Beyond the Horizon

By Todd Spillane

 

As we enter the next decile of the 21st century, there are a number of things that I see coming at us with increasing speed. These are the things that I am thinking about that are coming at us fast and furious as it relates to the asset management industry and investments as a whole.

 

First, the global economy, even in the face of the pandemic, will continue to spread its wings into the far reaches of the world.  Correlations between equities will continue to increase to the point that there will be little dispersion between US equities and the rest of the world and asset managers will need to will need to look for other ways to add alpha for investors.

 

Investment strategies have evolved over time, it seems to me that the evolution from a fundamental value strategy to a fundamental growth strategy to a quantitative value, balanced or growth strategy. Managers also explored other “non-correlated” assets including commodities, but at the end of the day, they all become highly correlated.  Like most things, these strategies get over done with too many managers all doing the same thing, can you say FANG? So, what is next for the asset management industry?

 

In looking beyond, the horizon, I see a number of things that will be very different in the near future and some a bit further out in the asset management industry.

 

  • There will be more consolidation under the theory that bigger is better. While this is probably true, it is only because of the crushing weight of the expenses of running a big asset management firm particularly in the mutual fund space.
  • ETFs will continue to erode traditional mutual fund market share due to the significant cost differential, the transparency and the ability for shareholders to exit at any point during the day.
  • Investors will continue to look for the holy grail of exceptional performance and a low cost. While this may be utopia, as we all know performance wins at the end of the day, and consistency of performance is the third leg of the holy grail trinity.
  • Investors, particularly wealthy investors that can access hedge funds and private equity for potentially better investment opportunities with positive results, significant assets will flow their way.
  • Investors that are driven to see outsized alpha may find it in funds that have a very different way of managing the assets and will find opportunities in funds that are quantitatively managed using artificial intelligence (“AI”) and machine learning (“ML”).

 

So, what does this mean from a compliance perspective?

 

Compliance will become more challenging for firms, from limited resources and converging firms. As a result, compliance professionals must keep current with not only all the changes in the markets, but also the changes in the investment universe. To that point, we all thought that we knew the various investment strategies and how portfolio management teams think.  Now, we have a whole new set of business and portfolio management issues to understand and think about how our regulatory world meshes with the new age of technology.

 

In order to stay current with the investment strategies, compliance professionals need not only to stay current on their readings but also use the investment team as a resource to understand the investment process not only for disclosure purposes but also for monitoring and testing purposes.

 

Additionally, a great resource for compliance professionals are the various vendors and service providers.  Use them to get as much information that you can, they love to explain their product and if it covers an emerging area, they are patient and willing to explain how their service works in addition to the broader markets.

 

The challenge of being a compliance professional in this day and age is that the regulatory landscape is changing quickly as well as the business landscape changing even faster. In order to keep up, compliance professionals need to have their firm be committed to spending the right amount on technology and on staff.  The key is to get the right balance to manage the regulatory risks that each and every firm faces in this technology age.