We are joining the year-end tradition by offering some thoughts on major industry developments and accelerating trends.
Over the next few weeks we’ll publish separate pieces on these five trends that we think will offer both increasing opportunity, and possibly challenges, within investment management.
1) The shift of focus from product to service will accelerate
Driving this is the fact that the costs an investor pays for product have fallen dramatically. Indeed both ETF fees and execution costs made it to zero in 2019 with the announcement in early in April that Sofi launched two zero-fee US ETFs and in October Charles Schwab, E-Trade, TD Ameritrade and Fidelity all dropped trading commissions to zero. We believe the key for firms to survive in this environment is to win on service. However achieving true personalisation at scale still requires many firms to retool the front office. Part of this re-tooling will also, we believe, result in a change in the active vs passive battle, with active re-inventing itself thanks in part to increasingly vigilant regulators taking a dim view of benchmark hugging and more and more investors adopting tools that enable them to better ‘understand’ these more concentrated funds and therefore be able to better place them into diversified portfolios.
2) Thematics will re-emerge as model portfolios converge into very similar forms
Managers of portfolios constructed from combinations of funds, ETFs and individual exposures will, like the active managers, need to differentiate themselves. Huge firms are now offering their services, for example last week Blackrock announced a partnership that will see it push further into wealth management. Other big firms such as Invesco and Santander have this year also launched model portfolio services. The press picked up on this comment relating to the Blackrock news: “The adoption of models is a massive industry trend that saves time for advisors and helps create better outcomes for their clients”. To differentiate, wealth managers will need to again re-tool the front office — this time vis-à-vis scale, efficiency, and governance for the efficient creation and risk management of many different model portfolios. Having these tools will allow thematics to be adopted either across the portfolio, for example in the broadest sense adopting higher and higher ESG standards as products/funds become available, or in specific instances using products like narrowly focused ETFs such as the successful ROBO.
3) Self-indexation within asset managers will become much more prevalent
The second half of 2019 has seen a lot of news and announcements from firms launching and restructuring to offer self-indexing. Some of headlines will always be written with a sensationalist tone, perhaps, as noted above, because the passive/active debate has subsided. For example in May the FT wrote a piece with the headline “Index companies to feel the chill of fund managers’ price war”. The index providers don’t seem to have taken the bait pointing out what they do “looks easy from the outside”. The FTSE Russell publication from which this quote was taken points out there are hurdles such as data management, the need for expertise to balance real-time reflections of the market with investbility and turnover criteria, and have a governance framework that meets evolving regulations. MorningStar said “In practice, the benefits of self-indexing are perhaps not as significant as they first appear, but neither are the risks as grave.” ALPIMA is in a unique position to see the reality of these changes thanks to working with asset managers, specifically their research teams, as well as index and ETP issuers. Our platform offers the power, flexibility and visualisation capabilities needed to help all types of firms, and various roles within them.
4)ESG convergence: ESG ratings will see increasing standardisation as these ratings become effective and the impact on companies will be felt.
While this value re-alignment has been happening for a few years, it does feel that S&P’s purchase of pioneer Robeco’s ESG ratings business and the ECB’s Lagarde making ESG a focus are happening at a watershed moment for the industry. Differentiation in performance is now becoming an increasingly common topic of client conversations and it is picked up more and more in the press, for example Bloomberg this week highlighted a 5% YTD performance difference between two more and less ESG EM bond indices. Clearly all the factors such as duration and credit would need canalising. just as has been the case with equities where factors such as size and quality may be playing a large part in performance differentials. Asset owners will require asset managers to be able to quickly show how funds would have performed if ESG criteria had been applied over time, and those asset managers will have to be able to explain pre-emptively potential performance differentials. This will of course require the right tools. Again the ALPIMA platform is uniquely suited for this.
5) Data is widely described as the new oil — but oil is not transparent, it requires distilling.
Therefore we are going to see the adoption of new tools to help clients see through a relentless and accelerating information overload.
As all clients are naming data as a key topic in the years ahead, we are helping a growing number source, organise and handle data so it can be turned into insights, through our platform and other venues. Machine learning and artificial intelligence, two grossly misused and abused terms, will continue going mainstream in functions where they are proven to add value. At the high-frequency end of investing, they already have a place, though the firms deploying them obviously don’t provide that much information. Other areas of finance such as credit checking and fraud detection are also obvious beneficiaries of the technology. We have seen the ALPIMA platform successfully used to ‘hyper-optimise’ investment strategies across multiple dimensions in order to develop relatively straightforward rules-based multi-asset portfolios, yet we note with interest other lower frequency allocation applications are yet to see AI make a mark. The AI ETF (ticker AIEQ) is a case in point, having this year delivered similar returns with similar volatility to the S&P500. This may change, although we don’t expect Goodhart’s law (also known as the Lucas critique) to disappear anytime soon. So, beware of the hype and fluff. Best to use ML and AI in areas where there are proven to add value, and check the evidence before deploying new tools. At ALPIMA, we help an increasing number of clients sort signal from noise in this rather noisy, if exciting, area.
The investment world is changing fast as a result of these trends having a profound impact across a wide range of firms. By virtue of its modularity, front-office focus and interoperability, ALPIMA’s platform is uniquely able to help product providers, asset managers, wealth managers and professional investors turn these trends to their advantage using their expertise and know how. More on this in upcoming pieces.
Meanwhile, happy holidays to all from all of us at ALPIMA.