The asset management trends for the rest of 2023 will be shaped in large part by persistent inflation and a still-bearish market, along with rapidly advancing technology, affecting investment strategies and how firms operate.
Entering 2022, the asset management industry hit a record $126 trillion in total assets.
But a perfect storm of events took place, sending markets into bear territory.
Indeed, inflation is the elephant in the room, and it's pressuring assets that were once strong performers.
But inflation and volatile markets are not the only things to watch in asset management trends.
Rapidly advancing technology is fundamentally changing the way asset management looks and works.
Below are some of the trends to follow.
The US inflation rate has slowed to 5%, down from its 40-year high, but the current level of inflation is still higher than what consumers and investors would like.
Persistently high costs threaten consumer confidence, corporate earnings, and profit margins.
When all three are are under attack, businesses will cut back on investments and hiring, leading to job losses and fewer job openings. Over a sustained period, the result will be a recession, the depth of which is unknown.
According to a UBS market analysis, inflation is expected to continue cooling, but more Fed rate hikes will be coming. How many future rate hikes there will be is dependent on labor market and how persistent inflation remains.
And with that in mind, asset managers need to find safe and reliable investments, challenging as it may be.
Sometimes it's best to keep it simple, going to back to the basics of economics.
When costs go up, how do consumer spending habits shift?
Then ask, what will consumers continue to pay for, regardless of price increases?
When you keep focus on where the money flows, you have a starting point to figure out your investing strategies.
After that, you can analyze company/sector details, as well as if/how government policy and geopolitical events may affect things.
With all this in mind, here a few points to consider:
People need gas and/or electricity for their cars. They need heat and/or AC for their homes.
With disrupted supply chains, shortages, and high demand, it usually leads to two outcomes:
Should Russia's war in Ukraine continue and OPEC+ keeps oil output low, and demand remains, high prices will hang around. It's no wonder energy stocks perform well.
Similarly, sustained high oil and gas prices will require governments to take action. The US's Inflation Reduction Act of 2022 includes government investment in alternative sources of energy to not only increase supplies and reduce dependency on a select few suppliers, but provide cleaner options.
In any case, energy has a bright future.
With higher interest rates, you'll get higher returns with treasury bonds. They are showing the highest yields in 12 years.
Similarly with CDs, you're locking in a higher interest rate than you would in recent years.
These offerings have their downsides and they won't be the ultimate source to major wealth creation, but they're a decent option when other asset classes perform poorly.
According to an October 2022 Wall Street Journal survey of economists, economists on average believe there is a 63% chance of a recession in the next 12 months.
Considering the potential headwinds, look at the sectors that perform relatively well in a downturn.
Consumer staples, health care, and utilities are some of the sectors to watch. This Nerdwallet article provides more information on why these sectors are worth looking at.
Up until recently, talks about artificial intelligence was more of a “tomorrow” thing.
Well, that tomorrow is now, and asset managers can no longer ignore machine learning.
According to researchers at Dutch-based asset management Robeco, their findings showed that machine learning models can improve investor predictions better than other quantitative models. Additionally, these models can be used in a variety of ways, from predicting corporate bond yields to market betas.
And the use cases don’t stop there.
AI can be used for other investing-related activities like risk management, portfolio management optimization, and trading. The technology can be used for client communication, sales and marketing activities, talent acquisition, SEC filings and other compliance activities, as well as CRM system management.
Indeed, asset managers will lose out if they don’t adjust:
“So far, machine learning methods in asset management [have been] more of an evolution than a revolution. Presumably, asset managers who [choose to] disregard advances in machine learning will see their performance wane relative to those who embrace machine learning.”
AI shouldn’t necessarily be feared, but rather be viewed as a tool that provides great benefit when properly managed.
And when properly managed, it means generating alpha, controlling costs, increasing profit margins, maximizing human and technology productivity alike, and ultimately providing a better client experience.
Growing social consciousness has led to a rise in ESG investing, with younger investors showing particular interest.
Nearly 8 in 10 millennial investors consider environmental, social, and governance as their top priority when considering investment opportunities. In fact, they see ESG as more important than the returns themselves.
What's more, 82% of Gen Z and nearly two-thirds of millennials have exposure to ESG investments.
And according to PwC’s Asset and Wealth Management Revolution 2022 report, asset managers globally are expected to increase their ESG-related assets under management to $33.9 trillion by 2026.
Despite momentum and positive long-term outlook, ESG investments haven't fared as well in 2022's bear market.
According to a report from data and analytics provider Investment Metrics, 78% of ESG equity products reviewed had underperformed relative to the MSCI ACWI World index.
And Bloomberg data showed that just 3% of the 166 US-listed ESG stock funds have had positive returns in 2022, compared to roughly 9% of overall exchange-traded stock funds.
The current headwinds is not the be-all end-all for ESG funds. Not long ago, it was outperforming the S&P 500, showing that you can pursue profits and invest in a socially conscious manner. Of course, if you want to generate the returns for your investors, do your investment research and strategize wisely.
Additionally, be aware of greenwashing. Some companies will consider ESG a “bandwagon” to jump on and be ESG-friendly in name only. So, make sure to perform your due diligence when it comes to true ESG investments.
The cryptocurrency total market capitalization is well below its November 2021 high of $3 trillion, as it plummeted below $850 billion a year later.
We all know about Sam Bankman-Fried how his crypto exchange FTX has collapsed. An $11 billion class action lawsuit has been filed against the now-bankrupt FTX founder.
Notable figures like Tom Brady, Gisele Bündchen, Shaquille O'Neal, Stephen Curry, and Larry David have been named in the lawsuit. They are accused of defrauding "unsophisticated investors" in a "Ponzi scheme."
Crypto has a lot of question marks and scandals, but the worst of the crash may be over (for now at least). Total market has rebounded modestly from its November 2022 lows to over $1 trillion.
And despite the questions, the global cryptocurrency asset management market is expected to reach $9.36 billion by 2030, a more than tenfold increase from $0.67 billion in 2020.
Crypto has been down but not fully out. Exercise extreme caution with this lightly regulated asset class.
The need for new capabilities to keep up with the competition, as well as to keep up with trends like alternative investments and direct indexing, are the reasons for sustained M&A activity.
In addition, asset managers will look for different kinds of deals, including transactions that focus on environmental, social, and governance products and deals to improve their operational efficiency.
When deliberate efforts are made, real progress takes place, as seen by investment management firm Wilshire Associates.
Wilshire Associates adopted the reporting standards of the Diverse Asset Managers Initiative, an organization with a goal to increase the use of asset managers from underrepresented groups by institutional investors and to growing those managers’ assets under management.
When following those standards, the proportion of Wilshire clients investing with diverse-owned firms grew from 20% to 39% from 2018 to 2021. However, AUM with diverse-owned firms still lagged, and the asset management industry overall continues to struggle with increasing diversity at desired rates.
When it comes to women, they've made gradual progress with representation, but still not where many believe it should be.
And the lack of representation of women and minorities in asset management is by no means due to a lack of ability. In fact, the lack of representation is a lost opportunity.
According to a report from the Diverse Asset Managers Initiative (DAMI), funds managed by diverse asset managers often yield greater performance results for their clients than the broader market.
Katie Coch, Chief Investment Officer of Public Equity at Goldman Sachs Asset Management, had an interesting take:
"In investing, you seek to create an edge by having a unique perspective relative to the market. One of the ways to cultivate that variant perspective is to bring in people with different perspectives and backgrounds – ensuring that there is a diverse set of voices at the table so that our collective understanding is better informed and less biased."
In the meantime, the continued encouraging of women and minorities to pursue a career in asset management will strengthen the talent pool, especially with a looming talent shortage.
The downward pressure on fees shows no signs of stopping.
Larger asset managers like Vanguard, American Funds, and Inspire Investing cut their fees earlier in 2022.
This is huge for their investors, as they save a lot more money.
But for smaller competitors, they feel the pressure even more, losing out on potential clients while dealing with rising costs.
Despite the downward pressure, some firms have fought back. Expanding offerings and when delivering genuine value, clients will pay more if they know they'll get a lot in return.
Also, firms can cut costs. One place to start is operations.
Asset managers can outsource their middle- and back-office work to third-party providers. In turn, they benefit from cost savings and timely, accurate reporting. This also frees up their team to focus on revenue-generating activity.
The SEC has been quite active with enforcement of rules recently, and with cryptocurrency crashing, they have more work cut out for them.
And they're not slowing down, and that's a good thing.
To keep our markets fair, functional, and transparent, it is imperative that the SEC continues to crack down on fraud, corruption, and other financial crimes.
Now, the SEC is considering new regulations that sets standards around how asset managers' use of third parties.
The SEC recognizes the benefits asset managers gain from outsourcing, but they also know the risk firms and their clients face if asset managers don't do their due diligence on third parties.
According to the SEC, "the proposal would require advisers to satisfy specific due diligence elements before retaining a service provider that will perform certain advisory services or functions, and to subsequently carry out periodic monitoring of the service provider’s performance."
This rule would only apply to firms that outsource certain “covered functions,” including those services or functions necessary for providing advisory services in compliance with the Federal securities laws and that if not performed or performed negligently would result in material negative impact to clients.
In addition, the proposal would require advisers to conduct due diligence and monitor all third-party record-keepers and obtain reasonable assurances that the record-keepers meet certain standards.
Lastly, the proposal would require advisers to maintain books and records related to the new rule’s oversight obligations and to report census-type information about the service providers covered under the rule.
When asset managers partner with an outsourcing provider like Empaxis to handle their middle- and back-office functions, they can rest assured that we value compliance.
We're an open book in how we operate, and we are proud to share our ISO 22301 certification, among other credentials.
While Democrats maintained control of the Senate and Republicans gained control of the House in the recent midterm elections, enacting new tax legislation in the US will prove difficult the next 2 years.
With Democrats and Republicans holding small margins of control in the Senate and House respectively, the projected gridlock is likely to prevent decisive legislation on taxes, one way or the other.
Democrats would like to increase taxes on the wealthiest individuals and corporations, as they believe it will reduce the inequalities in the country.
Republicans would like to make Trump-era tax cuts permanent and limit funding for IRS enforcement, as they believe lower taxes and less regulation will spur more economic growth.
To learn more about what the recent midterm elections means for tax policy, check out this Forbes article.
In any case, whatever happens will influence the way asset managers run their business (i.e. assess cash flows, determine how much they need to pay for taxes, decide when to buy and sell assets).
As much as some employers want their employees back in the office, they need to be flexible with their demands.
With gas prices still at near-record highs, commuting to and from the office Monday-Friday will be a hard sell to existing and prospective employees.
Asset management firms that promote workplace flexibility will have an advantage over those that don’t. Employees and applicants with options will go where the grass is greener.
And even as employees return to the office, it should be a more flexible, hybrid work environment. Employees have grown accustomed to this flexibility.
In short, the way asset managers worked before the pandemic is over.
George Wilbanks, founder and executive recruiter of Wilbanks Partners, an executive recruitment firm, shared this take:
"The cat's out of the bag, and firms have to respond to it... The firms that don't [allow greater workplace flexibility] are really going to have a challenge on their hands."
To maintain long-term competitiveness, asset management firms need a proper tech stack. It means getting rid of older, less effective systems in favor of a cloud-based, all-in-one setup.
Use the financial technology to grow and scale your business: service more clients while expending minimal resources, spend more time gathering clients, and marketing your firm.
Also, use the technology to improve internal collaboration and workflows. Adopt more effective cloud-based technology in the form of a data warehouse, portfolio accounting system, trade order management system, compliance reporting system, CRM, etc.
Not to mention, asset management clients want instant access to their investment portfolios and easier communication with their asset advisor. They need an all-in-one platform for this.
At Empaxis, we help asset managers on their path to digital transformation.
Our TAMP1 platform lets asset advisors and their clients see all reports and data in one place in real time, pulling in data from any required sources. In the process, we help asset managers streamline processes by automating their workflows.
In the world of asset management and trends, there's never a dull moment.
As much news there is with inflation and a shaky market, rapid advances in AI could really shake asset management to the core.
By observing the trends, asset servicing firms must do everything they can to put their best foot forward, be it:
- focusing on the right investments
- cutting costs
- hedging against risk
- making the workplace attractive to prospect hires by offering hybrid work
- leveraging technology to be more efficient
Admittedly, the rest of 2023 may be challenging for many asset managers, but they have tools at their disposal to make it through and ultimately, come out ahead.