From product consolidation, to remote workforce technology, to novel types of investing — 2020 is a year of change that promises to flow into 2021 and beyond. Below are nine trends we are watching in the investment industry.
Most asset managers would agree that one of their strategic goals is, or should be, to reach the most customers with best-in-breed products, thereby maximizing overall revenue. So it stands to reason that asset managers with a wide range of products, particularly in our current challenging economic environment, are looking at product rationalization and consolidation for a couple of key reasons:
We are seeing fund families consolidate similar strategies to gain efficiencies after the transaction closes.
Outsourced service providers have continued to invest in technology to drive efficiencies and better serve investment company products. Firms continue to invest in automation, streamlining routine tasks and enabling employees to focus on higher level work. This has driven down costs to operate products. However, clients are also demanding more services and data interfaces, and regulation has continued to increase — both of which have largely offset the cost savings gleaned from automation. Additional regulation, including liquidity risk management and investment company reporting modernization, has increased roles and responsibilities for management, boards and outsourced service providers.
Read “SEC Division of Investment Management Updates Investment Company Reporting Modernization FAQs”
This is the new kid on the block. Several firms have developed and received exemptive relief for non-transparent actively managed ETFs. These products are very similar to any other ETF, except they don’t disclose the contents of their holdings publically on a daily basis. We see this potentially expanding the viable universe of interest in the ETF space.
Over the past five years, many large asset managers have entered the ETF business by acquisition, by building ETFs products organically, or by launching ETFs within established ETF series trusts with seasoned management teams and distribution partners. We expect this trend to continue for the large asset managers that have yet to enter the space, as non-transparent ETFs continue to grow in popularity with investors and the markets due to the funds’ operating efficiencies and tax advantages.
Asset managers, both large and small, were able to instantly transition to an almost 100% remote work environment when COVID-19 hit, largely in part to their investments in business continuity planning and technology in prior years. In addition, the entire asset manager service provider eco system, including accounting, administration, transfer agency, custody, trading, legal and many others, was able to adopt the same model with very little disruption. As a result, it’s likely asset managers and service providers will consider adopting a more flexible work environment, with employees working from home a percentage of the time and from the office a percentage of the time. While this will allow firms to maintain a smaller office footprint, they also will need to address areas such as cyber security, equipment security, proper oversight and review, and how to maintain company culture.
Fund boards also quickly and successfully adopted virtual board meetings. The initial conclusion is that there is no substitution for in-person meetings, but boards could adopt a hybrid model in the future, perhaps with 15c meetings primarily being in-person and more routine meetings occurring virtually.
As the COVID-19 pandemic is predicted to still be in full swing throughout 2020 and going into 2021, the prospects of in-person, large scale conferences will continue to be off limits. Technology will be the vehicle for providing applicable content, both from a sales perspective and continuing education perspective (and the user experience still varies widely as emerging technologies are created to solve for the virtual reality). Virtual conferences of course save costs associated with travel and increase the number of individuals who can attend; however, this new format will certainly affect networking opportunities and the ability to have multiple one-on-one informal meetings.
Defined as Environmental, Social and Governance (ESG) issues, this area of investing stretches to various areas, including climate change, renewable energy, carbon footprint, sustainability, diversity and inclusion, equality, social injustice, executive compensation, diversity on boards and management teams, and shareholder transparency. Retail and institutional investors around the world are increasing their allocations to ESG investing, and the marketplace is continuing to development products that fit within these categories. The next generation of investors, including millennials and Generation Z, has placed high importance on this segment. Regulators around the world are focusing on ESG investing and determining how to define and categorize these types of investment strategies. We expect this marketplace to continue to evolve over the next several years.
Volatility in the markets for equity securities over the last couple of years has investors seeking out more alternative type of investment products. Interval funds don’t have the liquidity restrictions of open-end mutual funds and can therefore invest in more alternative types of investments, including collateralized loan obligations (CLOs), private placements, hedge funds, real estate and private equity funds. We believe this trend will continue for many years. Currently, these products are targeted more toward institutional and accredited investors, but many retail investors have expressed interest as well due to the low correlation of the equity markets.
There is still a lot of uncertainty in the stock market as a result of COVID-19 and its far-reaching and yet uncertain impact on Wall Street, Main Street and the presidential election. What we do know for certain is that the results of this election, while critical for many reasons, will directly shape the leadership of the SEC and its resulting regulatory priorities for years to come, impacting both fund companies and their boards.
These are the top trends Cohen & Company is monitoring that we think they will make a big impact on the investment industry in the months to come. We welcome your feedback on how these trends will impact, or already are impacting, your business as well as other industry trends you may be watching.
Contact Brett Eichenberger at beichenberger@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.