The last decade saw a dramatic reshaping of the investment industry affecting asset owners and managers alike. Today’s environment feels much more unpredictable due to a combination of inflation, market concentration, political regime change, geopolitical uncertainty, regulation, and cost pressures.
Asset management businesses have certainly been impacted, but these dynamics have also created a challenging set of circumstances for underlying investors.
Inevitably, these factors are shaping what asset owners expect from their managers. It is therefore critical that investment providers understand the nuances shaping their clients’ thinking.
Via interviews with senior decision-makers across Europe, responsible for more than $3 trillion of assets, JPES Partners has identified some major, intertwining themes defining asset owners’ future plans that managers will need to factor into their business activities.
One important consideration is the role of technology, specifically AI, and how this will shape investment activities – from portfolio construction to investor engagement. With the impact of the AI evolution being felt across all walks of life, it is no coincidence many asset managers have sought to promote their credentials in this area and demonstrate their ability to apply such capabilities to create efficiencies and improve outcomes.
Underlying investors, however, appear unconvinced. While a high proportion of respondents to our study (58%) saw the use of technology as a key area in the future development of the asset management industry, an almost equal number (52%) expressed dissatisfaction in the way AI and other capabilities are being deployed by asset managers.
Essentially, investors feel they are yet to see the benefits of these technologies, with managers needing to do more to demonstrate their ability to deliver material benefits. The idea of ‘techwashing’ has become more prominent within financial services in recent times and asset managers run a real risk of being labelled in this way if their technological claims cannot be supported by evidence of resulting improved outcomes.
Concurrent to this is a continued focus on the effects of consolidation. The arguments for acquisitions and mergers to build scale and improve resources is well known, and there have been numerous examples of investment businesses coming together on this basis, albeit with mixed success. More recently we have seen many large firms make strategic acquisitions of specialist boutique businesses, either to access new investment capabilities or to improve their geographic footprint.
The pressures on asset management businesses means that scale is becoming an increasingly critical factor in long-term business thinking. It is difficult to forget the prediction made by PwC that one in six asset and wealth managers would likely be acquired or cease to exist by 2027. Certainly, it is being talked about more within the media, with questions being asked if even those managers responsible for hundreds of billions of assets are sub-scale relative to much larger competitors with even larger resources, budgets and in many cases broader investment offerings.
While this may suggest an inevitable direction of travel and asset management ultimately being the domain of huge, multi-national businesses, the future is much less clear – namely due to the attitudes of those investors these businesses are seeking to service. Over three-quarters (79%) of respondents to the JPES study viewed consolidation in the asset management industry negatively, citing a potential lack of choice, diminished quality of service and potential lack of alignment with clients as causes for concern.
This brings us to perhaps the most important consideration for asset managers – the extent to which they are effectively and positively demonstrating the culture of their businesses.
Culture is an incredibly important but often overlooked factor when investors are deciding which provider to employ or retain. Demonstrating culture allows asset managers to differentiate themselves as, regardless of similarity of investment strategies and approaches, no two businesses will ever be the same. It is the people within and its philosophies that define that company. Oftentimes, culture will be a deciding factor in whether to employ or reject a manager, with asset owners choosing those they feel they have the best rapport and alignment with.
Of those we surveyed, an astonishing 86% of respondents identified this as a key criterion for manager selection. Yet for all its importance, a similar number (88%) were dissatisfied with the way managers address and convey this.
It is here that the playing field may be at least somewhat levelled as, rightly or wrongly, a common perception is that larger businesses face greater challenges in pulling together the various strands that are critical to defining and articulating a positive corporate culture.
There is much for boutique managers to do in terms of demonstrating the merits of their structure, size and focus, but those able to do so may find themselves in a highly advantageous competitive position.
