6 Trends Shaping the Investment Industry in 2020 and Beyond
Duncan Marwick | MBA Class of 2020 | Student Experience
The investment industry is constantly undergoing transformation as a result of changes in the global economy, consumer preferences, technology, shocks and regulations.
Major trends and events in the past, such as the launch of the first hedge fund in 1949, the 1980’s junk bond craze, the 2008 financial crisis, the rise of algorithmic trading, and in recent years, the shift from active to passive management and focus on smart beta, have all nudged the industry in new directions.
A recently released survey from CFA institute found that 43% of investment professionals think the role they perform today will be substantially different in 5–10 years’ time, which begs the question, what will the industry look like then?
Below, I aim to provide insight into this question by exploring six major trends which are shaping the investment industry in 2020 and beyond.
1. AI+HI as the norm
“AI+HI” denotes the interaction of artificial intelligence (AI) and human intelligence (HI). For certain interactions, the combined model adds more value than either component alone because it leverages the benefits of both.
From a CFA institute survey of 3800 members across the globe, the growth of machine learning and AI methods was voted the highest source of potential disruption to the industry.
Despite this, relatively few investment professionals are currently using AI/ML techniques in their investment processes. Only 10% of portfolio managers and 25% of analysts that responded to the survey used AI/ML techniques in 2019.
These results suggest that the investment industry is in the very early stages of adopting AI techniques and related technologies.
CFA institute cites high costs, lack of talent, rapid continuous changes in technology, a lack of vision, and significant investments of time as major barriers to implementation.
Looking forward, CFA institute states that these technologies have the potential to bring about the most significant change to the investment management industry that current professionals will experience in their careers.
Additionally, successful investment firms of the future will start to strategically plan their integration of these technologies into their investment processes now, to be able to exploit the opportunities brought about as the technology matures.
2. Increased use of alternate data sources
Alternate data includes the use of data sourced from web-scraping, social media posts, credit-card data, geo-location data, and satellite data.
The interest in alternate data sets may have been triggered by the now legendary tale of a UBS analyst using satellite data off 100 Walmart parking lots to accurately predict that the company’s stock was undervalued. That was way back in 2010.
According to a recent survey conducted by Refinitiv on AI & Big Data in financial institutions, 70% of survey respondents report to be using alternate data sets in their institutions, primarily for trading and investment idea generation, risk management, and performance analysis. (It should be noted that this survey included the broader financial industry, including investment banks and security brokerage firms, but had strong representation from the buy side.)
Many investment professionals are combining alternate data sources with traditional market data and internal company data to gain insights that would be hard to uncover using traditional analysis alone.
Historically, it has been more difficult to use alternate data, as much of it is unstructured. Fortunately, however, new capabilities are making this possible, allowing managers to find patterns and relationships amongst seemingly unconnected phenomena and use these to drive investment decision-making.
Linked closely to trend #1, the use of alternate data should only rise as AI / ML is further implemented in the industry.
3. The growth of sustainability factors in investing and stewardship roles
The Principals for Responsible Investing (PRI) is the world’s leading proponent of responsible investment that aims to drive environmental, social, and governance considerations amongst its international network of investor signatories.
The number of signatories has grown year on year to over 3,000, representing over $100 trillion in assets under management. This includes some of the world’s largest fund managers, sovereign wealth funds, pension funds, and other asset owners.
Additionally, according to a recent CFA institute survey on investment firms of the future, over 72% of respondents expect their firm’s commitment to ESG and sustainability issues to increase in the next 5 to 10 years.
ESG related products such as green, social, and sustainable bonds have also grown from strength to strength, with green bonds reaching a record USD257.7bn total issuance in 2019, up 51% from 2018 figures. Social and sustainable bonds have also grown traction, albeit at a slower pace.
One of the challenges in the past was the lack of data and generally fragmented information on ESG factors. This has been tackled by a barrage of corporate reporting standards, taxonomies, ESG bond standards, ESG indices, and other tools at an investor’s disposal. This is making it easier than ever to integrate ESG considerations into the investing processes.
4. The growth of private market investing
As mentioned in the introduction, one of the trends shaping the industry in prior years has been the move away from active investment management to passive management. This has largely been driven by customer preferences for low-cost investment funds.
As a result, active managers have applied their skills to less liquid parts of the market, which conveniently also supply higher returns. According to EY, private equity as an asset class has outperformed public equity over the past 8 years, resulting in a record amount of capital flowing into the industry.
Additionally, 2019 saw record amounts of dry powder in the private equity industry, which is essentially committed but uninvested capital. This will need to be allocated in the coming years alongside the fresh capital that continues to flow in.
Interestingly, from 1996 to 2012, the number of US listed firms dropped by half, with 2012 seeing 14% fewer exchange listed firms than there were in 1975. This indicates that corporates may also have a preference for remaining in private markets.
5. Changing expectations of the user experience
Investment professionals may never have imagined that they would need to provide the same user experience to their customers as retailers or consumer electronics companies. However, user experiences in one area of consumers’ lives are shifting user expectations in others, and businesses must respond.
Additionally, as customers become more used to digital banking and other fintech platforms, they will begin to expect the same experience from their investment manager of choice.
Looking to China as an example of the future, the largest money market fund is Ant Financial’s Yu’e Bao, a spare change investing platform directly linked to consumers’ Alipay mobile payment account.
Technology like this can completely change many aspects of the professional– client relationship. Platforms for investment products and services can now deliver better customer engagement and provide better insights (by harnessing data) into customer preferences and needs.
Accenture consulting’s’ recently released report on the ten trends shaping the future of asset management states that asset managers should develop deeper, more meaningful customer relationships to deliver the right offering to the right client at the right time.
The report goes on to state that it is critical that leaders of asset management firms recognise that they are no longer just competing with industry peers. They need to learn from other industries and match or provide better types of personalised experiences than those companies.
6. China’s investment industry opening for business
In January 2019, a group of senior leaders from across the Chinese financial system came together at the World Economic Forum Annual Meeting in Davos to explore ways to more closely connect the Chinese financial system to the global one. They saw a status quo that was unusual and concerning: a major global financial system developing somewhat in isolation.
Soon after, plans to open up the markets began to form, including the accelerated relaxation of financial-sector foreign ownership limits as well as the launch of the Shanghai-London stock connect, a mechanism which connects the Shanghai stock exchange (SSE) and the London Stock Exchange (LSE).
As of February 2020, 15 foreign-owned securities firms were established in China and 18 joint-venture securities firms are queuing up for approval.
In addition, China’s stocks and bonds have been included in main global indexes, such as the MSCI, FTSE Russell, S&P Dow Jones and Bloomberg Barclays index, and their weights are steadily increasing.
RMB 200 trillion (~USD 28 trillion) of Chinese wealth is locked away in domestic bank accounts that is beginning to get unlocked as the country’s investment industry matures.
This is supported by regulatory reforms that are moving the markets away from the highly retail-driven, volatile markets that exist today, toward a more institutionally driven industry.
China is already the second largest economy globally and is now expected to become the second largest investment management market globally. For many fund managers, the question is no longer “Should we invest in China?” but rather “How much should we invest in China?”
These six trends that are driving the industry in 2020, and provide some insight into what the investment management industry of the future may look like. As finance and investment professionals, it is our responsibility to stay up-to-date with these trends and help move this industry forward.