March 8, 2020

Monday Morning Memo: The Coming Decade of Change for Asset Management

by Detlef Glow.

The European investment management industry is in an overall transition mode if you look at the trends and underlying dynamics of the industry. In fact, there are so many trends that will change the face of the industry over the next few years that the inescapable conclusion is this will be a decade of great change, and European investment management will look totally different by 2030.

First of all, we have seen a number of mergers and acquisitions in all parts of the value chain of the industry over the last few years, and this is a trend that will be continuing. Big seems to be beautiful in this industry.

We have also witnessed a number of new regulations, such as the RDR in the U.K., or other regulatory initiatives with regard to remuneration of fund distribution, that will change the way in which mutual funds and ETFs will be distributed to investors in the future. From my point of view, it is safe to say that fund sales will change from a personal business to an online business. Younger investors increasingly prefer a computer screen to face-to-face interactions. Accordingly, fund promoters will have to adopt their business models and get prepared to meet investor demand for information and the ability to buy or sell funds 24 hours a day, seven days a week.

On one hand, this trend is driven by the centralization of fund selection teams, which make decisions on mutual funds in one location which may impact all branches of their company around the globe. On the other hand, we see that an increasing number of retail investors and wealth management clients have started to buy and sell mutual funds via online platforms and, therefore, need information on the funds they want to trade. This trend does not mean that the current face-to-face business model is dead, but it is on the ropes. This will lead to a decrease in client-facing sales representatives and an increase in back office staff to service the increasing information requests.

We will also witness a change in the way asset managers will communicate with investors. The rising generation of digital natives prefer different ways of communication than the current generation of investors. This means that the digitization and adoption of new technologies will be key for asset managers to make their business future proof.

ETFs have established themselves as a growth driver for the asset management industry in Europe over the last 20 years. This has been the catalyst for a constant back-and-forth discussion over passive versus active management, but this overlooks the fact that an ETF is structurally different and, therefore, this is not an apples-to-apples comparison when talking active versus passive fund management.

First of all, an ETF is a distribution wrapper—a basket of securities listed on an exchange which can be traded any time during the trading hours of the respective exchange for a fair price. This is because there is normally more than one market maker pricing the ETF throughout the day. Mutual funds are only priced once and, therefore, can only trade once a day. As the ability to trade a fund at any given time becomes a necessity—especially for professional investors—active managers may want to list their funds as ETFs to profit from this trend.

Also, the trend toward passive products (ETFs and index trackers) puts a lot of pressure on the pricing models of mutual funds since a number of the so-called actively managed funds can be seen as index huggers that do not deliver enough alpha to counter their high fees and, therefore, underperform their benchmark. This means that asset managers either have to change their portfolio management approach or their pricing models. The latter becomes more and more likely, since investors and regulators are no longer accepting that a number of funds carry out different pricing models for different markets and/or investor groups such as retail versus institutional share classes and/or charging high fees for low alpha, as the DNB case in Norway shows.

Another driver for change in portfolio management models is the breakout of ESG investing from a niche strategy into the asset management mainstream. For example, there is an increasing demand from investors for products that take ESG criteria into consideration. This means that asset managers have to integrate non-financial data into their securities selection process. Even as some asset managers see this as a box-ticking exercise, investors have started to get really serious about this. As their knowledge about ESG integration increases, more investors will be able to identify so-called greenwashing. This could lead to a loss of credibility for asset managers, so they need to take the integration of ESG criteria seriously and must develop these capabilities in-house rather than outsourcing them to a third party.

The demand for in-depth, in-house analysis will also change the way in which non-financial data is collected and handled. Currently, a number of these data points are based on assumptions as there is no standard for data disclosure. Therefore, we witness a wide range of evaluations for a company, depending on the approach of the data provider.

Once the asset management industry starts to handle non-financial data in the same way as financial data, we will see an increase in the number and quality of the data points available in the different sectors, as well as across sectors. This will lead to more streamlined evaluations and a more uniform postulation on sustainability. This will in turn lead to a further adoption of ESG criteria by investors and asset managers since investors will be able describe their needs to asset managers who will be able to describe how they integrate the respective measures within their portfolio management process.

All these trends will shape the future of European asset management, massively changing the face of the industry over the next 10 years. The decade will truly be this century’s version of the Roaring ‘20s.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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