liabilities.

The shift into a new era powered by big data and advanced analytics will have profound impact on the asset management industry. From hackathons to the introduction of synthetic datasets with modelling based on video game technology, embracing the cultural change required to invest in the technological evolution is still the industry’s greatest challenge. Ultimately those who invest in technology will replace those who do not.

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  1. https://www.genevaassociation.org/sites/default/files/research-topics-document-type/pdf_public//pensions_epidemic_summary_final.pdf

By Rebecca Healey, Head of Market Structure + Strategy, EMEA

Harrison Short