An ancient Greek philosopher named Heraclitus is said to have coined the phrase “The only thing that is constant is change.” Roughly 2,500 years later and these words ring truer than ever. In the world of asset management, it’s crucial that firms have a grasp on where things are heading so they can remain competitive, but it’s becoming increasingly difficult to predict the direction in which things might go.
Technology leads the conversation on change, and if firms avoid new initiatives and fail to keep on top of trends they will simply fall behind. The broadening use of exchange-traded funds (ETFs) and passive algo-based investing is an ongoing race to use data and analytics to develop the most sophisticated investment strategies. Firms also need to keep internal operating systems running as efficiently as possible. Technology can alleviate administrative burdens, as well as improve investment strategy, so it’s important to judge which new technologies are worth integrating and, perhaps more crucially, which aren’t – a classic example being distributed ledger technology (a.k.a. Blockchain), which people cannot agree on what its full effect will be.
Most firms are still getting used to the changes from MiFID II and the long-term effects have yet to be seen. But the likes of MiFID II, Investment Company Reporting Modernization and Funding Liquidity will not be the end to all regulation. As the financial industry evolves with new fintech firms and offerings appearing on the scene daily, and as trading goes ever more global with accelerated growth in emerging markets, new regulation will come into play. Looking ahead, firms will have to examine whether it will be worth investing in developing the systems in-house or outsourcing them as well as ensuring they keep tabs on all of their operations.
On top of this, investor demands and regulatory bodies are turning towards sustainability with environmental, social and governance (ESG) considerations on the rise. There is an undeniable trend across the globe where investors want a more social and environmental approach, and this demand is set to rise as well. Eventually, it’s likely investors will simply expect this to be incorporated into their portfolio, so firms will need to factor this into their ongoing strategy. Similarly, alternative investments, such as real estate, infrastructure and commodities, are becoming more popular. This is being spurred on by the ongoing market volatility that links to the current economic and political landscape – another key area that is proving difficult to read.
Geopolitical curve balls, such as the potential for a Trump-driven tariff-based trade war, are also coming around thick and fast. This can prove problematic both for risk management, as well as developing long-term strategy. Brexit, for example, has surfaced issues on whether or not to open new offices in other domiciles and, if so, where the best place to move would be? It’s not yet clear. All such decisions take careful consideration, once again demonstrating the importance of asset managers having the ability to make quick but also well-informed decisions in order to keep pace with the market. On the topic of market volatility, decisions need to be made as to whether to jump on the cryptocurrency bandwagon, or avoid it like the plague. For the moment, generally, firms seem to be avoiding crypto, but the topic is not going away.
All this means asset managers need to ensure they are doing their utmost to keep up with the trends and developing strategies that bear these changes in mind. The future of asset management remains shrouded in mystery. So whatever materializes, it’s clear that the ability to adapt may well become the defining feature for asset managers, both big and small, to succeed.