Changing attitudes to risk, changing investor profiles and the inexorable rise of ESG are among the key themes dominating investment managers’ priorities this year. We summarise the key trends shaping the investment industry in 2023.
Following a turbulent year in 2022, 2023 has seen an uptick in equity and bond markets despite an uncertain business environment. How can investment managers continue to deliver returns every quarter while also transforming their strategies and operating models to cater for the investor and society of the future?
BNP Paribas was a gold sponsor of this year’s IMpower Fund Forum, held in Monaco in June. In this article, we outline the five top trends discussed by panellists and leaders at the event, which will shape investment managers’ and their partners’ strategies in the months and years to come.
Please note: opinions expressed in the article may be those of panelists and speakers and do not necessarily reflect BNP Paribas’ view.
1. The three Rs: risk, return, responsibility
The years of high profit margins, double digit returns and bearish markets are behind us, as asset managers face new and ongoing pressures to generate yield. Financial outcomes are no longer enough. Clients expect credible investment propositions which offer positive financial returns but also ‘do good’. The impact of climate risk on financial outcomes is now built in to investor expectations and portfolio construction.
At the same time, risk and return need to be viewed through a new lens. Structural drivers – notably increasing production and energy costs – are expected to keep inflation higher over a couple of years, and investment managers need to adapt to lower returns. Risks – in particular tail risks – are increasing. This will need to be fully integrated into asset allocation and priced. While diversification remains important, the recent positive correlation between asset classes has made this more challenging, and investment managers need to look at other factors such as time horizons and sustainability factors. But there are also opportunities: investment managers can also harness the potential of decarbonisation or technological innovations.
2. Private markets: capturing demand
The trend of growing allocations to private markets is now well-established. It has even become a major part of economic agendas; the UK government, for example, recently announced a new commitment by nine of the largest pension providers to commit 5% of default funds to unlisted equities. New types of funds with different levels of liquidity are proliferating. But how can the investment industry best equip itself to take advantage of increased investor interest?
- Private markets have long been a valuable channel for institutional and high net-worth individuals (HNWI), but the route to broader democratisation is not yet clear. Retail investors and their financial advisors need more education on return, volatility and liquidity profiles. In many cases the increased return can be eroded by the lack of liquidity and higher fees. Private funds should also keep in mind the recent difficulties faced by open-ended real estate funds in the US and in Europe, when trying to increase access to illiquid asset classes through partially or fully open ended funds.
- There is a gradual shift in fund structures towards more evergreen funds for retail clients, but this requires close monitoring of the liquidity pockets and the nature of performance
- A shift of mindset is required. Retail investors need to learn to assess the long-term value of private investments, and be patient. At the same time, asset managers need to develop and innovate with the right technology and infrastructure to build scale and develop new fund structures to cater to this market
3. ESG: a long and winding road
The investment industry is undergoing an existential transformation. Investment managers are expected to manage clients’ assets responsibly, fulfil obligations to society and shareholders, offer solutions to real environmental challenges, and develop products that answer clients’ ESG demands while meeting growing liabilities. How can they be good and do good?
We are still at the beginning of the journey towards greater alignment across geographies. There is no agreed definition of ‘sustainable investing’, and the industry is only starting to discuss globally standardised sustainability targets or methodologies. This has led to a proliferation of approaches to ESG. To cope with this, as well as reputational risks and increased reporting requirements, managers will need to offer greater transparency to both regulators and clients. One important step will be standardisation of data, which will be greatly aided by collaborative, public initiatives such as the Net Zero Data Public Utility, which will help to create clearer, unified indicators for impact. More open infrastructure, multiple data source and platform models – which are common in other sectors – are also key.
4. Changing investors, changing expectations
Much has been made of the aging population and declining birth rates. All of the world’s 15 largest countries (by GDP) have a fertility rate below the ‘replacement’ rate[1], meaning that population aging and decline is inevitable and pension liabilities will become increasingly strained.
By 2030 the profile of investors will also shift, as 55% of global wealth is expected to be owned by women[2]. Younger investors are starting to hold more influence with an estimated USD 84 trillion of wealth transferred to millennials by 2045[3], although this may take longer than initially expected.
Investors increasingly expect a wide range of investment products that align with their values and objectives, more transparency over costs and services, and will be able to access more direct distribution methods.
How can the investment industry cater for these evolving needs? The key will be ultra customisation and added value services. All those in the investment value chain will need to adapt to reduce complexity and clearly demonstrate their role for the end investor.
5. New tech: enabler or inhibitor?
Following the new wave of Generative AI, the potential impact and opportunities for the investment industry are still being understood. While artificial Intelligence is already being used widely across the industry, some firms are also looking at the prospects of blockchain. But in terms of technology, there is no ‘one-size-fits all’ model. These technologies and the related data come at a cost, and in an industry already under cost pressure, it is key that these investments generate efficiency gains.
Outsourcing is one way to improve cost efficiency. By developing more capital-light business models, investment managers can benefit from economies of scale and trigger wider standardisation across the industry. However, managers must balance this with the differentiation and value they can offer through using and enhancing their data. The shift towards open architecture models and shared data repositories must also be balanced with stringent data privacy requirements, and the need for strong operational resilience.
[1] Global fertility has collapsed, with profound economic consequences (economist.com)
[2] Mauro F Guillen – 2030: How Today’s Biggest Trends Will Collide and Reshape the Future of Everything
[3] Press Release: Cerulli Anticipates $84 Trillion in Wealth… | Cerulli