With only so many ways that factor funds can be differentiated from one another, the asset management industry may end up being dominated by a concentrated group of highly successful firms. That’s one of many conclusions to draw from new Willis Towers Watson research released Wednesday.
“There will be 10 to 15 firms that will do well with systematic,” said Roger Urwin, global head of investment content the investment advisory firm.
“There are forms of differentiation in systematic, but it’s not quite so portfolio manager-oriented. It’s a team effort and it involves more technology,” Urwin said in an interview.
Urwin explained that conventional active management, which is based on highly idiosyncratic individuals and teams hasn’t been a durable or scalable idea. As a result, investors are turning to systematic building blocks and switching their emphasis in building portfolios from the traditional style boxes to factors.
That shift, helped along by technology, is transforming the industry.
According to the authors of the report from WTW’s Thinking Ahead Institute, “a number of changes to the investment model are evident and are showing up in current trends. We can expect more systematic investing in public markets.”
The report highlighted that, “For increasing numbers of asset owners, this is likely to be the core active strategy used. The disciplines in the methods used, lower costs, and lighter governance all seem increasingly attractive.” Willis Towers Watson used the CFA Institute’s study from May 2018 on the future of investment firms as a framework for its own paper.
Active managers are being hit by both traditional market capitalization-based index funds and systematic, which Urwin contended are active strategies. The number of investors that are putting new money to work in traditional categories such as active global equity is falling fast, said Urwin. Instead, they’re evaluating passive or factor options.
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The report also raises the question as to why the industry hasn’t had its “Uber” moment.
According to the study, asset management has avoided disruption thus far because it is highly regulated, complex, and long term. “It does not lend itself easily to the worldwide wish for simple and speedy that is leading most disruption,” wrote the study’s authors.
Urwin said the industry, though, is not safe from an Uber moment. The Uber moment happens when a firm addresses a long unmet need, he said. “The need in asset management that has gone unfulfilled is exceptional alpha,” explained Urwin. But so far no one has been able to provide these types of returns at scale. “I believe there is an Uber moment in every industry. Sometimes it takes longer than you think,” he added.
The paper also pointed to the increasing importance of culture in asset management. Strong cultures are said to include professionalism, diversity, performance reviews, communication, and other nuanced issues.
Willis Towers Watson argued that firms often throw up their hands in terms of creating a distinct culture or a larger purpose, in part because the asset management business has been built around detailed quantitative measurements. But ignoring culture is dangerous, particularly when firms are growing or dealing with other big changes.
“The cultural legacy of asset managers of a previous era is that asset management has been producing more for itself as an industry than for its clients. It’s not that unfair to think of it that way,” said Urwin, in the interview with Institutional Investor.
“But the dimension of greater purpose and stronger culture are getting better rewarded with how money is moving about. It’s more reflective of a good culture than performance numbers. Culture is a subjective assessment of some human motivations, and just because it’s not measurable, doesn’t mean it’s not truly important,” he stressed.