Our research suggests the the power base will finally shift to Money
Holders from Money Managers. We see four main ways that global economic,
social and political trends are driving this massive power shift:
Rapid technology innovation is generally positive for most money
holders and will provide an opportunity to differentiate for
intermediaries and money managers . Technology, and specifically the
internet, will drive greater transparency, ease of use, and efficiency,
while creating new opportunities for funds looking to generate alpha.
But technology is neither a panacea nor fault-free, e.g., the 2015
Flash
Crash and Bank of New York Mellon’s
mutual
fund settlement problems. Overall, technology will both raise assets
and reduce fees, but it will not be a competitive differentiator on its
own. Some startups will target upgrading institutions’ investing
process: consider
Earnest
Research, which analyzes transaction data and other non-traditional
data sets for investment research, and
AcordIQ,
a platform that institutional investors can use to gain better control
and governance of funds they are invested in. Other will target
individuals:
Long
Game is turning gamblers into investors.
A slow growth economy has negative impact on most of the asset
management industry and is forcing accountability on money managers.
Many of the leading macro investors, including
George
Soros,
Ray
Dalio and
Vanguard’s
Chief Economist, Joe Davis, are pessimistic about global growth
outlook. One of the biggest implications for asset management is that
underfunded pension funds will have a difficult time meeting their
return expectations. Another implication is that the large money
managers that collected hefty fees from riding the long term “beta”
growth wave in the 80s and 90s will have a difficult time justifying “2
and 20” fees in a lackluster economy.
As women and millennials become key allocators, they create a
new group of underserved customers with new unmet values and
expectations . Womens’ $14 trillion in assets today is projected to
reach $22 trillion by 2020,
according
to a Family Wealth Advisors Council white paper. Meanwhile, millennials
are coming of age in the work force. The new decision makers will expect
the industry to reflect both better gender balance and be more
accessible everywhere, and will invest in money managers who do not look
like Warren Buffett. Internal diversity forces an organization’s members
to question their assumptions more aggressively, think more deeply, and
are less likely to generate bubbles, according to
research
by Professor Sheen Levine. Further, these two groups (women and
millennials) tend to invest differently than the past generation of
older
men.
According
to the Spectrum
Group,
Millennials,
for example, are both more risk-averse and more socially conscious than
past generations when selecting investments. In addition, having come of
age during the financial crisis, millennials have a negative brand
perception of some of the traditionally dominant financial services
companies.
Geopolitical risk around the world leads to capital flight to
safe havens. Political volatility is typically not good for savers and
allocators as it tends to destroy asset value. Regional political
instability and the fear of totalitarian regimes exists in China,
Russia, the Middle East, and South America, which now have millions of
well-educated and newly wealthy citizens that look to protect themselves
and their nest eggs.
The
IMF reports that we are seeing the first net private capital outflows
in emerging markets since 1984. For example, according
to
Bloomberg,
money is quietly leaving China at the fastest pace in at least a decade:
an estimated $300 billion in financial outflows in the six months
through March 2015. This is double the capital ($150 billion) that
exited Russia prompted by the Ukraine crisis. Overall, the economic
outlook in the US is modest, but the country is relatively stable
despite political dysfunction, and remains the most attractive on a
relative basis. Just as immigrants streamed to Ellis Island, the wealth
of the newly prosperous emerging markets will increasingly seek refuge
in the United States, as well as other perceived safe havens such as
Singapore and Switzerland.
The Money Manager
of the Future
\label{the-money-manager-of-the-future}
Based on the problems and global trends uncovered in our research, we
outline below the five characteristics that will differentiate the
winning money manager of the future (See Picture 5):