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Subsequent Lessons from the Past, Insights for the future: Two decades of change in the investment industry

Subsequent Lessons from the Past, Insights for the future: Two decades of change in the investment industry

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Reflecting on the past two decades in the investment industry, and the significant changes that have occurred, can be extremely useful in helping us prepare for the future. As Nedgroup Investments celebrates its 20th anniversary, I have spent time looking at the big events and shifts of the past few decades to attempt to look at what the industry may look like in the coming decades.

As a departure point, let's consider some of the headlines from 2003.

  1. Human genome project completed after 13 years and $2.7 billion of investment: This was a monumental scientific breakthrough but too expensive for practical use. The subsequent drastic reduction in the cost of sequencing a human genome, from $100 million to less than $1,000, highlights the power of exponential technological advancements. Human minds naturally think of change as linear, so understanding where these exponential changes are happening can be immensely valuable, especially when they occur close to inflection points. 
  2. USA invasion of Iraq: Another headline from 2003 was the US invasion of Iraq. While it may seem like a distant memory, recent events like the Russian invasion of Ukraine remind us of ongoing geopolitical conflicts and the widespread effects that they can have. Mark Twain's quote, "History doesn't repeat itself, but it often rhymes," emphasises that, while we may not know when or between whom these conflicts will arise, the likelihood is that they will.
  3. Temperatures rising: The highest-ever recorded temperature in the UK in 2003 and numerous subsequent temperature records in recent years demonstrates the significance of identifying structural trends and tail or headwinds early on. By recognising these trends, we can position ourselves to leverage their potential impact.
  4. No iPhones: The absence of headlines about iPhones in 2003 is a stark reminder of how difficult it is to predict the future accurately. Since then, 2.4 billion units have been sold and they have fundamentally changed the way we interact, entertain ourselves, consume information, and work. Acknowledging the limitations of our foresight is crucial in navigating the unknown and being prepared for new game-changing developments to enter our lives.

So how does being cognisant of these trends help us on the path ahead? As Niels Bohr's said: "Predictions are difficult, especially about the future,". However, my experience has taught me that while some things will change, and change dramatically, other things stay the same – and this gives us a foundation to work from when it comes to long-term planning. 

For example, despite the ever-changing landscape, certain human emotions such as fear, and greed (renamed FOMO recently) remain timeless. Understanding the influence of these emotions on investor behaviour is a fundamental part of being able to make rational and future-proof decisions. 

In our planning process we identify and debate which large trends we think will most impact our industry so that we are able to position our business accordingly. As I look into the crystal ball, I see seven key trends that stand out. Ask yourself: 

  1. How important/relevant do you think they are for you/your business?
  2. If relevant, how well do you understand them and how well prepared is your business?
  • First, recognising the impact of interest rates on asset prices, especially in the context of a period of artificially low rates over the past two decades which created numerous anomalies and risks. With the rapid increase in rates over the last 18 months (the fastest any of us have experienced in our careers), a 60/40 balanced global portfolio experienced its worse annual return since 1931. While this risk has clearly played out, there remain areas, particularly illiquid asset classes where risks remain and it seems sensible to be cautious.
  • Second, geo-political tensions, exemplified by recent events, pose a major risk to the relatively stable world order we have known for the better part of the past century. Understanding the potential consequences of this fragility and how states might/can align themselves is crucial. For example, our sleepy Simonstown port and the events that did/didn’t occur on Lady R, could well impact South Africa’s AGOA agreement which gives duty-free access to the US for over 1800 products.
  • Third, demographics, particularly declining birth rates and an aging population, have slow but certain long-term game-changing implications. Experts assert that China’s population has peaked at 1.4 billion and could reduce by more than a third by the end of the century; its working population is already reducing rapidly. This has a material impact on both individual finances (having to fund a longer retirement) and state finances (fewer tax-paying workers need to support more retirees).
  • Sustainability, although still facing challenges, continues to shape the industry and is a long-term structural trend. Staying authentic, being educated, and transparent are essential in responsible investing and to avoid the risks of ‘green washing’.
  • Increasing fees incurred by investors is a significant trend that has continued across asset classes over the past two decades. This has been led by both an increase in the use of passive and the lions’ share of new flows going to the cheapest quartile funds (both active and passive). As costs increase, driven by technology spend and regulatory requirements, adapting to this trend is essential for both asset managers and wealth managers.
  • Cybersecurity remains a top concern, as cybercrime continues to grow and poses significant risks to individuals and organisations. The average cost of data breach is $3.86m and the average cost per stolen record is $146 per individual. The challenge is that it’s exceedingly difficult to isolate who you are up against when it comes to cybercrime. Understanding the evolving nature of cybersecurity threats and taking necessary precautions could be the difference between companies that succeed and those that do not.
  • Lastly, the rise of generative AI has brought about a paradigm shift in creative tasks. Gates spoke about in his career two examples that struck him as revolutionary – the first was effectively the computer and graphical interface in the 80’s and the second was Chat GPT. The speed and the scale at which generative AI is evolving across both analytical and creative spheres is changing the way we think and the impact on various industries, including financial services, cannot be underestimated. There is no doubt that keeping up with this rapidly evolving space is vital.

In conclusion, the past two decades have witnessed significant changes in the investment industry. Reflecting on the past, learning from experiences, and looking forward to key trends are essential for businesses to remain relevant and well-positioned. Amidst all the change and innovation, it is crucial to remember that investors are humans driven by emotions. Amongst all of the trends, consistency and trust are foundational principles that will endure in the industry's future.

Nedgroup Investments dedicates many hours to identifying and understating industry and world trends that may shape our future. Follow us for more detail and further content on this topic.