Not Just for Quants Anymore

Asset managers, including those that buy and sell companies based on fundamental research, recognize that they need to glean insights from data analytics to stay competitive, but most have not developed a clear roadmap to do that. According to research released today from The Boston Consulting Group, asset managers that are able to take advantage of data, machine learning, and artificial intelligence will be in the best position to thrive in a future marked by lower fees and weaker fund flows. The technology will help firms improve performance and invent better client-service models while keeping costs under control. Most asset managers, though, are at best still experimenting with the technology.

Managers need to do some soul searching on tech and other issues that will help them deal with an uncertain future. Although global assets grew by 7 percent between 2015 and 2016, the growth was driven primarily by market appreciation not new business. In fact, net new flows into the industry amounted to only 1.5 percent in 2016, paltry compared to prefinancial crisis levels of 4 percent to 5 percent. Flows have hovered around 1 percent since 2012. What’s more, industry revenues declined 1 percent and profits fell 2 percent. The revenue decline was attributable to lower fees as investors shifted to passive products. But revenues also fell as investors moved from high-cost active equity funds to actively managed fixed income and as fees declined on hedge funds and private equity. Hedge fund fees have fallen 1 percent since 2010.

Brent Beardsley, the global leader of BCG’s asset and wealth management unit and a co-author of the report, “Global Asset Management 2017: The Innovator’s Advantage,” says, “Asset managers are struggling with what to do next, the cost and whether the technology really gives them anything worthwhile.” Beardsley adds that he sees a lot of experimentation going on as well as caution about how much to spend on the effort. He says it’s quite easy to spend $10 to $20 million depending on an organization’s size and specialty. Most asset managers should probably keep it under $5 million—or even $2 million—per year at first, says Beardsley.

Quantitative hedge funds have been using data analysis and other techniques to get a short-term information advantage for decades. Fundamental and other managers are now finding they can get insights that will help them identify longer-term trends from these technologies as well. “Fundamental managers have to use data, otherwise they’ll be far behind the market,” says Beardsley. He stresses that human portfolio managers aren’t going away, but researchers need to augment their decision-making with new methods. Given that some portfolio managers have picked securities the same way for decades, BCG says firms will have to manage talent well as part of any technology overhaul. “Folks who aren’t savvy with data analytics will have be educated about the value,” says Beardsley.

According to statistics BCG pulled from its research specifically for Institutional Investor, the U.S. asset management industry grew at 5.3 percent in 2016, reaching $30.6 trillion in assets. Although a positive mark after the industry contracted in 2015, the growth was from asset appreciation, not new clients. The industry had net outflows of .3 percent. Institutional assets grew by 5.7 percent, driven mostly by defined contribution plans.

Additionally, BCG’s research for II found that registered investment advisers and retail investors going directly to managers will drive the industry’s future growth through 2020. RIAs and even robo-advisers will outpace the growth of wire houses, insurance companies, and independent broker/dealers. Markets such as corporate defined benefit plans will offer few opportunities. Corporates will continue to experience a decline in assets through 2020.