Worried about your job in the current climate?
Instead of worrying, having an insight to what the future may hold for your industry may help alleviate stress on job security and more importantly – help you better prepare for future changes.
Since most CFA candidates are interested in an investment management career, our data-driven guide summarizes the latest asset management outlook published by top consulting firms, focusing on future trends and potential impact on jobs, especially from Artificial Intelligence (AI).
This Asset Management sector outlook guide starts with a quick look at the current state of the industry, before moving on to understanding the 4 key trends that are transforming the asset management sector, and how they may affect current and future jobs.
Let’s dive in!
Asset management outlook: How’s the sector doing?
In 2023, the total assets under management (AuM) grew by 12% to $119 trillion globally, with the growth rate higher than historical average of 6% annually for the period 2005-2022. This is mainly driven by net new asset flows from retail investor demand. In fact, PwC projected that global asset management AuM will continue to grow at 7% annually from 2023 to 2028.
When broken down by region, we can see that most regions (except Europe and Asia Pacific (excluding Japan and Australia) delivered above average growth in AuM from 2022-2023.
| Regions | Commentary |
|---|---|
| North America | World’s largest asset management region, with US accounting for over 90% of the region’s AuM. AuM increased by 16%, adding $7.5 trillion in value. This growth is mainly attributable to strong consumer spending, and a historically low unemployment rate. |
| Europe | Also recorded decent AuM growth, increasing by 8% to $25.3 trillion. UK is Europe’s largest market with ~27% market share. Institutional segment (majority of UK market) is the main driver of growth. |
| Japan & Australia | Both countries have collectively grown 15% to $7.9 trillion AuM, mainly due to strong market performance. |
| Asia (excl. Japan & Australia) | Assets in other Asia Pacific countries grew faster at 16% to $22 trillion. This growth rate is heavily influenced by China – the second-largest asset management market in the world. Retail segment accounts for 60% of China’s AuM, which recorded a strong growth in 2023, mainly driven by the rise in retail investing. |
| Latin America | Latin America’s AuM grew 13% to $2.3 trillion, with Brazil holding 61% of the region’s AuM. Brazil’s AuM growth is mostly driven by retail investors. |
| Middle East & Africa | Middle East is the largest market in this region with $2.3 trillion AuM. Its 13% AuM growth is mainly driven by strong market performance and recovering oil prices. |
OK, that’s a good start, I hear you say.
So, what are the key trends for the future of asset management?
1) Despite AuM growth, Profits Declined Due to 5 Fundamental Pressures
Despite AuM growth, the global asset management industry revenues increased only slightly (0.2%), while costs rose significantly (4.3%), leading to an 8.1% decline in profits.
- Revenue pressure: Asset managers can no longer rely solely on market performance/appreciation to drive revenue growth like in the past. Growth is typically associated with low interest rate environment and currently many governments around the world are battling inflation with higher interest rates.
- Passive funds are increasingly popular: Passive investment products are capturing a growing share of net fund flows. In 2023, passive products attracted 70% of total global mutual funds and exchange-traded funds (ETFs) net flows (about $920 billion).
- Fee compression is accelerating: The pressure to lower fees shows no signs of easing. Continued tight monetary policies, combined with general market uncertainty, resulted in investors moving into products with lower fees.
- Costs are rising: Operating costs for asset managers continue to increase at about 5% a year annually since 2010.
- Fewer new products are surviving despite attempts at innovation: Many new investment products struggle to gain traction and survive in the market.
2) Winning Through A Better Customer Experience
An asset manager can win and retain business in 3 primary ways: performance, cost and client experience.
Traditionally, performance and cost-based business models have dominated the industry. Although these models remain relevant, there are natural limits to them: only a few managers can sustain outperformance and costs can only go so far as zero.
In the next wave of competition, asset managers would need to further differentiate themselves by creating world-class customer experiences. Compared to the performance and cost-based business models, the only limits to innovating on customer value are creativity and the ability to execute.
With consumers around the globe purchasing more online than ever before, they now expect the same seamless, personalized digital user experience from investment managers.
To that end, asset managers are creating data-driven business intelligence in sales and marketing to help the entire organization develop a deeper understanding of client needs. These customer insights are also incorporated in the product development process, to better enable personalization of portfolios. All these help improve customer loyalty, enable cross selling of value-added services and create an overall better value proposition for clients.
How does the increasing digitization in asset management affect jobs?
1) Technology will become mission critical not only to drive operational efficiency (see section #1), but also drive customer engagement, build deep customer insights data, simplify regulatory and tax reporting. Most global asset managers will soon have a chief digital officer (CDO) to oversee the huge business digital transformation.
2) The sales and marketing process (distribution) will be more efficient. Sales and marketing staff can adapt and up-skill by being familiar with data analytics, and increasingly focus on their creativity and communication skills which is still core to this client-centric business.
3) Passives & Select Alternatives Are Winners
Since 2005, alternative and passive assets have grown considerably faster in the lead-up to 2021, to become more significant parts of portfolios.
Alternatives delivered 6% AuM growth in 2021. This asset class has grown from less than 10% of the total market AuM in 2003 to 51% in 2021. It has become the largest revenue pool across products and is likely to capture a 51% share of global revenues by 2026.
The key driver of this growth is investor demand for increased performance, uncorrelated returns, illiquidity premiums, and other nontraditional return profiles, particularly as institutions across the globe face the challenge of a widening gap between assets and liabilities.
That said, not all alternative assets are created equal. Private markets – including private equity, real estate, infrastructure, and private debt – have grown assets at an annual rate of 9% since 2008, and they currently represent 66% of AuM and 60% of revenues in alternatives.
Hedge funds, by contrast, have seen their asset growth decline as overall returns over the past decade have trailed the S&P, although capital still flows disproportionately into the larger funds (AuM > $5 billion) as investors prioritize reputation and track record.
For those interested in further specializing in alternative investments, check out the Chartered Alternative Investments Analyst (CAIA) designation.
If you happen to be a CFA charterholder, you can get exemptions to CAIA Level 1 to sit for CAIA Level 2 (final exam) to obtain a CAIA charter.
Meanwhile, passive investments overall grew faster than any other product category – mainly driven by equity and fixed income ETFs growth – with total AuM rising by 19% in 2021. Although the passive products market growth is expected to continue the next 5 years, revenue will remain at a ~1% CAGR due to the already depressed pricing.
The increased share of passive investments is driven by both institutional and retail investors’ demands. The separation between alpha and beta will accelerate as investors increase their investment allocation to passive products in search of low fees and broad beta market exposure.
So how does the growth in alternative and passive assets affect asset management jobs?
1) While there is generally a reluctance by firms to change Portfolio Managers (PMs) for fear of triggering huge outflows, PMs cannot afford to be complacent. The growth of passive investments, artificial intelligence and computer-driven investment styles are headwinds to watch out for.
2) While passive investments are rising in popularity, this doesn’t mean active is “out” though. While active core products are declining in market share and revenues, active specialty products (e.g. sectors, small/mid caps, emerging markets, high yield, convertibles) is still expected to hold its market share, although it continues to experience price pressure in the future.
3) Hiring opportunities in alternative investments – especially private equity, infrastructure, private debt and real estate – is expected to increase in the next 5 years.
4) ESG Investing Is Set to Grow (Fast)
Asset managers’ efforts to incorporate customer insights into product development have paid dividends. In the mutual fund and ETF categories, products focusing on sustainability, market volatility, and megatrends (thematic approaches e.g. urbanization, health care, technology disruptions) have been launched. These resonated more with investor goals and emotions compared to previous classification systems such as large cap value.
In particular, sustainable investing has experienced a dramatic growth in asset management, driven by the increasing financial relevance of ESG (environmental, social and governance) factors, better ESG data, growing investor demand, and – in some markets – growing regulatory pressure.
Global inflows into sustainable funds had a record year in 2021, buoyed by the broad market recovery from the first-quarter coronavirus pandemic market sell-off.
The disruption caused by COVID-19 has accelerated the sector’s growth as investors look for sustainable business models that can withstand market shocks.
In fact, many of these sustainable funds have also outperformed their benchmark indices over the last year and even longer, despite the COVID-19 pandemic.
After falling 12% in Q1 2020 to US$ 846 billion, assets in sustainable funds rebounded since then and reached an all-time high of US$ 2.9 trillion at the end of 2021.
European institutional investors have led this demand, but interest among US and Asian institutions and global retail investors is starting to accelerate.
In Europe, rising investor demand drove net flows into sustainable funds. Regulatory developments in the European Union such as the creation of a standard ESG taxonomy and ESG-specific benchmarks is likely to further drive the growth of ESG investments.
In response to this trend, many asset managers have already started building climate science expertise by boosting their data, research and analytics capabilities on ESG topics and explicitly integrating it into their investment process.
For active managers that have suffered from the shift to passive funds (see previous section #3), the fast growing ESG segment is a positive development as it is active money that comes with higher fees and solid investor demand.
That said, although majority of sustainable funds are still actively managed, there is also growing retail investor demand favoring passive sustainable funds.
According to MorningStar research, Europe remains the largest market for sustainable passive funds, accounting for more than 75% of global assets, but the US is catching up at 20%, up from 13% three years ago.
What does the projected growth in ESG investing mean for jobs?
Sustainable investing has created 2 types of new roles within asset management:
1) a pure stewardship/governance role which offers an alternate route into the asset management industry for those that come from a non-investment, but more policymaking or natural sciences background.
2) an experienced investment/research role which focuses on ESG issues at a sector level, making recommendations across asset classes and articulate what ESG considerations the team should take. For existing experienced investment professionals with strong interest in responsible investments, this offers a route to shift to a more ESG-centric role within the firm.
For those interested in upgrading your knowledge in ESG and climate change matters, do check out these relevant global qualifications which currently can be done remotely:
–Certificate in ESG Investing by CFA Institute,
–Certified ESG Analyst (CESGA) by EFFAS,
– Certificate in Climate and Investing by CFA UK,
– Sustainability & Climate Risk (SCR) Certification by GARP
So, What Have We Learned?
The asset management sector is undergoing a huge transformation to reinvent itself in the face of fee compression, mounting cost pressure and fierce competition.
Although technology is a central piece of this change, it doesn’t mean that coders, data scientists and engineers are the most valuable resources in the firm. While these technical skills are important to asset managers’ future, delivering the right outcome from technology will also require ‘creatives’ and people with ‘softer’ skills to motivate, manage and organize complex cross-functional teams in the future.
AI would be prominent in driving change in the asset management sector. The industry will be more digitized and efficient in the future, with a strong focus on building a better customer value proposition. To overcome these challenges, asset managers need to create a diverse talent pool, an inclusive culture and incentives that align with their stakeholders to deliver. Those open to embracing these changes and work with new technology should stand in good stead.
What do you think of these upcoming changes? How do these trends affect your current career planning? Would be great to hear your comments below!
Meanwhile, here are some related articles that may be of interest:
- Why Is ESG Important & Which Careers Can Benefit From It?
- What Does An ESG Analyst Do & How To Become One
- Complete Guide to ESG Certifications & Courses
- How To Correctly Display Your CFA Program Status On Your Resume, LinkedIn & Business Cards
- What Are Typical Career Paths for CFA Charterholders?
- Switch Finance Jobs Effectively With Our Career Change Planner
- The CFA Charter is Not a Golden Ticket to Jobs – But Here’s How It Can Help
Very insightful – thank you.
My pleasure George – what part in particular you found interesting? Are you currently in the AM sector, or looking to move into it?
i’m looking to move into it