Last summer the Boston Consulting Group put out a report on the global asset management industry, called “The Innovator’s Advantage.”
The title was an allusion to a landmark 1997 book by Clayton Christensen, The Innovator’s Dilemma, which in turn was a forceful restatement of some old Schumpeterian ideas about the destructive nature of creation. Christensen’s particular emphasis was on how great companies become locked into doing things the way that has worked for them, and about how it becomes virtually impossible for such companies to continue to innovate in the way that made them great in the first place: the torch of innovation passes always to the marginal.
The BCG paper is written in that spirit. In their introduction, the authors (led by Brent Beardsley, a senior partner and managing director in the New York office of the BCG) observe that a disruption is underway, and “tomorrow’s industry leaders will appear quite different from today’s.” They will be the firms that learn how to make use of artificial intelligence, machine learning, bag data, and analytics. They will also pursue the opportunities created by big market moves and address costs structurally.
China and Brazil
Early on the report mentions two nations in which the asset management’s industry in 2016 was impressive. Industry assets under management grew 21% in China over 2016, a growth driven mostly by investor inflows. Both the retail and the institutional segments of the asset management industry in China have shared in this growth.
The report includes a sidebar on how “entry paths for foreign players multiply as China’s market evolves.” It says that a foreign firm wanting a piece of the Chinese action should focus either on entering into a joint venture with a local party or on getting a private fund management license as a wholly foreign-owned enterprise (WFOE).
Meanwhile, in Brazil AUM grew by 17%. This comes mostly not from inflow but from asset appreciation.
But let’s get back to the necessary innovations. Fewer than half of the managers surveyed by BCG reported using big data or advanced analytics, beyond “aggregation and integration techniques,” which these authors clearly would assign to the elementary schools. Further, only a small set of best-in-class managers use more sophisticated tools such as AI, data visualization, or machine learning.
Beyond innovation in process, there is innovation in the products offered to the public. Here the challenge is the get the timing right. Not necessarily to be a trailblazer, but to be a “fast follower.” As a poet wrote: be not the first by whom new things are tried, nor yet the last to lay the old aside.
Beardsley et al look at environmental and socially responsible investing in this light. For years this was “a niche market” but “it is now going mainstream as an important area of innovation for leading asset managers….Some asset managers have mastered it, but others are still learning.” Those others had better be wary of being “the last….”
As noted above, Beardsley et al also believe that successful asset managers of the near future will have managed their costs structurally. What does that mean? It means for example, they will have learned the streamlining of research with data sharing.
Cost management also means a reduction in customization. Only at most 26% of firms “price the cost of customization using risk-return target adjustments.” Customization can be a valuable tool but it must be offered at a scale that makes sense and in a way in which its value is transparent to the clients.
Managing costs also means centralizing trading. It once did make sense to keep trading desks close to the portfolio managers, which implies decentralization. That is no longer the case, though. The BCG suggests “combining trading desks and rationalizing trading platforms across locations and asset classes” given the electronic and commodified character of trading itself in this second half of the second decade of the third millennium.
Winning Business Models
Speaking broadly, Beardsley et al list four “winning business models that can deliver sustainable success for future asset management.” They are: alpha shops (with deep investment experience in specific assets and strategies); beta factories (with scale and operational excellence); solution providers (with skills in multi-asset class portfolio construction and the like – specialists in the avoidance of specialized niches); and distribution powerhouses (offering best-in-class support to intermediaries.)