It’s been a rough ride for active fund managers in recent years, as they wrestle with tougher regulations, increased competition on fees and technological disruptions hurting the industry.
But there’s a silver lining — or three, to be exact — and asset managers who figure out a way to navigate the shifting landscape will come out as winners, according to Tom Brown, global head of asset management at KPMG.
“We’re at a real crossroads,” he said in his opening address at the FundForum International conference in Berlin earlier this week.
“On the one hand, we’re living in this golden pool of assets to manage … But on the other hand, the pressures around disruption, regulation and technology are intense. So success for you is whether you make the right choices — the right decisions — as you face into these challenges of this uncertain world,” he said.
Brown pointed to three game-changers that are likely to reshape the asset-management industry, but at the same time offer major opportunities if tackled right.
1. ETFs. These funds, which track a group of assets around a theme, have posed major competition to active fund management because their fees are much lower. But instead of putting up a fight to the ETF providers — and potentially a losing one — fund managers should instead embrace and use them as a part of their active investment strategy, he said.
There should be room enough for everyone in the ETF space, too. Assets invested in ETFs globally have just topped $5 trillion, and Brown expects their tally to overshadow the U.S. mutual fund market within a few years — a “mutual funds version 2.0,” if you will, according to the KPMG partner.
“ETFs do play well into digital technology, and I think it’s for that reason we should all be looking more into ETFs,” he told the audience at the fund managers’ conference.
“In a number of years, the majority of us will have ETFs. So I think now is the time to be looking at this new technology.”
2. China. The world’s second-largest economy is on track to become the biggest, according to Brown. The same goes for the China’s asset- management industry, which is expected to dwarf the U.S. in a number of years, he said. This was his rundown of why China has a lot of things going for it in terms of money management, at the moment:
• A rapidly growing market for pension funds as well as retail and institutional investors.
• Huge leaps in fintech disruption that makes it easier for managers to engage with clients.
• Changes in regulation, which means Western fund managers can now hold a majority stake in a Chinese joint venture, rather than the maximum of 49% before.
• The government recently restructured the Chinese pension system, allowing pension funds to now invest more in equities, offshore assets and alternatives.
3. Responsible investing. The asset management industry has a trust problem that needs to be fixed, Brown pointed out. In the latest trust barometer from public relations company Edelman, financial services was the least trusted sector, behind the auto sector and packaged foods.
One way to flip this distrust to confidence is by embracing so-called ESG — Environmental, Social and Governance investing, Brown said. He sees an increased demand for ESG-proofed portfolios from retail investors, pension funds and, not least, millennials.
“Millennials next year will start to really enter the peak of their economic activity. We can’t ignore this,” he said.
The KPMG partner cited a recent study by the University of Oxford, which showed that companies that incorporate ESG practices get better operational performance, stronger cash flows and ultimately higher stock prices.
For ESG, there’s a “myth out there that somehow you have to compromise your investment, but there’s a growing body of evidence that says the opposite,” he said.