Welcome to the sixth edition of 10 Ideas in Asset Management. Although last year we flagged the “known unknown” of macroeconomic change, events in 2022 have been shocking in scope and scale, and the industry is now operating in an environment that most of today’s practitioners have never experienced. While this adds even more challenges for managers to navigate in markets and in their business models, it also opens new opportunities. We are optimistic these conditions will stimulate new energy, new thinking, and new approaches to counter the challenges and will deliver value not just to investors, but to society as well as the planet. We set out our predictions for 2023 below.

10 Ideas In Asset Management 2023

1. Squaring the investment triangle

The “two‐dimensional” investment challenge of balancing risk and return has got much trickier as managers try to balance a “third dimension” in the form of ESG and sustainability commitments. Asset managers will square this investment triangle in one of two ways: (1) reduce it back to a “2‐D” problem by narrowing the interpretation of “fiduciary duty,” arguing that the data and methodologies are insufficiently robust, and adopting a “we give what our clients want” approach; or (2) accept the “3‐D” problem by redefining what “fiduciary duty” entails to drive alignment between risk/return aims, ESG/sustainability commitments and client objectives, and adopting a proactive, agile mindset that changes client engagement approaches, investment processes, operating models, talent strategies and incentive structures.

2. (Real)lizing the nominal return fallacy

While some nominal‐minded investors will help drive a revival in fixed income, others will (real)ize that higher nominal yields are a fallacy, and that long‐term investment success requires shifting their mindset to build portfolios capable of generating real returns. At a minimum, solutions will emerge that focus on specific equity, infrastructure and real estate investments that can benefit from (or at least keep pace with) inflation. Other solutions, including tailored mixes of extractive/non-extractive commodities and precious metals, and even baskets of levered, FX‐hedged global real return bonds may gain prominence. At the extreme, some combination of all of these will be packaged into a real return and inflation‐hedging solution.

3. Taking it from the top — the renaissance of active management

After a decade of easy money, globalization, political liberalization and dampened inflation, the goldilocks era for financial assets abruptly ended in 2022, replaced by a new world order. This should present opportunities for active managers to demonstrate added value by drawing on a combination of bottom‐up and top‐down analysis. At an individual company level, detailed bottom‐up research will help capture idiosyncratic factors, but it won’t be enough. The change in the macro context has been so fundamental that it will render old investment ideas and rules of thumb obsolete. Instead, those managers that can inject a deep understanding of macroeconomic and financial linkages into their investment decisions will be the ones generating the most value. This will drive a renaissance in active management, but it will be concentrated in those that start from the top, not the bottom.

4. Cutting the tail…on cost

Over the last decade asset managers have invested heavily in digital solutions with the aim of cutting costs, improving efficiency and reducing manual processes. Sadly, this hasn't happened: processes have often become more complex, headcounts have risen, and costs have marched higher across operating platforms. A microcosm of this can be seen in the explosion in the number of applications used — it isn’t uncommon today for a diversified asset manager to be running 300+ apps that are both expensive to maintain and can, paradoxically, add operational complexity. As we come out of 2022 and cost pressures intensify, asset managers will be forced to make hard choices, not just around how to streamline the proliferating app landscape, but to identify areas of unproductive complexity and “flab” across the business to cut costs by what we think needs to be 20‐30%.

5. Heads up! New incoming solutions

As the inflationary environment and volatility in markets raise concerns amongst those saving for retirement, rising interest rates present an opportunity for asset managers to revisit their retirement income solution offerings. As annuity sales soar (up 27% YoY in the US in Q3), we expect asset managers to once again push out their own investment‐oriented income innovations, such as capital markets solutions to approximate annuity exposures, mortality credit pools, or products that combine managed drawdown solutions with deferred income annuities. As these products will invariably be more complex to explain (and likely more costly than passive income funds), managers will invest heavily in enhancing their educational and marketing materials, and in enhancing their engagement strategies with financial intermediaries.

6. Most wanted — putting a price on carbon’s head

As asset managers move beyond making net-zero pledges and setting interim decarbonization targets, attention has turned to operationalizing their net-zero transition plans. The most innovative and committed will borrow a page from economic theory and carbon trading markets, and begin designing internal carbon pricing frameworks. While the details around the design will have a huge impact on the efficacy, such a solution (for example, a cap‐and‐trade emissions trading system to allocate carbon credits across different asset classes or investment teams) can provide the right incentives while maintaining firm‐wide flexibility to help an organization more efficiently meet its decarbonization goals in a commercially viable way.

7. Thawing of the crypto ice age — tokenized funds

With the false starts, empty promises, and the high-profile crypto collapses of 2022, it is easy to forget the transformative potential of the underlying distributed ledger technology. One use case that is already gaining traction is tokenized fund shares, especially for private markets (enabling fractional ownership, secondary trading, or more efficient operations). For the next stage of evolution, asset managers will develop their own digital wallet propositions or partner with third-party providers to overcome the prevailing regulatory KYC and tax issues. Some players will see this as part of a journey to disintermediate the distribution landscape and get closer to the end client; others will see it as part of developing a more compelling value proposition that improves cost, security, transparency, and liquidity for a broader array of investors.

8. Shaken or stirred? Blending capital to drive impact

The level of financing needed to drive real impact at scale requires an unprecedented amount of collaboration across different types of investors. To date this has been massively challenging, but the acuteness of the need will reach a tipping point, driving asset managers to seek more opportunities to engage with non‐profits, development organizations, quasi-governmental agencies as well as governments themselves who recognize that driving demonstrable impact at scale requires catalytic, risk‐bearing capital (for example, first loss tranches or guarantees) to draw in private, market return‐seeking investors.

9. Keep (SIP)ping the innovation Gatorade

As the asset management industry in India rides high on the success of Systematic Investment Plans (SIPs), players will continue their journey on innovation. Taking inspiration from other industries will help — for example, bringing together a household view on financial assets to allow for more holistic planning, as leading telecom players now offer. Or building a truly digital first and direct to customer proposition, as a number of consumer players do. Or specifically targeting the needs of newly affluent customers (such as the rising demand for diversification through global assets). We see 2023 as an exciting time for the industry in India, with continued momentum for those already there as well as rising interest from global asset managers to build a foothold in the market.

10. Best of both worlds

The shift to passive investing combined with cost, tax and liquidity advantages have fueled remarkable growth in ETFs over the last 15 years. More recently, advances in trading technology, zero commissions and the ability to support fractional shares have propelled a new era of growth in passive through direct indexing at lower wealth levels. While the continued shift to passive will be a tailwind for ETFs and direct indexing for years to come, the benefits of customization, liquidity, transparency, cost, tax efficiency and value for money will drive the next wave of growth in the form of active strategies. Today, already a quarter of all ETF launches have active strategies underneath them. Asset managers that are able to combine efficient structures like ETFs and direct indexing with the benefits of integrated active asset allocation, security selection and market timing will be able to offer the best of both worlds to a much broader array of investors.

Originally published in December 2022