12 Special reportAsset management The EconomistNovember 14th 2020
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Economist.com/specialreports“T
herearetwo kinds of forecasters,” said the economist John
Kenneth Galbraith. “Those who don’t know and those who
don’t know they don’t know.” Asset management is a business
built on the notion that the future is somewhat knowable, even if
in large part it is not. So we must look for omens. Today’s “dishev-
elled” or “inchoate” borrower should not be expected to pay back
its debts tomorrow, as The Economistwarned in its editorial of
March 28th 1868.
Speculations about the future are also often helpful in organis-
ing thoughts about the present. In this spirit, this special report
finishes with some predictions tied to its main themes. Some are
extensions of current trends. Others are
more speculative—concerning, say, a
trend that may reverse or one that could
go in a surprising direction.
The first prediction is the least bold.
By 2030 the sorting of the industry into a
small club of giant asset managers and a
bigger one of niche managers will be
largely complete. Already in 2020, index-
tracking funds and etfs account for a
majority of pooled investment funds in
America. In a decade’s time they may
make up the bulk of all stockholdings.
Investors will mix beta, the market risk,
with exposures picked from a menu of
smaller specialists which, to survive the
industry’s upheaval, must have a truly
distinctive approach. These remaining
funds might be thematic, based around
increased longevity, say, or climate
change. Or they could have a particular investment philosophy.
Such specialist funds will be global or regional in scope.
A second prediction is that competition in asset management
will revolve around products designed for particular needs. The
present-day industry is a creature of the baby-boom era. Many
boomers have built up assets in workplace schemes in which
benefits depend on the size of a pension pot at retirement. Their
needs are changing. A challenge to which the industry has not re-
sponded well is to find ways for people to draw on their retirement
savings without running out of money too quickly, says Mr Tara-
porevala, of State Street Global Advisors. Quite so.
Another challenge is to tailor products to millennials. Their
share of wealth is still small, but it will grow. And their preferences
are different. For baby-boomers a mutual fund was the only way to
invest in equities at a reasonable cost. The technology now exists
to buy and sell individual shares at virtually no cost. Low-fee
“robo-advisers” mechanically allocate savings to a mix of bond
and equity index funds according to preset rules. These advances
appeal to a generation reared on smartphones. Millennials have
less need of the money doctors who tended to the boomers.
A third forecast is that esgwill not be the saviour of active asset
management. By 2030 it will be too mainstream to be a source of
differentiation. There is likely to be a surfeit of choices for inves-
tors who want even the most exacting kinds of esg. Despite the in-creased salience of corporate governance, the big passive funds
may ultimately choose not to use their vast voting power to influ-
ence firms—a fourth prediction. Securities-market regulators will
continue to push them to vote their shares, to fulfil their fiduciary
duty to investors. But antitrust agencies will increasingly fret
about the latent ability of big funds to soften competition among
firms they indirectly own. Trustbusting is moving back to the “big
is bad” assumption that governed it before the 1980s. It may prove
costly and legally messy for funds to exercise their voting power in
a way that satisfies all watchdogs.
Some popular predictions about private markets—that they
will be “democratised”, and fees will come under pressure—will
turn out to be wrong (or premature). Private-equity fees do look
out of whack and big pension-fund managers are more inclined to
haggle over costs. Returns on private equity are likely to disap-
point. Yet fees for public equity came down because there was a
cheaper option: buy the index. Private-equity stakes are not as
tradable as listed shares, so there is no index. So fees will stay high.
Other popular predictions will prove correct. Private debt will
grow in importance. America will slowly lose its lead in venture
capital. The big brand-name vcs of Silicon Valley will retain their
lustre, thanks to their record of creating
billionaire founders. But more new
champions will emerge elsewhere.
Finally, there is China, where the un-
certainty is perhaps greatest. Sceptics
point to China’s record of allowing for-
eigners to profit only as long as it takes
Chinese firms to copy and supplant
them. Asset management is different.
Unlike with makers of breakfast cereals,
it is hard for consumers to judge the mer-
its of an asset manager. It is equally hard
for copycat firms to find out what works
and what doesn’t.
That is not the only reason the foreign
money doctors will stick around in Chi-
na. Rich-world banks are increasingly
contained by national borders. Busi-
nesses are less inclined to set up abroad.
Offshoring is being replaced by onshor-
ing. Almost by default, capital markets will become the main ave-
nue for diversifying risk by geography. If China’s leadership wants
Shanghai to be a global financial centre and the yuan to be an inter-
national currency, it needs to keep channels open. Foreign asset
managers will be a crucial conduit.
In the quiet revolution of asset management, one thing will re-
main constant. Philip Rose’s investment trust was composed of ex-
otic foreign bonds traded in London; his idea inspired Robert
Fleming, who mostly invested in America. From the start, asset
management has been global. Why change that now? 7Doctor’s prescriptions
How will asset management look in 2030?The end-game