Welcome back, everyone. Hope you had a great holiday break, and are ready to take on the new year. It promises to be an interesting one. Here are some themes we at Eze are watching closely.
1. More Opportunities For Active Managers?
Alternative management may be finding more favor amid expected higher volatility and rising interest rates. This could mean potential wins for innovative hedge funds and alternative asset managers, as institutional investors are expected to dial back fixed-income allocations and diversify. The passive versus active debate isn't over yet, and there’ll be interesting opportunities on both sides. At the same time, factor-based portfolio construction and the ability to deliver new, innovative and, bespoke strategies will become even more critical in an uncertain market environment.
2. Fee Compression & Operational Efficiencies
As institutional investors and plan sponsors continue to tightly focus on performance net of fees and manage fund expenses, emerging opportunities aren’t likely to take pressure off fees and the need for asset managers to be more efficient. A November Ernst & Young survey found that the days of 2% management fees are “in the distant past,” with the average reported around 1.35%. At the same time, investors told E&Y they were not materially happier with the expense ratios charged by their managers, so it’s likely that fee pressures will remain in place. Those asset managers that will be able to adjust their operating models to optimize cost savings and boost returns will likely come out ahead.
3. Regulation in a Post-2016 Era
The last year featured unprecedented political upheaval, with Brexit in the U.K. and Donald Trump’s election in the U.S. threatening to shake up regulatory structures built over the years. What will the U.K.’s impending exit from the European Union mean for regulations such as BASEL III? There are likewise any number of opinions about the impact of Brexit on MiFID II – the only thing that’s certain is that we’re in for a period of uncertainty on the matter. Stateside, Donald Trump has promised to eliminate two regulations for every single new one instituted. Dodd-Frank may be on the chopping block, which would have a big impact on the fixed-income markets. The question is whether any of the dismantling will actually take place, and what impact the overall state of flux will have on global trading volumes. Will regulators strike the balance of more breathing room without compromising protections? Time will tell.
4. Cybersecurity, Information Security & the Role of Technology
Cybersecurity was certainly a big topic in 2016, with a number of significant breaches everywhere from Yahoo accounts to SWIFT to the Democratic National Committee. As Congress grapples with the possibility of an election hack and what to do about it, investment management companies are gearing up for their own battle. Compliance with General Data Protection Regulation, as well as more predicted data breaches, are likely to strain firms’ cybersecurity capacity over the next year. Among other things, we’re watching the impact on how firms use the cloud to handle their data, and what technology enhancements are made in light of the greater concern about cybersecurity. One thing’s certain: investment managers are investing in trade surveillance technology, and that’s a good thing.
5. Continued Operations Outsourcing
We live in interesting times. Some say investment management is entering an era of unprecedented change, with multiple regulatory, market and competitive forces forcing investment managers to rethink their operating models to survive and thrive. Operational efficiency is one way to make a difference to the bottom line, and investment managers are likely to continue to outsource its optimization. A recent survey of the asset management industry found that more than half of respondents plan to replace outdated or legacy technology in 2017; outsourcing technology operations was cited as a priority by nearly a third.
These are just some of the trends we’re closely watching as we strategize for the year ahead. No doubt there’ll be others that materially change the landscape of the asset management business in 2017.
Next week, tune in for an update from Rob Keller on some of the things we’re working on in this exciting new year.
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