Decoding 2024: Five Economic Trends Impacting Asset Management

As we progress through 2024, asset managers face a dynamic global economic landscape. This article breaks down five critical economic trends – inflation dynamics, evolving investment strategies, equity market shifts, the growing role of private markets, and potential forecast risks. These trends are not only shaping the economic outlook for the year but also significantly influencing the asset management industry. A clear understanding of these trends is essential for asset managers to navigate risks, identify opportunities, and formulate effective strategies in this changing economic climate.

Inflation dynamics: After a bruising year of inflation-induced volatility, the pivotal question facing central banks and the markets is: to what extent do inflationary pressures remain entrenched? Sustained falls in headline inflation rates – the most visible indicator – suggest that the worst is over. Central bank policy committees clearly do not want to countenance further interest rate rises. Most market participants expect the central banks’ next move to be downwards; the main question is when.

Investment strategies: Investor sentiment has pivoted in expectation of probable rate cuts by central banks, fuelling a reawakening in the markets. As inflation concerns ease, many are asking what advantages this new world might hold. An immediate consequence is the opportunity for investors to make the most of the re-set and put their cash to work. It’s no surprise we’re hearing the mantra: “Bonds are back!” In the fixed income market, the opportunity to lock in the current level of yields on high-quality bonds looks attractive. Not only can these assets provide a healthy income stream, but there is also the added benefit of potential diversification if the growth outlook turned nasty.

Equity markets and tech innovation: A vigilant approach to the extreme valuation disparities within the equity markets would be wise, particularly in the U.S. tech sector, where AI-driven excitement has fuelled severe price distortions. Glittering promises from the tech world have a habit of not proving quite as pervasive as first promised; don’t forget, too, that it is notoriously difficult to pick the ultimate winner. Dispersion across regional markets could provide broader gains, particularly if investor interest in UK and European stocks picks up as falling inflation gives rise to renewed economic activity.

Role of private markets: While bonds can provide effective protection from growth shocks, they do little to mitigate against inflation-driven shocks. Alternative assets can be useful to plug gaps where the public markets are insufficient or unsuitable. Investors are increasingly obliged to access private markets anyway, as ambitious, fast-growing companies choose to stay private for far longer than just a few years ago. There are also opportunities to be found in sectors that thrive in inflationary environments, such as timber.

Forecast risks: The primary downside risk is that inflation concerns continue to drive market volatility. While headline inflation rates have improved, underlying pressures remain in the form of continued supply chain issues linked to the rerouting of global trade, and conflagration in the Middle East; wage growth, too, is one to watch, while political noise, much of it emerging from a pre-election United States, adds another layer of uncertainty. While it’s still too early to call the U.S. election, it’s good to remember that what politicians say and what they ultimately do may be very different. Legislative checks and balances have historically tempered much of even the most radical policy agenda.

Navigating the 2024 Geopolitical Landscape: Key Trends Impacting Asset Management

Asset managers and financial institutions are operating in a world increasingly influenced by shifting geopolitical dynamics. This article delves into four key geopolitical trends in 2024 – shifting ideological tides, political reconfiguration in the UK, the challenge of restoring political trust, and the impact of election dynamics and unforeseen shocks. These trends are shaping the global political landscape and have significant implications for the asset management industry. Understanding these geopolitical shifts is crucial for asset managers to navigate potential risks, seize opportunities, and formulate effective strategies in this changing environment.

Shifting ideological tides: The coming year represents a pivotal moment in global political engagement as an estimated four billion people in 50 nations – almost half the world’s population – go to the vote. For better or worse, the spotlight shines most brightly on the United States, but prevailing themes of political distrust and the burgeoning appeal of populist ideologies echo a shared political narrative across much of the world. Notably absent is any celebration of democratic values; in its place, pervasive disaffection and a conspicuous pivot to the right, giving rise to a palpable feeling that decision time has arrived in the choice between autocracy and democracy.

Political reconfiguration in the UK: In contrast to the global rightward tilt, the Labour Party’s transformation under Keir Starmer has significantly bolstered its electability. Key challenges facing future Labour governments range from navigating potentially seismic shifts sparked by the integration of AI into an employment landscape deeply rooted in services to invigorating an economy still labouring under the legacy of successive rounds of austerity. For now, Labour continues to tread carefully on any possible realignment with the European Union, although a substantial election win could provide a mandate strong enough to make some very bold decisions.

Restoring political trust: Across major economies, a pressing concern is the erosion of public trust in politicians and politics itself – a particularly live issue in a post-Johnson UK. To help bridge the disconnect with the electorate, political leaders might reinforce their commitment to the Nolan Principles, emphasising honesty, integrity and selflessness in public service. Other proposals include an induction system for new Members of Parliament in hope of shaping the ethos of newly elected representatives before disenchantment sets in. It’s not helped when governments fail to listen to the electorate – chronic, real-world problems such as housing drive voters straight into the arms of the populists.

Election dynamics and unforeseen shocks: Electoral forecasts remain vulnerable, of course, to sudden disruption by unforeseen events that can drastically alter political fortunes – just look at recent elections in Australia, Norway, Scotland and Spain, where unexpected developments dramatically reshaped the political terrain. In the U.S., the main candidates’ advanced ages and the legal controversies buffeting Trump suggest at least the possibility of sudden profound change.

The Regulatory Roadmap of 2024: Top Five Trends Shaping the Future of Asset Management

As we venture into 2024, the regulatory landscape is set to undergo significant transformations with five regulatory trends defining the asset management sector in the years ahead. These trends encompass sustainability and ESG integration, financial stability, emerging retailisation of private assets, the non-banking sector’s role, and EU-UK regulatory alignment. Each of these trends presents unique challenges and opportunities for investment funds and asset management professionals and understanding them is crucial for navigating the evolving regulatory environment, driving compliance, and managing risk effectively.

Sustainability and ESG integration: In a pivotal year for Europe, underscored by national and European parliamentary elections, the regulatory agenda remains busy. In view of the huge growth in sustainable finance, implementing sustainability-related regulation and avoiding greenwashing remains a supervisory priority for the European Securities and Markets Authority (ESMA). A key area is the issue of fund names: with Articles 8 or 9 effectively acting as a “proxy label” for funds, ESMA’s primary concern is to ensure that the underlying investments are properly aligned with a fund’s name where those names use ESG or sustainability-related terms. ESMA will publish new guidelines on the use of ESG or sustainability-related terms in fund names in 2024.

Financial stability and liquidity: Amid a new macro-prudential environment, a renewed focus on financial stability has seen the Financial Stability Board scrutinising liquidity mismatches in open-ended funds, with the International Organisation of Securities Commissions reviewing liquidity management issues. With the EU focusing on monitoring the implementation of liquidity provisions by asset managers, some mandatory requirements on the use of liquidity management tools are likely through the Alternative Investment Fund Managers Directive (AIFMD) review – so called AIFMD 2.0, with ESMA due to draft technical standards specifying the available tools. In the area of leverage, AIFMD 2.0 also contains new rules on loan origination.

Emerging retailisation trends: One of the hottest topics of the year, the European Long Term Investment Fund (ELTIF) 2.0 structure has sparked a significant amount of work by national regulators committed to broadening investment in private funds; an area where Europe trails the United States. In its proposed Regulatory Technical Standards (RTS) for ELTIF 2.0, ESMA has made significant efforts to balance flexibility and agility against risks to financial stability. The draft RTS is now being reviewed by the European Commission.

The non-banking sector’s role: Debate surrounds the level to which the asset management sector will be called on to finance global climate transition. From a regulatory standpoint, fairness for investors must be balanced against maintaining the robustness on which the wider economy relies. The European Commission’s report considers these issues. Further work may be needed to examine the interconnectedness of the banking and non-banking sectors, though so many safeguards already exist at both the fund and macro levels, including stress testing, leverage limits and rules governing liquidity management and loan origination.

EU-UK regulatory alignment: In the UK, where the FCA has adopted an outcomes-based philosophy exemplified by its Consumer Duty, the regulatory agenda has proved to be broadly aligned to that of the EU – in a global industry, after all, similar issues face all regulators, even if the timing and specificity of their responses may differ. Under the UK’s Overseas Fund Regime, a legislative framework for a new streamlined process to recognise overseas collective investment schemes domiciled in jurisdictions deemed ‘equivalent’ by the Treasury will make it easier for such schemes to market to retail investors in the UK. As a first step, the Treasury has deemed EEA states to be equivalent in relation to UCITS (except money market funds). The FCA is also working to streamline the recognition process for individual funds once their jurisdictions have been deemed equivalent.

Investor Preferences Amid an Evolving Asset Allocation Landscape

Investors face a paradigm shift in asset allocation strategy as structural adjustments in the investment landscape present new opportunities in the fixed-income and private markets. Tailoring asset allocations to specific pension fund needs remains crucial, while investor intuition remains an important factor in spotting opportunities during periods of market stress.

Investor preferences amid a shifting landscape: Asset allocation remains one of the most critical factors in determining success or failure for investment funds. As the sun sets on a decade that has proved remarkably generous to the pensions industry, investors should assess the extent to which their needs and preferences may evolve as the tailwinds that have proved so helpful for so long morph into challenging headwinds.

Diversification and evolving markets: With their eyes focused resolutely on the long term, pension funds have learned how to remain undisturbed by the clamour of politics and the distractions of the short term: positioning a portfolio for geopolitics, after all, is nigh on impossible. Yet as funds redesign their portfolios in search of the robustness needed to withstand the challenges of the coming decades, the diversification agenda – so important in a world in which traditional bond/equity correlations have largely fallen away – will remain front of mind.

Structural shifts: The good news, funds report, is that promising new opportunities abound, particularly in the fixed-income and private markets, which seem set for spectacular growth in a world retooling for the zero-carbon transition. Increasingly wary of growing volatility in the public markets, investors’ growing preference for alternatives is driven, too, by the search for scale: companies that once resorted to private funding to plug gaps can now finance landmark deals without any recourse to public markets. Despite the recent LDI and real-estate crises, greater comfort among investors with ever-higher allocations of illiquid assets has only accelerated the trend.

Tailoring allocations: Asset decisions remain heavily dependent on pension funds’ membership profiles, scheme types and funding needs, of course; what works for one may not work for all. Asset and liability management techniques can provide a useful lens on tough allocation calls, but, despite technological aids, there’s still a role for good old-fashioned investor intuition. Opportunities arise through crisis, after all: nimble footwork can pay handsomely when assets come under stress and nervous investors flock to the exits.

Navigating the Future of Wealth Management: Key Trends for 2024

The wealth management landscape is at a pivotal turning point driven by demographic shifts, market dynamics and evolving consumer preferences. This article explores the trends driving wealth managers, insurers and banks to evolve their business models to better serve different customer segments, including mass market, affluent and high-net-worth clients. Understanding the shifting landscape will be crucial for asset managers to navigate potential risks, seize opportunities, and formulate effective strategies.

Changing market dynamics: The wealth management landscape is set to undergo significant change in the years ahead. Ageing populations and related demographic shifts have led to a greater demand for intergenerational wealth transfer, creating new opportunities for product differentiation for the sector. The distribution ecosystem is also evolving, with disruption and challenge from fintechs and new entrants intensifying competition and pushing some to consolidate. Investment strategies are becoming more diverse, with the increasing use of multi-asset solutions and inclusion of alternative assets in retail portfolios. Regulatory change continues to also shape the market.

The client experience: Amid this complex and shifting landscape, ambitious players continue to focus on customer engagement. Changing consumer preferences have placed greater emphasis on bespoke solutions; greater demand for a digital experience from a younger generation is also driving new approaches in how institutions interact with their clients. Responses are becoming more dynamic, with a “customer first” approach founded on technology-based solutions that aim to gain efficiencies at the initial phase of the customer experience.

Industry responses: As business models evolve, established players and new arrivals alike share the challenge of securing customer access. Some banks are already participating in the retail wealth management sphere by leveraging their existing customer bases; insurers and other new players have looked instead to acquire companies for their customer networks, then built out wealth management offering platforms to match. A chief driver common to all is the desire to own as much as possible of the value chain, including the customer advisory element, the product offering, and the investments that lie beyond.

Technology and the challenge of retention: Unsurprisingly, technology will be pivotal in delivering tailored solutions that meet the demands of this changing consumer base. The challenge for institutions lies in dovetailing their investment proposition with a tech-driven front-end user experience. If a customer wants access to more complex investment solutions, particularly retirement planning, the customer journey needs careful design with well thought through choice architecture – not an easy task without some human intervention.

Regulatory changes: Increasing regulation is also driving development, including Consumer Duty that is still working through how providers and advisers operate. Regulatory scrutiny of growing retailisation in asset management, such as the EU’s European Long Term Investment Fund (ELTIF) measures, and the introduction in the UK of a new principle focusing on the delivery of good customer outcomes, will accelerate existing trends in the industry and ultimately improve client retention rates.

Navigating ESG Challenges in Asset Management

Environmental, social and governance (ESG) considerations are increasingly a defining factor in the evolution of the asset management industry. This summary highlights some of the factors driving a changing ESG landscape, including the funding challenges and investment opportunities likely to arise from the transition to Net Zero, the importance of establishing a global baseline in reporting requirements and a need to plug a skills shortage in ESG data capture and management in the asset management industry.

Funding the transition to Net Zero: As asset managers consider the long-term implications of a global transition away from fossil fuels in a post-COP28 world, responsibility for financing the shift to Net Zero – possibly the most capital-intensive transition in history – will fall primarily on the private sector. The sheer scale of the capital needed to decarbonise vast swathes of the world economy, including heavy industries such as the cement, steel and aviation sectors, is significant. There is progress, even with government policy some way behind where it needs to be in order to support the transition, some landmark infrastructure and clean-energy projects have already got off the ground and funding opportunities are expected to increase rapidly. Beyond funding opportunities, skilled human resources and new innovative products, processes and technology are all an output of this new industry.

Reporting complexity: The pressure on asset managers to embed ESG in their investment management considerations has already spawned a huge demand for the generation and reporting of information in an attempt to allow them to substantiate their ESG-related claims and to help investors make investment decisions that support ESG initiatives and a transition to Net Zero. There is an increased focus on transition plans and a growing requirement for those plans to be disclosed. The need for a more unified approach to reporting standards is still acute: while the creation of the International Sustainability Standards Board has been a positive step, current reporting standards remain fragmented, underlining the need for a global baseline befitting a global industry. Beyond merely collecting the data, data flows and analysis need to be operationalised and digitalised so it is reportable – people and processes are needed to do this.

Skills shortage: The unrelenting push for data has exposed a lack of expertise in the investment funds industry. ESG reporting requires expertise in financial reporting, knowledge of regulatory requirements and data analysis, in addition to experience in evaluating ESG materiality. With the direction of travel moving towards ever-greater disclosure requirements, the need to plug a skills gap will become more pressing, particularly with regards to the automation of data extraction and integration of data sets into decision-making. Even where organisations possess expertise in these fields, it is often located in different areas of the business, presenting ongoing challenges in finding effective ways to bring expertise together.

Tangible contributions to Net Zero: The implications of the Net Zero transition will also be seen in more profound ways in the industry, not just through the obligation on asset managers to extract data from investment companies at the portfolio level, but also to demonstrate how they are contributing to or accelerating decarbonisation in the real world. A singular focus on greenhouse gas (GHG) emissions – for example a plan to simply sell assets that emit GHG in order to lower GHG exposure – will not achieve effective transition. Likely implications include asset owners quizzing managers via requests for proposals (RFPs), and generally increased due diligence with managers obliged to show how they are implementing transition plans themselves.

Navigating the Investment Landscape: A Leadership Lens on 2024

With the investment landscape at a pivot point, this article explores some of the trends that are likely to drive decision-making by CEOs and investment firm leaders in the coming year. Weathering the uncertainty of the more complex macroeconomic and political panorama that lies ahead may depend on getting smart about the “knowledge that matters” and shoring up talent in key areas.

Key drivers for 2024: CEOs identify a complex interplay of macro-level factors driving the year ahead. Buoyed by an initial uptick in activity, most investment firm leaders express a cautious optimism in forecasting the coming months, albeit one tempered by concerns of lingering recession risk and the legacy of last year’s interest rate spikes. Few are willing to call the year’s most influential elections with any certainty; others worry that China’s fiscal stimulus may be insufficient to prompt a global reset. Moving cash back into play will help boost growth, most believe, but the intensity of the search for scale will continue to drive aggregation and consolidation in asset management. Significant downside risks include potential for a major fallout in the U.S. job market which then feeds through into a more marked consumer-side slowdown.

Adjusting investment strategies: As the investment landscape pivots towards this more volatile and challenging future, investment firms are likely to dispense entirely with passive investment strategies and gravitate naturally towards active strategies. Acquiring knowledge – not just information or data but “the right kind of knowledge,” as investment firm leaders emphasise – will be key to understanding and mitigating risks. Being informed on cutting-edge issues like AI and having an ability to identify telling details amid the obfuscation of election-driven political noise will be vital not only to keep one’s own organisation on target but also in providing useful value-add when educating clients.

The talent imperative: The successful organisations of tomorrow are those that crack the talent question and solve the challenge of sourcing the right people to drive their organisations forward. Strategic hiring is an important tool allowing organisations to build their brands and affirm their values, making recruitment a process that merits oversight at CEO level. Across the industry, technology and ESG will remain the most competitive fields for attracting and retaining high-level expertise, but individual asset managers should identify mission-critical aspects within their operations and prioritise the talent search on those areas.

Shifting generational dynamics: Many organisations still prefer to recruit older, more experienced individuals, but hiring among the younger generations provides an opportunity to grow talent in-house. Older executives may mistrust what they see as the caprices of the millennials, but the twentysomething generation offers digital fluency, adaptability and – based at least on widespread anecdotal evidence – a preference for the office environment over remote working. Cultural change is already transforming the asset management industry, as the diversity of cultures, languages and life experiences possessed by today’s employees ushers in new outlooks at even the most traditional of organisations.

Harnessing AI in Asset Management: Navigating a Transformative Landscape

The deployment of AI and other digital value creation levers has the potential to drive transformative change in the asset management industry. Yet success in integrating technology-led applications may depend on a willingness at the executive leadership level to take a business-led approach to questions surrounding the deployment of AI-based solutions while also navigating an array of industry-specific considerations.

Understanding the potential: In an industry characterised by fee pressures, margin constraints and perennial volatility in the capital markets, AI appears to offer plentiful opportunities for disruption and for transformative change achieved through enhanced productivity. Early applications are likely to be seen in the search for efficiencies in middle- and back-office tasks and the automation of investment research. Others will seek to gain from innovations in product delivery systems or by developing sophisticated solutions to front-end tasks such as intuitive client interfaces. For all players, choosing the appropriate AI-based solution will be a key decision.

Regulations, governance and trust: Successful integration of AI will require navigating an array of industry-specific considerations, including the role of regulators and the primacy of data protection and privacy. Indeed, the question of governance lies at the heart of the AI narrative: guardrails at the policy level in the form of legislation and regulation, and – in a world in which deep fakes will be ever easier to produce – solutions at the fund management level on the issue of trust. Mitigating the risks, most believe, will open the floodgates to a far more widespread application of AI in the funds industry.

Business-led integration: Taking a business-led approach to AI adoption will pay dividends to those seeking to benefit from AI and other digital value creation levers. Ask not what the technologies can do, some advise, but rather what challenges within an organisation exist that might be solved through technology. An emphasis on the potential of AI to transform the human experience can help guide stakeholders through the transition and ensure that AI solutions are crafted to meet actual business needs, rather than simply being applied for their own sake. The most critical factors for success? Effective leadership at the executive level, a considered selection of technology tools, and adequate training.

Digital transformation beyond AI: While highly significant in itself, AI of course forms part of a broader digital transformation in asset management powered by the search for cost efficiencies, greater productivity, risk mitigation and brute market forces. The potential for AI to unlock unprecedented value, however, seems set to establish it not as a fleeting trend but as a cornerstone of the funds industry of the future.