2020 outlook identifies four paths for firms to achieve growth in increasingly complex landscape
Investment managers will be highly motivated to go outside their comfort zones as they pursue profitable growth next year, according to a new report from Deloitte.
“A quick glance at the asset growth in the investment management industry over the past nine years shows steady growth—a sign of health and stability,” wrote authors Doug Dannemiller and Sean Collins. “However, the details seem to tell a more complicated story.”
Aside from the dramatic shift to passive investing over the past decade, they cited the mixed global economic backdrop and relentless fee pressures faced by long-only investment managers, private-equity managers, and hedge funds as assets are concentrated in a handful of successful firms.
“In 2020, many alternative and long-only investment managers alike could cross boundaries and leave their comfort zones,” the authors said.
One avenue for growth, the report noted, is a more aggressive shift toward diversification of products and markets. Aside from PE firms fueling growth through permanent capital pools, the authors said investment management firms could ramp up their use of technology to open new market segments.
“M&A can be a strong path to immediately achieving scale and serving new clients, but they are not a panacea,” the report said. “Thoughtful planning for M&A integration that begins in the transaction phase will emerge as a leading practice in 2020.”
Another route to success is market development, or finding new markets and investors for existing investors. The report highlighted a US regulatory consultation on opening alternative-investment access to the retail market, a move that would have implications on liquidity, risk, and return objectives for millions of small investors. Technological platforms, it added, can be used to address liquidity and control concerns of embedding alternative investments in portfolios across varied client segments.
“Many investment managers are crossing traditional industry boundaries to develop new products and reimagine others,” the authors continued. Aside from an increased focus on ESG-oriented and thematic strategies in the ETF and mutual-fund space, there’s growing interest in permanent capital structures and debt markets among PE firms to create products similar to closed-end mutual funds.
The cultivation of new structures and products can be driven by needs of existing customers, whose financial circumstances and market opportunities continue to be in flux. Leading firms that pursue this needs-driven development strategy, the authors said, are likely to have exceptional insights into their customers’ evolving needs, as well as embrace cannibalization of existing products in order to foster the growth potential of new launches.
Finally, the paper discussed the possibility of revitalizing active management strategies through the use of AI algorithms and access to alternative data sets. Non-traditional data has the potential to provide game-changing insights for PE firms, it said, adding that talent and culture are also important in bridging the gap between data science expertise and investment savvy.
“As a whole, active managers, other than those in PE, have been on the losing side of the market expansion strategy for the past decade,” the authors said. “Any active manager looking to win in their existing markets with their existing products has this mandate, and will be asked to demonstrate it.”
