In my last post, I discussed the importance of the financial industry for everyone from individual investors to nation-states. It plays a critical role in allocating risk and capital which enables economic growth. I suggested that the mechanism for effective allocation is the fair pricing of securities and that active fund managers are the main agents to make this work. Active managers create value by helping to keep prices fair thereby supporting efficient allocation of risk and capital.
We are now in the 21st century
The world is being changed by automation, machine learning, big data and cloud computing. Information-intensive industries like asset management are right in the line-of-fire. This is more revolution than evolution.
Are active managers ready, willing and able to play this important allocation role?
The muted returns of active managers over the last decade suggest many managers are not keeping up with the required speed of change.
Being ready requires the managers to be prepared to change their processes, their incentives, the mindsets of their people to take advantage of the change. For example, many firms have poor or legacy technology that is no longer fit-for-purpose. Similarly, a workforce that is only familiar with Bloomberg and excel is not sufficient.
The idea of willing is about alignment. Active managers need to radically restructure incentives to be properly aligned with their investors. Much less focus on management fees and up-front fees and more on performance sharing.
Able means having the right approach, infrastructure and capabilities to operate effectively in this new world. That is, to be able to deliver performance at low cost with rich digital engagement with their investors.
Active management has had a lucrative run. But we think the cottage industry phase is over. The time has come for the industrialisation of investment management.
This has three dimensions:
- digitisation of the business to reduce costs and enable scale
- re-imagining the business model to be solidly focused on alignment and performance
- development of capabilities to deliver performance for investors in this new information-dominated world.
I’ll elaborate on these three dimensions in my next post.