The disruptive digital forces facing the global asset management business, including the rise of the robots, the power of big data, and the emergence of strategic beta, will push the industry toward more passive-strategy, data-driven investments, says Moody’s Investors Service in a report published Tuesday.
Robo-advising will see continued rapid growth in assets under management (AUM), the report says, “posing a bigger threat to traditional managers beyond the next 10 years as millennials enter their peak earning years.
This trend is expected to push asset managers further towards passive-investing strategies, Moody’s says, although this may evolve as these platforms mature.
“Because robo-advisors use liquid passive strategies – exchange-traded funds (ETFs) – in their investment solutions, robo-advisors will drive flows away from active strategies and toward passive ones in the next decade,” the report says. “However, looking further out, we do expect new types of robo-advisor platforms to be developed that will include some elements of active management …”
Additionally, strategic beta is an increasingly large, and fast-growing force in the global asset management business, the report says. These strategies currently account for over US$600 billion of total AUM, and they have been growing at a 25% annual rate for the past several years. The ratings agency expects these sorts of products to continue to grow in the next 10 years, “given both investor and regulator preference for low-cost, passive strategies,” the report says.
“However, we do foresee an evolution in strategic beta products, because as strategic beta investment factors (value, volatility, small capitalization, momentum, etc.) become more widely understood and adopted, the excess returns generated by the strategies will diminish,” the report adds. “Even in the nearer term, it is likely that human decision-making will be required in order to decide which factors will outperform at any given time. We therefore expect active management to play a role alongside passive factor-based strategies in the products of the future.”
Big data will be another major disrupter for the industry, according to the report. “Consumers’ online searches, for example, can be mined to gain an edge in forecasting retail sales for specific industries sooner than was ever possible before, improving stock picks and overall portfolio returns,” it says. “Sellers of mutual funds and ETFs can also learn about the product preferences of wealth managers via the managers’ digital footprints, increasing sales to them and simultaneously reducing the cost of those sales.”
However, this will be costly, favouring the industry’s large players, the report says. “To do all this, asset management firms will have to invest large sums in both technology and in data scientists, giving an advantage for firms with the cash on hand to make such investments.”
Photo copyright: davinci/123RF