Updated: Aug 6, 2019
With a rapidly-changing asset management industry, new innovative technology, increasing consolidation and the rise of both index and ESG investing, the future of equity portfolio management has a clear direction despite its inherently uncertain nature as an industry.
The most certain statement we can make about the future of investment management is that indexing will be a significant part of it. This will require greater levels of financial engineering skills and technology in providing more possibilities to hedge or make profits. Consolidation in index fund management is set to continue, with a widening gap between leading and lagging fund managers. Declining market returns, slowing organic growth and contracting margins reveal that the industry is not as scalable as previously believed. An example of such consolidation is the recent merger of Standard Life Investments and Aberdeen Asset Management, resulting in significant scale benefits across asset classes and geographies. The most successful indexing firms manage trillions of dollars’ worth of assets globally, such as Blackrock, Vanguard and L&G, offering very low fee index funds. An advantage of this strategy is that indexing does not seem to face systemic risks, which is especially important in the current macroeconomic climate with so much uncertainty.
The use of technology such as AI, machine learning and big data can be useful to construct well-diversified portfolios and for risk-management purposes. These innovations are set to play an important role in equity portfolio management going forward. Quantitative pure alpha investors—especially those who have the required skills—are already exploiting these opportunities, while other pure alpha investors may need to upgrade their skills in this technical area. There are reasons to believe that some pure alpha managers can still succeed in the future, based on informational inefficiencies, behavioural anomalies, investor constraints, and some opportunistic trades. The top pure alpha investors should be able to deliver consistent performance, as seen my fund managers such as Charles Acker, Andy Brown and Brad Gerstner. Much of it is about finding publicly available information the market does not yet understand.
Non-investment goals can live side-by-side with investment goals. Grouping those factors under the general heading of sustainability (or ESG), investors will have their choice of sustainable index funds and sustainable pure alpha funds, along with their standard counterparts. Given the assets in these investments already and the availability of technology to facilitate managing large numbers of separate accounts, investment managers can cater to the wide range of viewpoints and beliefs of their investors in terms of sustainability.
Looking forward, we can expect low fixed fees and increasing use of incentive fees in investment management. Investors do not see active and index strategies as mutually exclusive, with both playing an important role alongside new technologies in equity portfolio management. Finally, consolidation is set to continue in the industry particularly in terms of index fund management as opposed to pure-alpha investing, in order for businesses to reap rewards from scale from various asset classes and geographies.
References: The Future of Investment Management, Ronald N. Kahn, CFA Insitute Research Foundation.
Truths and the Future of Active Equity Investing, Blackrock.
Asset management M&A: Industry Outlook 2017 and Beyond, Deloitte.