By Nic Andrew, Chief Executive of Nedgroup investments
In March 2020, just before the world was turned upside down, Nic Andrew, Chief Executive of Nedgroup investments, outlined what he saw as five biggest trends in asset and wealth management.
Now, over 2 years later, he reflects on how those predictions played out and what has changed in the interim.
Lower for longer
The first trend that was very pertinent in early 2020 was ‘lower for longer’. The consequence of the risk-free rate being so low and therefore expensive, was that most asset classes which were priced off this reference asset were also expensive.
The implications of this were two-fold. Firstly, future expectations needed to be lowered. In some cases, this seemed fairy obvious – for example with bonds, which were already sitting at zero and couldn’t get much lower. Although Covid interrupted this prediction, more recently this assessment is proving accurate with sharp pullbacks in both the risk-free and most other asset classes.
The other implication of ‘lower for longer’ was the natural inclination to chase yields, which were likely to create potential tail risks. There are many examples of this coming to light where areas of extreme optimism and momentum have retraced substantially this year, such as high yield bonds, SPACs, non-profitable tech companies.
However, other factor affecting rates have changed dramatically over the past two years. Global supply chain issues, increasing geopolitical risks and liquidity shocks have sparked inflation fears. While initially the overriding rhetoric was that the increase in global inflation was temporary, many central banks have now admitted that they were behind the curve and are now in a difficult place having to play catch-up.
With yields across the board sitting in low single digits and inflation currently printing at high single digit numbers, beating inflation – which is the core of what clients require and what the asset management industry is trying to achieve – is not going to be easy.
It also seems that the markets are seeing the end of the ‘story stocks’ phenomena. People are starting to realise quickly that it’s not just about a good story when it comes to finding a good investment. It’s about cash flow, profitability and, most importantly for asset managers, the price one pays for an asset and sensible portfolio construction.
Therefore, it seems logical to change the name of this trend fro ‘lower for longer’ to ‘the end of easy money’.
Technology: efficiency, client experience and cyber technology
The second big trend that was gaining a lot of traction in early 2020 was the pervasive impact of technology on three areas: efficiency, client experience and cyber security. The efficiency component was a no-brainer – all businesses needed to use technology to make their businesses more efficient while also improving the client experience. Covid accelerated this trend in a range of ways such as virtual client meetings, digital events or the increased use of digital transactions.
Interestingly, while clients will still want to interact more digitally, Covid taught us that there are circumstances where clients really do still want the personal interaction. The crucial thing now is to decide where the balance is and which things would be best in person, and which ones can be digitised.
Meanwhile, the risk of cybersecurity has undoubtably increased over the past few years and most businesses have identified this as an area that warrants additional focus and resources.
As the world enters a new phase of recovery from the effects of Covid, the key question is which digital trends remain and which parts return to “in-person”. Getting the balance right will be critical and therefore, the trend we called ‘technology’ in 2020, has been updated to the more appropriately named ‘digital and hybrid’.
The third big trend before the pandemic was the increasing fee pressure across the industry. Two years on, this has played out in asset management fees, largely due to the material flows to passive and low-cost funds but also because of increased purchasing power of large buyers.
Another important element was advisor fees and the importance of identifying and communicating advisors’ alpha. There has been a lot of research into where advisors really add the most value. Much of this involves coaching clients and helping them avoid making poor and emotional decisions.
However, this value is often poorly understood and underappreciated by clients, therefore it is an area that needs much better communication so that clients can fully understand the value that their advisors add along their financial journey. To this end, this trend can largely be renamed to ‘fees and value add’.
From globalisation to externalisation
The fourth trend widely discussed in 2020 was globalisation – specifically two subset trends of emigration and externalisation.
The past two years have undoubtedly put a lot of pressure on the idea of globalisation, from global supply chain disruptions, border closures and recent geopolitical events. It is therefore even more crucial for asset managers today to remain nimble and adapt to the ever-changing macro environment and the subsequent evolution of client needs.
Changing demands of stakeholders and the complications of ESG
The final trend that was on everyone’s mind even before the pandemic was the changing demands of stakeholders, both regulators and society.
This trend has only accelerated over the past two years with the rise of ‘purposeful capitalism’ as asset owners adjust their demands in the search for more sustainable solutions. The challenge here is that, while ESG is an important and long-term trend, it is also extremely complex and challenging to get right. Many organisations that jumped on the bandwagon have been recently accused of “green-washing”.
The key is to be authentic around the topic, acknowledge the complexities and focus on education, communication and transparency. For these reasons, we have changed this trend to ‘authentic sustainability’.
On reflection, the major trends and the implications of those trends for the asset management industry, identified in the pre-Covid world, have largely remained the same over the past two years. However, while most predictions came to light as anticipated, others manifested with varying degrees of accuracy and there were also some new developments that need to be factored into our future view.
However, what is clear is that the ability to adapt and stay rational in decision making remains crucial to navigating an uncertain global environment. This is something asset managers need to stay steadfastly focused on when managing clients’ money, as well as to provide tools, content and engagements to help investors feel more empowered to make better long-term financial decisions.