Money managers face huge implications for their investment platforms as client demand, disruptive technology and increased costs continue to affect the sector.
“I believe that the industry will see more disruption over the next 10 years than it has over the past 50,” said Sonja Laud, CIO at Legal & General Investment Management, during a panel discussion at the Investment Association’s Investment Horizons Conference Dec. 3.
Fees are under pressure, clients are looking for “more holistic solutions … (from) fewer asset managers” covering both public and private markets, and the cost of doing business is also increasing, with regulatory change and new disclosure requirements, she said.
“There are real implications on how we have to react in order to stay competitive,” and as CIO, Laud has a lot to think about, including the battle for investment talent, the need for research and the impact of artificial intelligence.
"Every PM (portfolio manager), every analyst will need to deliver more — i.e.: productivity per head is going up. Efficiency and automation … will need to be part and parcel of what you’re doing, and that means your skill set is shifting. The skills you need on the investment floor will matter a lot, but they will look very different,” Laud said. “I'm sure I'm not the only one that has been desperately looking for quant skills that are easily … integrated in the investment,” she said. The battle for talent will be “an incredibly important one for companies to get right. … Your clear alpha generators will be a very sought-after asset that you might want to hang on to and make sure that you can keep them happy.”
Working out where “the human value-add is will be incredibly important,” she said. “I think the industry for a long period of time has been quite complacent about mediocre outcomes — we can’t afford this anymore. If you do not deliver the investment excellence, you will not be invited into the room.”
Laud thinks AI can be important in delivering value for clients in the areas of research, portfolio construction and index replication.
"That’s a massive shift compared to what we have done in the past, and this is what, I think … (is seen as a) threat: Humans are not good at dealing with change, and now there’s a threat coming their way where individual PMs and analysts might feel, ‘I will be replaced by a machine.’"
To deal with that, money managers will need to take staff on a journey with them to show they’re not being replaced, but that their “output has to go up, and we need to find a means to get there — because commercially, otherwise, we will not be able to make it work,” Laud said.
Speaking on the same panel, Michelle Ostermann, CEO of the £32.5 billion ($41 billion) Pension Protection Fund, London, said the concept of what an asset owner is and its importance is starting to come to the fore.
“It’s only in the last few years that I see it having a bit more prominence, with an appreciation for what that role is and how it works in concert with the economy," Ostermann said. "It’s becoming a very important layer in the financial ecosystem.”
On Nov. 14, the U.K. government unveiled its plans to inject about £80 billion of assets into the country through an overhaul of the defined contribution market and tweaks to how local government pension schemes operate and invest.
However, sources told Pensions & Investments that not introducing tax incentives to encourage pension funds to invest locally was a missed opportunity, and that without those changes, it was unlikely these pension funds could compete on the global investment stage.
Of the notion of U.K. pension funds being mandated to invest more in domestic markets, Ostermann said: “Mandation could work well when the asset portfolio has permission be able to take the risk-return assessment required. Often there's a bit of a an opportunity cost to force them to invest in less than a potentially less than ideal, subset of the industry.
“It's (taking) a bit of a moral high ground when choosing worker capital to solve a macroeconomic problem. So it doesn't seem to stick in many jurisdictions,” Ostermann added.
