Then and now: 5 trends affecting asset management and how Covid affected them
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Nic Andrew, Executive Head of Nedgroup Investments spoke to clients attending our annual Global Investments Summit held in London in June 2022. This is a summary of his presentation.
Watch the presentation here
In March 2020, just before the world was turned upside down, I was about to give a presentation about what we thought the five biggest trends in asset and wealth management were. Now, over 2 years later it’s interesting to reflect on how those predictions played out and what has changed in the interim.
Lower for longer
The first trend we identified in 2020 was ‘lower for longer’. I showed a graph (dating back to the 1300’s) that illustrated how rates were at historically very low levels. The consequence of the risk-free rate being so low (and therefore expensive), was that most asset classes which are priced off this reference asset were also expensive.
We highlighted two implications of this. Firstly, that future expectations needed to be lower. In some cases, this seemed fairy obvious – for example 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 (e.g., high yield bonds, SPACs, non-profitable tech companies etc).
However, other things 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. Central banks are being required to increase rates to deal with the inflationary risks.
With yields across the board (bonds, dividend) 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 we are all trying to achieve - is not going to be easy.
It also seems that we 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, for us as asset managers, the price one pays of an asset and sensible portfolio construction.
Therefore, we have adjusted the trend we called ‘lower for longer’ to ‘the end of easy money’.
Technology: efficiency, client experience and cyber technology
The second big trend that we identified in 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 need 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.
In the area of client experience, we predicted that clients would want to interact with us how they want, where they want and when they want. 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, including ours, 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 will remain, and which parts will 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 trend I spoke about in 2020 was fees, which we predicted would experience increasing pressure. 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.
The other element we discussed 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 appreciated by clients, and we think 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, we have renamed this trend ‘fees and value add’.
From globalisation to externalisation
The fourth trend we spoke about in 2020 was globalisation - specifically two subset trends of emigration and externalisation. Anecdotally, and looking at recent SARS statistics, we have seen an increase in financial emigration amongst wealthy South Africans, which is a concern for the wealth and asset management industry.
Furthermore, the change made in the budget speech of 2022 increasing the offshore limits for retirement funds to 45% will accelerate the trend to invest offshore. A rough calculation estimates that between R400 – R500 billion could leave the South African asset management industry as a result.
It will be crucial to understand the intended and unintended impact of the new Regulation 28 rules and what they mean for asset managers, advisors and clients. Considering this, we have changed this trend of ‘globalisation’ to ‘externalisation’.
Changing demands of stakeholders and the complications of ESG
The final trend I spoke about back in 2020 was the changing demands of stakeholders, both regulators and society. Some of the anticipated changes as a result of changes to retirement regulation have not happened as quickly as anticipated but it remains something to be cognisant of.
We also noted the rise of ‘purposeful capitalism’ which continues to be a growing trend 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, we believe, 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, we identified the major trends and the implications of those trends, with a mixed bag of accuracy in a pre-Covid world in 2020. While most of our predictions came to light as we 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 that we remain steadfastly focused on when managing our clients’ money and in our efforts to provide tools, content and engagements that help investors feel more empowered to make better long-term financial decisions.