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.
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!
In 2021, the total assets under management (AuM) grew by 12% to $112 trillion globally, with the growth rate higher than historical average of 7% annually for the period 2001-2020. This is mainly driven by strong market performance and 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 2021 to 2025.
When broken down by region, we can see that North America and Asia Pacific were the main drivers of global AuM growth in 2021:
| Regions | Commentary |
|---|---|
| North America | World’s largest asset management region, with US accounting for over 90% of the region’s AuM. AuM increased by 13%, adding $6.4 trillion in value.This growth is mainly attributable to quantitative easing, strong consumer spending, and a historically low unemployment rate. |
| Europe | Also recorded decent AuM growth, increasing by 8% to $26.5 trillion. UK is Europe’s largest market with 27% market share, still grew 13% to $6.5 trillion in 2021 despite Brexit concerns. Institutional segment (majority of UK market) is the main driver of growth. |
| Japan & Australia | Both countries have collectively grown 11% to $8.2 trillion AuM, mainly due to strong market performance. |
| Asia (excl. Japan & Australia) | Assets in other Asia Pacific countries grew faster at 16% to $17.2 trillion. This growth rate is heavily influenced by China – the second-largest asset management market in the world – whereby its AuM is estimated to have grown 10% in 2021 to $8.5 trillion. Retail segment accounts for 60% of China’s AuM, which recorded a strong growth of 14% in 2019. This growth is mainly driven by the rise in retail investing. |
| Latin America | Latin America’s AuM grew 11% to $1.8 trillion, with Brazil holding 61% of the region’s AuM. Brazil’s 8% AuM growth to $1.1 trillion is mostly driven by retail investors. |
| Middle East & Africa | Middle East is the largest market in this region with $1.5 trillion AuM. Its 12% 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?
Despite the continuous fee pressure, the global asset management industry managed a slight increase in profitability due to stronger AuM growth offsetting the slower increase in costs. This resulted in an average operating profit of 38% of net revenues in 2021, vs. 36% in 2020.
This means that the fee margin (fee as a % of AuM) is expected to decline in the near future. Introducing new products and expanding geographically is likely to help keep fee income up, but increased competition in the sector is likely to keep fee margin low.
The cost issue remains a problem for asset managers, in particular the fixed expense of people cost remains high. To survive, asset managers need to balance short-term savings at the expense of longer term goals.
While it is tempting to start cutting short-term discretionary investments – especially those in technology and innovation and – these are the type of projects that would likely bring a step-change improvement in cost structure and future competitive advantage.
Hence, asset managers need to transform their business model to increase operational efficiency. There are various ways to do this, with examples ranging from outsourcing, offshoring, technology-enabled transformation by standardizing and digitizing end-to-end system, automation and blockchain.
Interestingly, a study by Casey Quirk (a Deloitte business) on 95 investment managers in North America, Europe and Asia Pacific found that only 25% firms surveyed are able to both grow profits and margins simultaneously.
These successful firms commonly have:
So it seems that profitable growth is achievable, but certainly not easy! Successful firms that achieve this are more adept at rightsizing their operations using technology and outsourcing noncore functions.
As firms transform their operations, risk management grows in importance too. This is because the further the departure from the old way of doing things, often the greater the need for new policies, procedures, and controls to manage both external risks (such as cybersecurity) and internal risks (such as having the right talent).
In Deloitte’s 2019 Global Risk Management survey: cyber security, regulatory issues and operational risks are the top 3 risks asset managers are concerned about in the next 2 years.
So what does the move to greater operational efficiency mean for asset management jobs?
1) There may be a slight headcount reduction in the industry the next few years, but those that remain are on average more talented or productive.
2) The nature of the job is likely to change, with greater integration of technology to help streamline operations. Needless to say, jobs that mainly involve tasks that can be automated such as trade settlement, certain accounting and generic administration are at risk.
3) Some roles may be outsourced if firms choose to focus on their core investment functions. So these jobs are not ‘lost’ per se, but their employers change.
4) Risk managers familiar with cyber security, regulatory compliance, operational and market risk are sought after.
5) The business transformation initiative requires a cross-functional team to deliver: e.g. corporate development / strategy, technology, risk management and operations. External technology vendors and management consultants may also be hired to help execute these changes.
6) Mergers & acquisition (M&A) activities are expected to continue, as asset management firms use it to bolt on new capabilities in search for revenue growth, look for targeted scale opportunities or divest subscale product lines.
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.
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.
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
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.
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!
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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