Fund houses — and their clients — must get up to speed with how different parts of the investment industry is developing as a result of financial technology, warn industry experts.
Ten years ago, terms such as ‘big data’, ‘robo-adviser’ or ‘blockchain’ would have been meaningless to institutional investors and fund managers. Today they are central to the future of asset management.
Fintech is set to irrevocably change how fund management and investing is conducted. In large part this will be down to increasingly sophisticated computer algorithms and sheer processing grunt, but it’s also the product of an evolving investing environment.
“Three massive themes are intersecting: the regulatory environment is shining light on [the] transparency of the manufacture and distribution of funds; second, returns are relatively low and the outcomes are modest; and third is the advance of technology,” said Damien Mooney, head of retail and wealth business for Asia Pacific at BlackRock, the world’s biggest asset manager.
Experts predict that the investment industry will undergo a considerable shift over the next 10 years as a result of this confluence. At a bare minimum, many plain-vanilla types of equity investing could become automated, while the rise of online payments is expected to revolutionise fund distribution.
Some of these developments are already materialising in Asia.
“It’s still early days but we are seeing mainland [Chinese] investors utilising money market solutions as a substitute for banking and transactions, and the generation coming through today will have very different buying behaviours to the previous generation,” said Guy Strapp, chief executive of Eastspring Investments.
As he pointed out, fund salespeople in India already conduct around 20% of mutual fund sales via iPhone and Android mobiles, a habit set to accelerate as fintech makes funds cheaper, more efficient and easier to access, as well as perform better. For fund houses, that’s both exciting and worrying.
Actively managed equity funds and hedge funds have not done themselves any favours over the past decade.
The vast majority of actively managed US equity funds (92%, according to Standard & Poor’s Dow Jones Indices) failed to beat their benchmark in the 10 years to December 2016. Yet active US equity funds charged 82 basis points in annual administrative fees on average last year, according to the Investment Company Institute (ICI) based in Washington, DC.
Equity fund performance is typically even worse for retail customers in Asia, due to the relatively high retrocession and trailer fees attached to them.
Institutional investors have responded by shifting more money into passive products and illiquid alternatives. Private banks are doing the same on behalf of their clients. US retail investors have also shifted masses of money into index funds ($492 billion last year alone).
But their Asian counterparts haven’t yet followed en masse. Mutual funds in the region lack the same penetration as in the US or Europe, and passive products in particular lack the profile of highly marketed active funds.
This is likely to change over the coming decade. In 10 years’ time, so-called Generation Y — aka millennials — will be in their 30s and 40s and Generation Z will have started entering the workspace. Both demographics are (or will be) comfortable with paying and investing through their phones or tablets — offering fund houses an opportunity to greatly expand their distribution.
Opportunities and issues
“Investing options will become massively democratised, which is good,” said BlackRock’s Mooney. “The industry is heavily underpenetrated now, with people still keeping a lot of money in cash or property.”
Fintech could also push investment products to the extremes, by fostering a 'survival of the fittest' environment. Increasingly sophisticated funds supported by artificial intelligence (effectively very detailed algorithms and data analysis) may cause benchmark-hugging managers to go largely extinct, and data analysis advances could help fund managers become truly active.
Some may use fintech to conduct risk analysis and combine passive or auto-active funds into multi-asset portfolios that offer alpha as well as beta. This will be made easier by faster settlement and payments too. Others may focus on areas such as private equity, where human interaction will remain vital.
“In 10 years I think we will see two groups of fund management,” predicted Katsuhiko Okada, chief executive and chief investment officer of the algorithm-focused Magne-Max Capital Management. “One will be AI-based fund managers, the other a more analyst-based investment style that takes long time horizons and looks into the personalities of company CEOs. That sort of information can only be obtained through deep associations with the management team of the firm.”
Fintech, in short, will be the catalyst that drives an investment revolution. Fund houses had best start planning how to benefit from this process today, if they want to avoid becoming victims tomorrow.
The full version of this article appears in the latest (June/July) edition of AsianInvestor magazine.