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Key Asset Management Trends Shaping the Future
Financial Services Review | Tuesday, April 18, 2023
Asset management is a dynamic field, subject to economic, regulatory, and technological changes. These factors will likely influence the industry in 2023 and beyond.
FREMONT, CA: Pressures in the competitive market are stronger than ever, and volatility stays for a while yet putting the responsibilities on smaller and emerging asset managers to find new ways to adapt. As the majority of organisations reassess operating models with imperativeness and look to differentiate their services against a backdrop of sustained pressure on fees and shifting investor product demand, the following trends are reshaping the asset management industry in 2023.
1. Inflation Persists
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The current inflation levels, which are at their highest in several decades, are causing a significant impact on the operational expenses of asset managers. These costs include technology and data expenses as well as salaries, prompting the industry to reassess its processes, operating structures, and technology expenses to control costs. Asset management firms are also seeking outsourced service providers, particularly for risk management, to increase efficiency. Although opinions vary on the duration of inflation, asset managers must find new ways to mitigate its effects. Some strategies, asset classes, and geographic areas that were previously overlooked are now becoming more popular.
2. ESG Reporting and Disclosures
The popularity of ESG funds has grown rapidly in recent times and is expected to continue in 2023. However, it's not just the amount of money invested that has increased. There has also been a rise in demand from policymakers for asset managers to provide more information and consistent reporting on ESG investments.
3. The Regulatory Onslaught
In 2023, the amount of work involved in meeting regulatory reporting requirements is increasing. Fund managers are now required to perform stress tests on the assets and liabilities of their funds, including the possibility of large redemption requests to mitigate liquidity risk. As a result, asset managers are having to dedicate more time to regulatory compliance than ever before.
4. Rethinking Data Strategies
Asset managers are reconsidering their data strategies to enhance operational efficiencies by eliminating internal data barriers and improving data quality used for portfolio analysis, client reporting, and regulatory compliance. Accurate and fast delivery of data is critical in current market conditions, where some managers are facing underperformance. The data also plays a crucial role in comprehensive performance and risk reporting. By swiftly aggregating data across various systems, managers can quickly identify the factors impacting portfolio performance, and assess risks and exposures in detail.
5. Improving the Reporting Experience
In the highly competitive world of capital markets, having exceptional reporting skills is essential to retaining existing clients and attracting new ones. Investors now value managers who can quickly respond to their requests and offer up-to-date information on performance and risk. Asset managers who want to stand out must offer more than just periodic reports; they must provide dynamic, real-time insights into individual security levels. Static reports are no longer sufficient for asset managers seeking to distinguish themselves from their competitors.
6. A Heightened Focus on Risk
Having strong and reliable processes and producing high-quality risk reports are extremely important. Asset managers should be able to provide various types of analytics such as portfolio sensitivities, stress testing, risk contributors, and liquidity, as well as performance contribution and attribute analysis. Implementing a robust risk governance framework is crucial for daily automated monitoring of regulatory and fund risk profile limits, which should alert managers of any breaches. These measures are essential for maintaining the integrity of the fund.
7. Providing Transparent Reporting
When investment performance is poor, transparent reporting becomes even more critical in retaining investors. Asset allocators have non-investment teams that value excellent client service, and their decision to withdraw funds from a manager may depend on this factor. Investors need to be assured that any underperformance is temporary, particularly in strategies that are prone to volatility and take time to deliver. Having confidence that there is no deception or hidden information is vital. Transparent and simple reporting is necessary to provide this assurance to investors.
8. The Squeeze on Fees Continues
Investors prefer low-cost passive investment funds, which puts pressure on active fund managers to lower their fees. In today's uncertain market conditions, active managers who do not perform well may face even greater pressure to reduce fees. To maintain profits, asset managers must seek operational efficiencies through technology and provide exceptional reporting to stand out from competitors.
9. Factors are Back
In 2021, it was a common belief that factors were no longer necessary. However, due to ongoing inflation and geopolitical issues, people's perspectives have shifted, leading to a reduction in global interdependence. As a result, investors are once again focusing on factors to gain a better understanding of their portfolios and the opportunities available in the market. This has resulted in a renewed interest in equity risk models, which are being used by asset managers to ensure that the stocks they purchase are performing as anticipated.
10. Technology Adoption
In a period of volatile markets and intense competition asset managers need to be nimble. Investment management software based on the cloud allows smaller and emerging asset managers to automate their risk management and reporting tasks, freeing up time for more valuable portfolio analysis and business development activities. This also improves the reporting experience for clients. In light of the current situation, asset managers must find ways to increase efficiency and reclaim time.
Asset management is a constantly evolving industry that is influenced by a range of factors, including economic conditions, regulatory changes, and technological innovations. While it is impossible to predict the future with certainty, the above trends provide some insight into potential developments that could shape the asset management landscape in 2023 and beyond.
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