Asset Management Trends 2022

The asset management trends for the rest of 2022 will be shaped in large part by inflation and a bear market, affecting investment strategies and how firms  operate.

Up until last year, the asset management industry had been in growth mode, topping $100 trillion in total assets.

But right now, with inflation and rising global conflict, the markets are well below their record highs from late last year.

While other asset management trends related to ESG and M&A activity are worth noting, inflation is the elephant in the room.

Below are some of the trends to follow.

10 Asset Management Trends to Watch in 2022

1. Asset Managers Must Deal with Inflation and Find Safe Havens

Inflation is rising at its fastest pace in 40 years, thanks to a perfect storm of issues: supply chains disruptions from COVID-19 and Russia's invasion of Ukraine, printed money at the height of the pandemic, and recovering demand.

In this environment, asset managers need ways to offset high inflation, but finding those safe havens is increasingly difficult.

Cryptocurrency looked like a good option up until last year, but not anymore right now. Even consumer staples aren't as safe of a bet when inflation gets too hot.

And with the Federal Reserve raising interest rates to slow down inflation, that affects property sales, and real estate values will grow at slower rates or decline altogether.

Despite the headwinds, real estate remains one of the more attractive investments, in particular REITs.

Alex Doll, a certified financial planner and president of Cleveland-based Anfield Wealth Management, shared his take on real estate:

“Real estate performs well because landlords and property owners see the values of their properties increase… Also landlords can somewhat easily pass-through rent increase.”

Also, consider a recent report from BlackRock that suggests the total returns of privately held property and infrastructure assets globally have beaten those of main stock and bond indices when inflation has exceeded 2.5%.

In addition to real estate, value stocks have performed well recently.

And here are some other assets to invest in and ways to profit during inflation.

2. ESG Stays Top of Mind, ESG Share of Assets Continues to Grow

According to a Celent report, ESG assets are excepted to top $53 trillion by 2022. By the end of the 3rd quarter in 2021, there were 7,486 funds for ESG (a 51% increase), and that number is expected to grow.

Consider the demands of your current and potential clients. They are increasingly concerned about climate change, social issues, and global conflict. They want to invest in businesses that reflect their values.

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.

In terms of client acquisition and retention, having ESG as part of your strategy makes sense.

Not only that, ESG funds have outperformed the S&P 500, showing that you can pursue profits and invest in a socially conscious manner.

Of course, 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.

3. Cryptocurrency on the Rise... and Fall

Although cryptocurrency got a huge boost from support by The White House earlier this year, 2022 has not been kind.

As of July, cryptocurrency total market capitalization plummeted to $866 billion, well below its $3 trillion peak in November 2021.

A lot of people are probably thinking, "What is the future of crypto?" Will the market bottom out before a new rally?

Whatever the case may be, asset managers must proceed with caution

Financial advisors recommend no more than 5% of a portfolio allocated towards crypto, or at least whatever you are OK with losing.

Cryptocurrency is still a relatively new asset class, and it has its share of "growing pains." It's gone through tough times, but it's too early to say it's the end of crypto.

As it matures with better regulation, understanding, and oversight, better days may be ahead.

And assuming a long-term upward trajectory, there will be demand for skilled asset managers who can manage crypto-assets for their clients.

Check out his PwC blog post that goes further into the topic of crypto-currency and the growing demand for talent.

4. Asset Manager Merger & Acquisition Activity Remains High

A Piper Sandler report revealed that 2021 was the most active ever for asset manager M&A activity, reaching up to 392 deals.

2022 appears to be similar, as Piper Sandler believes M&A activity will remain high due to an ongoing reshaping of the industry ledy by shifting age demographics, evolving client preferences, and new technologies.

5. The Case for Active Investing

During the most recent (and long) bull market run, passively managed funds outperformed the actively managed more often that not.

As a result, many investors preferred the lower cost passively managed funds, much to the detriment of active managers who want the investors' assets to manage.

But now, the tide might be turning...

In a down market, active managers have more tools at their disposal to pick stocks and mitigate their losses. Passive funds don't have such flexibility.

In fact, actively managed ETS have outperformed passive, with more than half of US stock funds outperforming the average passive portfolio year-to-date through May 30. This is an increase from 45% in 2021.

Additionally, active funds have also mitigated losses in this bear market. The average annual return through May for active large-cap value funds was -4%, versus -7.3% for comparable passive funds. At the same time, active small-cap core funds returned -10.9%, versus -13.1% for passive peers.

6. Asset Management Fee Compression Continues

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In spite of the opportunities with ESG investing and crypto, asset managers' fees will be under tremendous pressure.

The downward pressure on fees shows no signs of stopping, and asset managers need to take action.

First, they have to 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.

7. SEC Asset Management Regulations Under Review

At a recent SEC Asset Management Advisory Committee (“AMAC”) meeting, SEC Chair Gary Gensler spoke and covered some of these topics:

  • Improving fund disclosures
  • Regulating digital engagement practices
  • Improving the resiliency of money market and open-end funds
  • Enhancing private fund transparency
  • Imposing criteria for “green” funding

SEC Commissioner Hester Peirce also spoke, in support of the AMAC’s Small Advisers and Small Funds Subcommittee final recommendations to:

  • amend the definition of “small entity” to be more reflective of the fact that “most investment advisers are small entities”
  • address the regulatory burden faced by small advisers
  • enable investment advisers and funds to deliver all their communications electronically by default

Regulations must reflect reality and adapt with the times, and the topics discussed reflect changes (or improvements!) down the road.

Whatever the outcomes may be, be prepared for regulatory policy changes in the asset management industry.

8. Tax Increases on the Horizon?

Holding a majority of seats in the House, Democrats are considering a tax increase on the wealthiest American individuals and corporations.

Here are some of their proposals:

  • Raise the corporate tax rates to 26.5% (from 21%) on businesses that report more than $5 million in income
  • Increase the top tax rate for capital gains to 25% (from 20%)
  • Raise the marginal tax rate to 39.6% (from 37%) for households with more than $450,000 of yearly taxable income and $400,000 for unmarried individuals

With these proposals in mind, it 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)

9. Flexible Working Environment in Asset Management

As much as some employers want their employees back in the office, the way asset managers worked before the pandemic is over. Not only that, COVID-19 is still not over; remote work must remain an option.

And 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.

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."

10. The Digital Transformation Movement Continues

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Why Move from Client-Server Portfolio Accounting Software to a TAMP

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.

Asset Managers, Find Opportunities Amidst High Risk

In the world of asset management and trends, there's never a dull moment.

As much as there is going on, inflation is really the hot topic. How to protect investments against rising inflation is the big challenge, and it affects how companies invest and operate.

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, it is a challenging year for many asset managers, but they have tools at their disposal to make it through and ultimately, come out ahead.

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