Predicting the future of investing: product flexibility
Technology has been slowly squeezing the business model of the global investment industry. Its grip is set to tighten even further in the years ahead.
Over the past 20 years, passive investing and exchange-traded funds (ETFs) have laid bare some of the arguments of active management houses. Many of these fund managers, it turns out, do not offer much upside over their respective benchmark stock or bond indexes, particularly once their fees are deducted. It is extremely hard to consistently outperform many parts of the public markets once you deduct a percentage point or more of fees.
That revelation has encouraged the surge of asset owner (and increasingly retail investor) money into passive mutual funds or ETFs. According to ETFGI, an ETF research provider, the global assets invested into ETFs and exchange traded products rose 4.6% during April alone to stand at $8.95 trillion, a historic record. And that amount looks set to keep rising.
At the same time, many asset owners have become disenchanted with the low single-digit returns they can expect from fixed-income funds whose yields have eroded, courtesy of ultra-low interest rates. That has stimulated the rising tide of funds into real, or private asset funds, which continue to offer low double-digit returns. Private equity, private debt, infrastructure and real estate managers, which can continue to charge two-and-20 fees or thereabouts, have rarely had it so good.
Public active fund managers, in contrast, have seen their assets under management and profit margins erode. That has led to an ongoing array of consolidations. More is likely, as asset managers seek to build economies of scale and, ideally, gain some private asset expertise.
But technology changes are not done yet. The rise of cryptocurrencies and the technology that supports them looks set to shake up what we think of traditional investment products today. Meanwhile the means of product delivery and the customisation of products is also likely to change, as computing power and risk analysis continue to evolve. Plus, environmental, social and governance (ESG) principles look set to become ubiquitous. That will play a big role in what is acceptable investing in the years to come.
AsianInvestor has identified five key areas of change that could well impact the fund management industry over the coming five to 10 years. At the end of that period, asset management as we know it will still be recognisable – but it may well have had a major face-lift.
We begin today by looking at investors getting the ability to enhance their product tailoring. Look out for the following four areas in the coming days.
- TAILORED PRODUCT BUILDING
China’s investment market has fewer products, less geographic availability, and a smaller array of good fund managers than those of the US or Europe. But in one area it is world-beating: fund distribution.
In March Alipay, Ant Financial’s super-app, launched an online fund investment platform called Tougu Guanjia, which is essentially a fund advisory and robo fund supermarket. It is initially offering products from five local managers with fund advisory licences, but the growth potential is huge, as fund houses seek to access the one billion people who use Alipay. Individuals can go online, pick fund products and invest in them within minutes.
Replicating this internationally will not be simple (the authoritarian Chinese state pays little heed to such information-sharing or privacy but it’s a big issue in many other countries). This is especially pertinent for institutional investors, which are often bound by substantial governance requirements.
As James Peagam, head of global insurance at JP Morgan Asset Management, noted to AsianInvestor, “today if you want to change a theatre ticket online you can do it by yourself, but for an asset owner, changing an asset allocation requires a guide-through process that could include consultants, risk managers and others weighing in. It’s far more complex”.
However, the development of such online product distribution platforms appears to be inevitable. Indeed, several fund managers have already created the sort of risk management and data systems required by such online platforms.
BlackRock, the world’s largest fund manager, has convinced many fund houses to comply with its Aladdin risk management and processing system. JP Morgan AM has a data platform called Morgan Institutional, which it hopes will attract asset owners by tailoring portfolio information to their preferences, while State Street has a similar program called Alpha.
There is real potential for fund managers to combine online platforms with dashboards and apps that allow institutional investors to identify anomalies or opportunities within the investments they hold with a particular manager or asset class -- and then make rapid changes.
For example, an asset owner investment team that believed they needed to reduce their allocation to European bonds and slightly weigh up in US corporate equities could use an investment app to request all necessary signatories to agree to a plan to make the asset shift, cutting the time taken to harvest these approvals from days to hours.
Janet Li, wealth business leader for Asia at Mercer, believes it will be increasingly essential for active fund managers to introduce such efficiencies and flexibility.
“Over the next five to 10 years the asset management industry will think about how to be nimbler in product design to launch and capture both cyclical and new trends, to better meet their client needs,” she told AsianInvestor. “They don’t have much choice, as otherwise their traditional client holdings will diminish.”
Could the process of new product creation become largely automatic, making traditional funds redundant?
“Imagine a world where the concept of a fund no longer exists, and asset managers manage a customised portfolio of equities, bonds, money market funds for clients,” said Justin Ong, the Asia Pacific asset and wealth management leader at PwC Singapore. “The idea would be to have a fully digitalised solution, where no legal form of funds exist; instead individual, separately managed portfolios with unique outcome-driven returns synthetically linked to investors are managed in the background."
He added that in such an instance, the synthetic could either be the client account or portfolio, depending on how the digital portfolio is set-up, or it could relate to portfolio performance returns which could be replicated off a hypothetical or actual basket of securities.
Of course, such a universal investment approach would be impossible in the near future. It would require enormous deregulation and data sharing (look out for more on this in a future article), plus more computing power and risk management. Plus, fund managers may initially prove reluctant to offer such a flexible solution, worrying how it would impact their traditional funds business and distribution channels.
Still, Ong says some fund houses are working on more limited approaches that offer more flexible investment strategy approaches to clients. At the very least the coming years should give asset owners more clarity and fleixbility over the investment products they use to invest.