The asset management trends for the rest of 2024 will be shaped in large part by persistent inflation and a volatile market, along with rapidly advancing technology, affecting investment strategies and how firms operate.
It was only three yeas ago 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.
Geopolitics and rapidly advancing technology is fundamentally changing the way asset management looks and works.
Below are some of the trends to follow.
While inflation has eased since its 2022 peak, it remains a significant factor in economic uncertainty.
Though the Federal Reserve initially signaled a slower pace of rate hikes in 2024, further adjustments may be required depending on inflation's trajectory.
And rate cuts might not come so quickly, as inflation is still higher than the 2% targets.
Of course, continued inflationary pressures could impact consumer spending, corporate earnings, and overall economic growth.
And with that in mind, asset managers need to find safe and reliable investments, challenging as it may be.
Understanding how inflation and potential economic downturns impact consumer spending is crucial for uncovering investment opportunities in 2024.
As inflation continues to influence prices, consumers will likely adjust their spending patterns. This may include reduced discretionary spending on dining, travel, and luxury goods, while prioritizing necessities like food, housing, utilities, transportation, and healthcare.
Identify sectors likely to remain resilient or even benefit from changing economic conditions. This could include:
Government policies and geopolitical events continue to play a significant role in shaping markets. Consider the following:
In volatile markets, a focus on strong fundamentals is critical.
Look for companies with consistent profitability, sustainable business models, and experienced management teams. This, alongside strategic asset allocation, can help investors navigate the complexities of the 2024 markets.
Market volatility could drive renewed interest in active management, but it's still a mixed bag.
Acording to a BNY Mellon report, 44% of asset managers expect to increase offerings of active/smart beta ETFs, while 60% of owners forecast increased allocations to passive strategies .
The future is now when it comes to artificial intelligence.
And PwC reports that 90% of asset managers already use some form of AI within their organization.
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 prompt engineering is how to manage and master AI.
And when AI is properly utiized, it means generating alpha, controlling costs, increasing profit margins, maximizing human and technology productivity alike, and ultimately providing a better client experience.
Environmental, Social, and Governance (ESG) investing maintains its importance, but investors demand more transparency and evidence-based decision-making.
Norges Bank Investment Management (NBIM), one of the world's largest investors, recognize that ESG ratings play a necessary role in guiding investment decisions, risk monitoring and stewardship activities, but the problem is the lack of disclosure regarding methodology, data sources and estimation surrounding the ratings. NBIM stated the following:
"We are a user of ESG ratings and have an interest in a well-functioning global ESG data market. As an investor, we need information on companies’ exposure to sustainability risks and opportunities, how these are managed, and relevant performance metrics."
It wasn't long ago when cryptocurrency went into free-fall, losing over half its value within a year, just as Sam Bankman-Fried faced criminal prosecution for the collapse of his crypto exchange FTX.
But since then, crypto has been in recovery mode, and asset managers have been buying Bitcoin through Fidelity's ETF, as just one example.
Part of that rise and recovery, 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.
Still, asset managers should exercise caution with this asset class.
When it comes to ESG for asset managers’ organizations within, there are signs of progress, according to Morningstar.
"We can see improvements for most managers we reviewed in the past year… They are putting in more resources, more people, they've had time to update their systems. We see improvement across the board." - Hortense Bioy, Global Director of Sustainability Research, Morningstar
And other investment organizations like Wilshire Associates have implemented programs like 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.
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.
Through their efforts, the proportion of Wilshire clients investing with diverse-owned firms grew from 20% to 39% from 2018 to 2021.
However, AUM controlled by diverse-owned US firms still lags, accounting for less than 2% of total assets.
Nimisha Srivastava, Head of Investments for North America at financial services consultancy firm WTW, shared her views on the value of diversity and asset management and how firms that show commitment will benefit the most:
“We believe the onus is on everyone in the industry, from asset owners and consultants to asset managers, to not lose sight of the opportunity that more diversity in the industry creates… We believe diversity leads to better investment outcomes, and have quantified this outperformance to be 45 basis points per annum in terms of net excess returns.”
In addition, a WTW report found that investment teams in the top quartile of gender diversity outperformed the bottom quartile by 45 basis points yearly in terms of net excess returns.
The asset management industry faces major cost pressure and margin constraints, forcing firms to evaluate their critical mass and ability to withstand the pressures from larger players, all while maintaining profitability.
And persistently high interest rates haven’t helped matters.
According to a commentary in another PwC report:
“If interest rates linger around 4% through 2024 and beyond, private markets managers will need to significantly raise their target internal rates of return (IRR) simply to compete, just as tough economic conditions and the end of cheap funding make this more difficult.”
According to another PwC survey, 16% of existing asset and wealth managers are expected to either go out of business or be acquired by larger groups by 2027.
Given a challenging market environment, nearly 3/4 of asset managers have considered acquiring or merging with competitors.
Rising costs, regulations, and market complexity are pushing asset managers towards outsourcing for long-term operational sustainability.
As asset managers consider their future state operating model, the main factors driving their decision to outsource are improving productivity and leveraging external capabilities.
And according to Cerulli, 33% and 20% of asset managers outsource the back office and middle office, respectively.
Of the asset managers surveyed by Cerulli, 58% cite leveraging external capabilities as a significant driver, followed by incorporating efficiencies (58%).
“As investing becomes more complex and challenging, keeping a firm focused on its main mission of generating returns is critical. By leveraging an outside party, managers can fine-tune their focus on other necessary strategic initiatives while building greater scale from a specialist.” - James Tamposi, Associate Director, Cerulli
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.
Additionally, we automate compliance reports like 13D and 13F.
Four years since the start of the COVID-19 pandemic, hybrid working models have become the norm.
Employees want a flexible work environment, and with gas prices at sustained highs, commuting to and from the office Monday-Friday will be a hard sell to existing and prospective employees feeling the pinch from inflation.
Those organizations that promote workplace flexibility will have an advantage over those that don’t.
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."
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 noticing the trends and knowing how to react, asset servicing firms must do everything they can to put their best foot forward.
The rest of 2024 may be challenging for many asset managers, but they have tools at their disposal to make it through and ultimately, come out ahead
Our monthly newsletter features helpful resources, articles, and tips to implement at your investment firm. Enter your email below to subscribe:
