Alexander Forbes Investments examined the developing themes and trends impacting both South African and global investors in 2020 and beyond.
According to Gyongyi King, Chief Investment Officer and Lebo Thubisi, Head of Manager Research, the most dominant themes impacting investors are:
Theme one: The asset management industry is consolidating – it’s a scale game
Larger investment managers have used their scale to expand profit margins, while offering products at lower costs. This means small and midsized investment managers are lacking scale and battling to maintain profitability.
High fees and subpar returns from active funds have led to a flood of assets from active to passive managers. “This has sent fees inexorably lower, led to the loss of thousands of jobs and forced large-scale consolidation among firms. That’s pushing the industry – with $74 trillion in assets as measured by Boston Consulting Group – towards a shakeout where only the strongest will survive,” says King. “The asset management industry is moving to a point where you have to be either very big or very niche to compete. The guys in the middle are going to struggle.”
Theme two: Regulation – nowhere to hide, nothing to hide, nothing at risk
According to King, “The significant cost and complexity of compliance with the revised Markets in Financial Instruments Directive, known as MiFID II, could even tip managers with tight margins into liquidation or consolidation, accelerating the trend towards a market with fewer, larger investment houses in Europe.”
Theme three: Entrenching sustainability and ESG
King believes that 2020 will take its cues from a turbulent 2019. She notes the negative share price reactions to investor activism and highlights that in 2019 climate change resolutions were tabled, a first for the JSE.
Looking at transformation trends in the South African asset management industry, Thubisi said black-owned market share of the top 20 asset managers remains flat and black-owned firms’ market share of traditional equities has fallen. He notes, however, that merger and acquisition activity has increased across the sector, driven by B-BBEE and consolidation. “This is as a result of a tougher trading environment, and an evolving market with expanded and differentiated product offerings. The move to either cash and bonds, private markets or balanced funds has affected the allocation to black managers.”
Theme four: Non-investment risks – cybersecurity
King states that although asset managers may not directly interface with the public at large, they can still be a tempting target to attackers for several reasons:
They hold a wealth of customer data.
Intellectual property is a key to their success and differentiation.
Data theft is a real concern used to front run trades and make profits.
Theme five: Monetisation of data analytics
Artificial intelligence has found promising application in enhancing wealth advisory services, offering customised portfolios, and digitising customer service. Some investment managers are acquiring robo-advisers to offer custom portfolio solutions for independent advisers as well as traditional wirehouse representatives. This widening application of AI across the investment value chain increases the possibilities of a shift in the business model, especially across customer touchpoints.
Theme six: A new breed of asset managers
Firms will make use of state-of-the art technology that helps to identify, segment and retain key clients. The shift to scale and the mega-manager model will also be driven by global regulation, which will provide a powerful barrier to entry to smaller firms. However, market structure will still leave room for local market specialists, spanning traditional, alternative and hybrid managers, who may or may not partner with the mega-managers.
Theme seven: Alternatives join the mainstream
A wider range of investors, including retail, will be able to access alternative investments as regulators allow regulated vehicles to be more widely distributed. Alternative asset classes will feature more prominently in institutional and retail portfolios. “Looking ahead, a disruptive shift is emerging where a significant portion of investors expect to increase their active involvement in limited partnerships or access the asset classes directly rather than investing with external managers,” says Thubisi.
“Passive investing will grow at the expense of active management,” as investors are increasing allocations to smart beta, says King.
King and Thubisi believe that change is firmly in the air, noting that clients are more interested in sustainable investing, with an increase in resources deployed to technology and big data and a decrease in aggregate investment management fee levels.