Five Asset Management Trends for 2023

The asset management industry enjoyed two years of supernormal growth and returns since 2020, fueled by monetary policies from global central banks to combat the effects of COVID-19 and on the back of regular but sustained growth since the 2007 sub-prime crisis.

The second half of 2022 has been a reality check due to a slow return-to-normal, global supply chains and rising inflation. The situation was further aggravated by the Russia-Ukraine war and resulting geo-political uncertainties.

If this was not enough, slower growth in the last quarter, followed by recession fears, mean the industry has to deal with a lot more uncertainty, including price pressures and demanding investors looking for newer opportunities for growth and impact.

Here are the five trends we believe will shape how asset managers will have to maneuver, as viewed through the lens of our SPEED capabilities (Strategy, Product, Experience, Engineering and Data & AI) that we use to drive digital business transformation. 

1. Investors want the best of both worlds: generate alpha combining active and passive management styles (Strategy: Go to market with hybrid offerings)

Investors are keen to take a more hybrid approach to investing by combining both active and passive investment management. Combining these two can help further diversify a portfolio and help better manage potential risk.

There has been a significant rise in passive over active management in the last decade, which has been driven primarily by the U.S. equity market (16% market cap compared to 14% in active as of 2022)—and this momentum will only continue. In fact, this is extending into the U.S. fixed income market as well, which can often be more complex with less pricing precision.

With high inflation expected to stay high for a reasonable portion of 2023—and more potential Federal Reserve rate hikes—markets will likely remain unstable. The market index is expected to yield 0-3%, which may persuade investors toward active management, especially in stock picking.

There has been a general trend away from mutual funds—which are underperforming—towards equity ETFs. ETFs have shown investors they can offer a lot more than mutual funds, from tax efficiency to lower expenses and higher returns. With continual year-over-year inflows for active ETFs, active mutual funds have only trended the other way. The growth will continue on the active ETF front, expecting to hit $600 billion in the U.S. (a $200 billion growth year-over-year from 2022).

Asset managers should ensure they offer education and opportunity for investors to choose the mix of assets that fit their goals in a changing market.

2. The rise of alternative investments (Product: Alts as an investment product have gone beyond being for the select few)

Since Q2 2022, U.S. equities have been down 20%, high-quality fixed income has been down 10% and hedge funds down just 4%. Real estate was, perhaps surprisingly, up 30% over the last twelve months, due to increased rents.

Market volatility has only pushed investors to be more cost-conscious and consider more alternative investment options. But, for a long time, alternative investments were almost exclusive to institutional investors and ultra-high net worth individuals (who invest more than 50% of assets in alts). Because of this “exclusivity," many retail investors only hold 2%-10% in this asset class.

However, industry giants like Blackstone and KKR are aiming to create more solutions for retail investors, focusing on acquiring half of their future alternative investment fund customers through retail channels. Regulatory developments have also helped retail investors gain access to the space—and, not surprisingly, individual investors have an appetite for higher returns and diversification.

Alternative asset classes may carry higher risks, but they can also deliver higher returns with longer investment horizons. These can be best for diversification and offer more protection against inflation. Further, alternative assets are often not as directly correlated to stock market performance (like real estate), which may help investors hedge against market volatility.

3. Liquidity managers will be busier…and under more scrutiny (Experience: How do we simplify Asset Managers’ lives to manage liquidity effectively and report with ease?)

After a decade of abundant liquidity and fairly calm market conditions, inflation and interest rate spikes have caused serious liquidity crunches. In addition, regulators continue to set new rules and enforce stronger liquidity management.

This has only added new layers of complexity (and expense) for asset managers. In short, regulators want firms to report on all liquidity risk dimensions, like market depth, liability level and cost of liquidation. This tests funds’ resilience and measures liquidity to prevent mismatch.

In a stressed market, any investment portfolio can be exposed to increased liabilities. Spreads between same-day buy and sell transaction prices for Tier 1 and 2 securities during a crisis period is statistically 3–6x normal years. This provides an estimate for the cost of obtaining liquidity during crisis periods, driven by illiquidity.

For corporate clients, funding costs are several times what they were in the lower-interest regime since the 2008 crisis. As a result, liquidity is more critical for short-term commitments and to service debt instruments that become a burden to shoulder.

It’s critical for asset managers to find a way to manage liquidity effectively and report with ease.

4. Asset managers will be squeezed on both sides—cost increases and fee compression (Engineering: Driving lower TCO without comprising on service quality)

There’s been significant stress put on asset managers and their revenue, given their connection to market performance. In addition, industry costs have only been steadily increasing (estimated total of $71 billion over the last decade).

As assets under management (AUM) values continue to fall, these costs will pinch further. These falling assets are forcing firms to cut costs and compress fees—while simultaneously determining specialized investment strategies for cost-conscious clients demanding more returns.

While retaining clients remains a challenge, asset managers also have the obstacle of acquiring new customers in a market full of robo-advisors, micro-investment platforms, etc., which often charge just a fraction of the cost. The pool of investors has only gotten smaller in the current economic climate, with many opting for short-term investment options to keep their funds more readily available.

This increase in competition has contributed toward fee compression, which has hit asset managers hard and unequally; those with AUM less than $10 million have seen a 10% decline, while those with greater than $120 million saw a 5% decline. Hedge funds have seen their management and performance fees drop 10% and 15%, respectively, over the last decade.

Can asset managers find a way to drive lower total cost of ownership (TCO) without compromising on quality of service?

5. There will only be continual growth for the sustainable investing market(Data & AI: Unlocking the potential of the sustainable investing market with data standardization and accuracy)

People are investing in what they care most about—social consciousness. It is at the forefront of young investors’ minds, leading to a significant rise in environment, social and governance (ESG) investing.

Gen Z is most likely to switch primary financial services organizations for one with a higher commitment to DEI or ESG.

With stronger government regulations and political ties also creating increased momentum in the sustainable investing space, there is now a higher demand for digitization—with sustainable practices being developed by advanced technology. There is considerable pressure from stakeholders and investors alike for companies to create more sustainable strategies, and businesses hope to incorporate these plans with modern tech.

81% of US institutional managers and 83% of European managers will increase their allocation in ESG over the next year, with the US on target to have one-third of all investments in ESG by 2025-26.

While companies are surely saying the right things about the environment, social and governance factors, political pushback by leaders at the state level are challenging these practices. The Task Force on Climate-Related Financial Disclosures (TCFD) will begin tightening regulation and reporting requirements in both the EU and US, and this will likely lead the charge (and need) for firms to capture better data quality and analytics.

So, how will asset managers find ways to differentiate themselves without competing only on price?

Digital is a central step to every value chain.
To continue to remain competitive, asset management firms need to fully immerse themselves in the digital-first era. Robust, intuitive and intelligent tools can help grow and scale a business, as well as help asset managers adapt their ways of working to better connect with their clients.

Your Path to Digital Transformation

Our business is to prepare and keep clients ahead of customer needs, while still meeting business objectives. Digital business transformation is our specialty, and our SPEED (Strategy, Product, Experience, Engineering, Data) capabilities allow cross-functional customer and employee journey transformation every step of the way.

Strategy: Explore opportunities to grow through acquisition, launching newer products, targeting different market segments, to stay ahead of competition from traditional and the fintech firms operating in the space

Product: Design and launch digital products with quality and speed to meet revolving customer needs and market demands

Experience: Create better experiences and platforms that institutional and retail clients want to engage in

Engineering: This is all about the build—and helping firms scale and reduce total cost of ownership (TCO). In a fee-compression environment, it allows asset management firms to provide cost-efficient services

Data and AI: Leverage data and AI to drive insights, opportunities for Asset Managers to generate newer opportunities using data driven decisioning and, at the same time, optimize their business model