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Article | Meeting Today’s Asset Management Demands: Five Asset Management Trends Driving Long-Term Growth

The last three years have been a period of profound and rapid change. The funds industry has dealt with the Covid crisis, a remote working revolution, the war in Ukraine, cost inflation, volatile financial markets and UK political instability.

Speaking at the 2023 Funds Congress, John Donohoe, founder and Group CEO of Carne Group, said: “It is a much tougher environment for many businesses than it was only a few years ago.”

But there are reasons to be optimistic. Donohoe adds: “The fund industry will continue to expand as it takes business from more traditional players like banks.”

Carol Widger, Partner at Dechert, added: “At this conference three years ago, there was one ESG panel but this is now a topic which permeates the industry and is one of the key issues on the regulatory agenda.”

Speaking at the same conference, Steven Libby, Asset and Wealth Management EMEA Leader and Partner at PwC, said: “The industry has adapted rapidly with sustainable investment funds now representing 46% of products in 2022.”

To ensure companies can thrive in today’s much tougher environment, business models need to be sustainable. There are five key trends which the industry needs to address to drive long-term growth in the asset management industry.

  1. Maintaining trust in sustainable investment

Despite the recent success of sustainable investing, it is a nascent industry with many issues to be resolved.

Speaking at Funds Congress, Karen Zachary, CEO of Crux Asset Management, said: “It’s difficult for boutique managers to embrace this development if they don’t have the resources to hire an ESG team.”

In addition, Inadequate data makes running sustainable investment strategies more complex as it makes it harder to benchmark funds and compare companies globally.

There is a danger that the opacity and lack of clear standards makes the end-investor think fund managers are greenwashing.

According to Morningstar data, some 40% of funds were shifted by asset managers from Article 9 to Article 8 categorisation in the final three months of 2022. This will erode consumer confidence in sustainable investment products.

It’s important the fund manager is clear about their intent, then explains the process to align with that intent and looks at outcomes relative to the intent and the process.

But it is difficult to demonstrate the outcome given the data challenges. David Rae, Head of Strategic Client Solutions at Russell Investments said: “There is, however, a lot of evidence solutions are being developed to overcome these issues.”

  1. Coping with regulatory complexity

In a poll taken at the 2023 Funds Congress, the audience ranked new ESG regulations as their primary regulatory worry divergence between the UK and EU rules as a close second.

There is an increasing disconnect between the different approaches taken by regulators to sustainable investment. This can make it very complex for a funds business to align its products for different jurisdictions.

In particular, the Financial Conduct Authority (FCA) is approaching its Sustainability Disclosures Requirements (SDR) as a way to label funds which is different to the approach taken by the EU.

SFDR was conceived as a transparency framework in order to foster common disclosure practice but is quite often taken as a proxy label for a fund.

ESMA recognises, however, there needs to be additional minimum sustainability criteria particularly for Article 8 funds, which are seen as problematic because there is lack of guidance and common understanding.

Broad labels for sustainability finance as proposed by the FCA will help to provide more clarity for retail investors.

  1. Reacting to demographic trends

Demographics presents both a challenge and an opportunity for the funds industry. An ageing population will become evermore reliant on savings products as they retire. But the industry also needs to consider how it will market its products to younger consumers.

Gen Z are 25% of the population and are expected to be the world’s highest spending cohort over the next decade. The industry needs to engage with this group in a different way. Trust is particularly important for this group who want companies to live their values.

James Pomeroy, Global Economist at HSBC Bank, agreed: “The values of people in their twenties are wildly different to earlier populations.”

Around half of this cohort are influenced by TikTok yet no-one in the fund industry is using this platform to engage with this population. The finance industry will need to embrace this change if we want to sell to these younger groups.

The impact of slowing growth rates is another factor the funds industry needs to consider.: “Shrinking working age populations are going to be a reality in Europe this decade, added Pomeroy.

  1. Improving the customer experience

At Funds Congress 2023, Donohoe said: “Businesses need to be simplified so they can be nimble. Those who are first to market get the biggest slice of revenue.” Building the right infrastructure is the key to ensuring fund providers can act swiftly.

Andy O’Callaghan, Global Advisory Leader of Asset and Wealth Management at PwC, added: “Technology is a vital part of the entire ecosystem from the management of investment products, the operational infrastructure needed for custodian and fund administration as well as the distribution to clients.”

But even though technology is so important, the industry has been slow to adopt new methods. The shift towards auto-enrolment has created millions of new customers which will create a challenge of scale for the industry.

The industry needs to start matching the standards delivered by other service sectors. If investing isn’t a seamless experience, then it will be difficult to get customers to save and invest over the long term. The first step is getting rid of the more antiquated processes.

  1. Managing geopolitical risk

After decades of smooth sailing, geopolitical risk has come roaring back. Lord Gavin Barwell, Senior Advisor at PwC, said: “We left the bipolar world of the cold war behind us and are now in a multipolar world.”

A key reason for this is the US’ reluctance to play global policeman. This multipolar world is accompanied by a retreat of liberal democracies which has been driven by social media and dissatisfaction, added Barwell.

Climate change will mean there will be mass migration of people which can create political instability. Barwell said: “Control of water resources will become as important as oil was in recent decades.”

As the world transitions to the green economy, there will be a competition for the minerals vital for this revolution. After 200 years of a more globalisation, we can expect this to retreat somewhat as trust breaks down between countries, added Barwell.

Navigating these trends

Given the depth and complexity of these five trends, it’s understandable for executive boards to feel overwhelmed. But the volatility of the past few years has shown the dangers of inertia.

The world has become very complex which makes it impossible to view the whole system and see all the causes or possible outcomes. Maximising the strength of your organisation requires a diverse workforce who have their views heard.

Close collaboration will be required to ensure companies can maintain trust in the sustainable investment process as well as ensuring the firm can stay ahead of regulatory complexity.

But strong teams are not enough. In an ambiguous environment, scenario planning is a necessity. While demographic trends are often predictable and allow a company to prepare for the future, geopolitical risk is much more uncertain and it is important that firms think about the impact this could have on their business.

Ensuring customers have a good experience which is constantly improving requires a company to look carefully at what they do well as well as what they do badly to drive innovation.

Companies need to be prepared. That means thinking about what we should do now for the scenarios which would be most harmful to the business.

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