The decisions investors make, and why, are changing.
At our December Connect Forum, we wanted to examine what fund firms need to do to stay relevant in our present day and in the future. What are the current investor behaviours and needs we need to acknowledge to assess how the market is changing? What will that look like in the future, and how can firms act now to continue to gain market share?
As industry heavyweight Martin Gilbert, Revolut’s Chairman, stated during our Leader’s Panel, “The industry has become very relevant but we have to show more value for money than we have in the past.”
The trend of the moment
The overwhelming shift to choosing ESG funds over all others is a secular trend that began long before COVID. That said, the last 20 months have caused an acceleration in changing sentiment as everything from flying to supply chains have been spotlit. The shift is now deeply marked: within Calastone’s network alone, $3 in every $5 of new cash invested last year into equity funds was ESG. This statistic is staggering, given the value and volumes that travel across our network.
In conjunction with growing demand and want for ESG funds is a growing insistence from investors that investments need to generate a societal return, and not just a financial one. Investors are increasingly aware of their investments’ impact on people and places. As a result, they want to ensure that their money is being put to good use with a good purpose.
“There is a growing need [from investors] to feed into your environment, rather than just feeding from it…that will lead to sustainable performance” Anne Lise Kjaer, Futurist, Kjaer Consulting said.
Our fund flow data demonstrates that investors became far more engaged with their investments over the course of 2020 and 2021, spurred on by an increase in savings that the COVID restrictions engendered, with much of the flow going into the ESG category. For that reason, investors have also started turning back towards actively-managed funds which again is clearly shown in our recent fund flow data.
Evolving investor needs and behaviours
While it is fundamental for the future success of asset managers to identify current trends within investor behaviour, so is identifying future demands and needs. Our discussions made it clear that how investors select investments is going to change alongside the type of investments wanted.
The shift in how investors go about choosing investments is largely driven by becoming accustomed to quick and easy access to other services and products through mobile apps. While the asset management industry has a great deal more regulation surrounding it than the Ubers and Deliveroos of this world, there is no denying that investors will want a similar immediacy with their financial affairs. That immediacy for products and services needs to be reflected in a fund firm’s ability to provide timely, up-to-the-minute data on investments for their clients.
Grasping this need for immediacy will be of utmost importance, given that the demographic demanding such speed of information is the millennial. As Edward Glyn notes, millennials will, thanks to inheritance, benefit from a mass transfer of wealth in the future. Consequently, their needs are paramount to address as they will become a generation of new investors entering the market.
The products that investors are looking at is also evolving. “If we’re trying to look at where markets might go, we have to look beyond growth stocks. Concepts of value will become much more important but also so will diversification and protection from downtrends in the market. We will probably see an uptake in the use of alternative strategies both in liquid assets but of course in illiquid assets. We are going to need protection from inflation and so we need to look at where you can get that protection from and that is looking beyond simple products like index linked and fixed income to assets that can generate real returns” William Lucken, Janus Henderson, Global Head of Product stated.
Moreover, and importantly, the investors that will want those products are the ones that are happy to adopt a wider set of asset classes. Investors will be increasingly willing to invest in the likes of PE & hedge funds, IPO allocations, crowdfunding, real estate and NFTs. These asset classes need to be available to investors as a result, but also easily. Implementing effective technology that accesses real-time data is the way to achieve this, supported by regulation too.
Making the (right) changes now
Given these current and future trends, to stay relevant, fund management firms must embrace several ideas.
Continuing with the ubiquity of ESG funds and their popularity, for example, Massimo Tosato of M&G asserts, “Fund management firms will become more relevant as we define the asset allocation of the capital markets through ESG investing as [asset management] can have a major social role”.
However, simply offering ESG products, if an asset management firm chooses to do so, is not enough. If fund firms do offer such a product, they have to do so to a gold standard. ESG fund products need to be true to their labels so they do not fall prey to being either a ‘fad’ or a ‘fraud’.
William Lucken of Janus Henderson argues that fund managers are aware of the potential for fraud in the ESG space, but that the definitions and rules around them are becoming clearer, creating less margin for error. In the interim, while those benchmarks are still developing, there is a real opportunity for the active fund manager. Given how investors are currently trending towards active management, that opportunity is the chance to generate genuine alpha.
Another key driver for growth, which Carolina Minio Paluello of Schroders points out, was that for fund firms to remain relevant, they need to offer thematic products. Thematic products help investors think more about the long term, which is an increasing demand. In part, that is down to the heightened desire for investments to be good for society as a whole, but also that investments ‘do more with less’, making money work harder.
But what might fund firms have not grasped already? Smaller, leaner and faster tech firms are able to use data much more quickly than large fund firms. It’s clear that, to remain profitable, the asset management industry will be reliant upon a digital transformation that allows them to offer lower-cost products with digital access and speed of information. That’s of the utmost importance given the pace of change within the industry where those that manage to use technology more effectively will immediately give themselves a competitive advantage.
Looking to the East – a role model for the future of investments?
Looking to the Asian market, it is already apparent that technology is the only way forward. We saw in Day 2 of the Connct Forum that Asia has adopted a number of digital strategies and new technologies earlier than the West and is moving more quickly in terms of offering low cost products, facilitated by that technology.
Moreover, advancement using digital asset strategies in Asia looks set to continue at pace as investor interest in new assets rises there. That, in part, is helped by a growing middle class in Asia with more disposable income. The key for fund firms is to identify how that large market can be serviced efficiently.
“How do we help investors work through all these nuances [of digital products] and pitfalls to make sure that people have a good experience of investing in this new technology?” said Stephanie Leung, Director and Head of StashAway HK and Group Deputy CIO, StashAway during one of our Asia panels.
One clear solution to improving asset and client servicing, regardless of market location, is that asset management firms need to build agile solutions that can react to a constantly changing landscape.
For fund firms to remain relevant, they also need to work ever-more closely with investors to align their investments to their values. As Josh Wade, Product Manager at Calastone, put it: doing so is ‘a major strategic lever’.
Using that lever will likely require fund managers to balance returns with positive social impact and offer a means of measuring that impact accurately. Plus, those balanced returns need to be achieved across a wider set of asset classes, which will require the digitisation of processes and employing the use of automation alongside the right platforms and technology. Doing so makes it far easier for asset managers to align with their investors to attain and, crucially, to retain all-important market share.
