As the funds industry prepares to mark its centenary, it outwardly appears in an unassailably strong position. It enjoyed a record-breaking year in 2021: fund flow volumes on Calastone’s network jumped by two fifths in 2021 to $1.84 trillion, while net inflows jumped 140% in 2021 to $151bn.
In the rear-view mirror, the picture seems rosy. Yet the forward outlook is less clear, giving credence to the argument of Schroders CEO Peter Harrison, who recently declared that “we are at peak mutual fund.” The annual growth rate of fund AUM, which cantered along at 13.7% during the previous five years, is forecast to shrink to 7.4% during 2022-26. Along with a slowing pace of growth, asset managers are also facing up to the prospect of shrinking margins in their traditional business lines and pressure from new competitors who will challenge them on product, cost and user experience.
These realities are putting the mechanics of a deep-rooted industry under a harsh spotlight, revealing that its dominant position in asset management rests upon an increasingly outdated infrastructure and value proposition. At a time when consumers expect all the advantages of a digital experience, mutual funds still rely too often on long and fragmented supply chains that add time and expense to what should be the straightforward business of delivering investment solutions. Once the cost and sometimes unwieldy processes of the platform, transfer agent, fund accountant, custodian, bank, trustee and asset manager have all been satisfied, it is inevitable that a consumer ends up paying more and waiting longer for their investment than they ought to. If they make a purchase on Amazon at the same time as they place a buy or sell order on a mutual fund, their doorbell is often likely to ring before their portfolio screen updates.
How can this unsustainable state of affairs be resolved? It begins with stripping out the inefficiencies that have become endemic in the funds industry, digitalising supply chains and delivering the purest form of alpha – cost reduction – to customers. That is the low-hanging fruit of change, and a task in which all asset managers are to some extent now engaged.
Yet the challenge is greater and more wide-ranging than simply optimising the status-quo. There is also the need, and in technological terms the opportunity, to re-envision entirely what is being offered, to whom and how. Much as the mutual fund itself was the financial revolution of its time, helping widen consumer access to markets, we should now look at new approaches which take the same spirit of democratisation and innovation and apply modern technology to the task.
From the drinks people order at coffee shops to the shoes they buy and the TV they choose to watch, consumers have become accustomed to a blizzard of choice, immediacy and a guarantee of personalisation, often at the touch of a few buttons. There is increasingly the means to deliver to the individual exactly what they want, and moreover what they value, in a way that would once have been either impossible or unprofitable.
The same catalysts of user expectation and technical possibility are now at play in asset management. The rise of distributed ledger technology holds the prospect that all assets can be accessed, tokenised, held and traded as digital entities in ways that significantly reduce transaction friction and reconciliation costs, something we are working on with our Distributed Market Infrastructure. For example, when any asset from a private equity fund to a real estate project can be tokenised, it becomes easier to facilitate their ownership by investors with almost any level of capital.
With the greater choice, relevance and engagement this engenders, the momentum behind increased personalisation is likely to grow. It is becoming feasible to offer every customer the kind of service that has hitherto been reserved purely for institutions and the wealthiest individuals: a basked of investments tailored to their needs and interests. The power of tokenisation promises to give investors the choice and transparency many crave without the cost and tax disadvantages that so often entails. The silver service of asset management is set to become the staple diet.
This offer should be to the liking of the new customers asset managers are eager to attract – often younger investors who will be the beneficiaries of the largest inter-generational transfer of wealth in history, and whose expectations have been shaped as consumers of digital services in all aspects of their lives. These are the investors who are more liable to have a strong view on what assets they want to hold and those they may wish – for moral, social or ethical reasons – to avoid. They are more likely to be interested in alternative asset classes such as cryptocurrencies and to have higher expectations of returns.
These needs and beliefs all speak to a bright future for asset management and personalisation – if supported by the right value proposition and user experience. Millennials are not necessarily as financially confident as they are technically savvy: despite the plethora of options for self-directed investment that now exist, more financial education is needed. Many recognise the need for help, guidance and advice either through traditional channels, social media platforms or a financial adviser. The opportunity for asset managers is clear enough: an offering that leverages tokenisation and artificial intelligence to provide personalised investing supported by a degree of financial advice, either through themselves or via external partnerships. They can potentially provide the best of all worlds – an intuitive, meaningful and seamless user experience, a wide choice of relevant investments, and the information and guidance needed to navigate them successfully over a long period and throughout varying lifestyle changes. Rather than being steered into a combination of pre-existing funds, the individual will be supported to build their own portfolio from a more flexible series of component parts.
This is not just a possible future but one that stands to benefit all concerned. The average investor will have access to the kind of customisation that would once have been beyond their means, along with the seamless experience they have come to expect as standard. In turn, the asset manager will move into margin-accretive business lines such as alternative asset classes, distribution and financial advice, thereby cementing their relevance further along the value chain.
In the world of half-a-century ago, the mutual fund was the best vehicle imaginable for delivering widespread access to diversified financial markets. If it does now enter a decline, it will simply be because it no longer passes that test. Technology has changed, investor attitudes have changed, but investment products have not kept up with the pace of change. The mutual fund has a long life ahead of it, but we are at an inflection point. Fund managers must take notice and consider how they can enhance their product offerings to remain relevant.