At present, approximately eight per cent of the world’s population is aged 65 or over. This is projected to rise to 13 per cent by 2030. Similarly over the same period, the percentage of the world’s middle class population is anticipated to increase from less than 30 per cent to approximately 60 per cent. This change in population profile will lead to a major shift in how investors access, use and rely on financial services. Combined with ongoing advances in technology, it may also lead the sector to adapt its current models of service delivery, and perhaps even foster a new generation of service providers (and ‘disruptors’) with as yet unseen business models.
The changing role of the fund manager
These social changes will inevitably impact the funds management industry in a variety of ways. At present, fund managers are primarily tasked with the achievement of their clients’ investment performance targets. They are also expected to play a leading role in the communication of the broader strategic and attribution aspects of their performance. Although the fund manager of the future will retain primary responsibility for investment performance, tasks such as client communication, custody and unit pricing will fall more within the domain of a dedicated client service provider (ie. back office).
The trend toward such a service model will be particularly evident within the pension (ie. superannuation) fund industry.
Investment advice, which at present remains largely the domain of financial planners, is anticipated to become a feature of the overall service offering of superannuation funds. Such a scenario makes logical sense in an environment where investment risk has essentially passed to the individual, who is increasingly assuming responsibility for the design, implementation and monitoring of their own personal investment strategy.
There will also be a change in how investment managers communicate with investors. The present direct link between investors and managers is likely to be replaced by a mechanism in which the superannuation fund functions as the link between the two parties.
It may also be argued that managers will be under pressure to increase the amount of information they provide. However, managers will need to remain wary of information overload, and instead seek to provide investors with data that gives them greater insight into their investment performance.
Pricing transparency and the search for higher returns
This search for more granular data insights has implications not only for the services that superannuation funds and investment managers provide, but also for the fees they charge. Service efficiency is likely to become progressively more important to fund managers, as investors will expect them to absorb the cost of any additional reporting. Also, investors are likely to progressively shy away from paying a flat rate irrespective of the returns they might receive. Instead, performance fees are likely to comprise a far greater and significant proportion of an investment manager’s fee structure.
In terms of the services offered by fund managers, exchange traded funds (ETFs) and similar investments are anticipated to become progressively more widely utilised, as investors demand investments that offer ease of access, liquidity and pricing transparency.
These trends are unlikely to move the debate regarding active versus passive management any closer to resolution. It would be fair to say that the respective popularity of the two methods will continue to wax and wane according to which is perceived as more likely to deliver near-term outperformance. Individual managers should continue to find that investors require them to outperform the market on a net-of-fees basis.
Aside from the question of whether the prevailing trend in equity investment favours direct holdings or ETF-type structures, it appears that the present low-return environment will continue for some time to come – perhaps even the next 20 years. A recent study, spanning just over 100 years of international data, shows that the equity risk premium has oscillated around the 5.5 per cent per annum level. Current forecasts for this premium appear downward biased, largely due to the ageing demographic in the OECD countries. This, in turn, will prompt investors to intensify their search for higher-return assets, and perhaps increase allocations to less liquid exposures and higher yielding and higher risk credit exposures.
The challenge for regulators
The changed investment management landscape of the future represents a challenge not only to fund managers, but also to regulators. In a broad sense, oversight of the superannuation industry has until now been largely focused on the accumulation phase. Post the ‘Murray’ Financial System Inquiry, there is no doubt going to be a gradual yet sustained shift in policy focus towards retirement incomes. Although the focus may change, the practical issue of resourcing is likely to remain an ongoing challenge for regulators.
It will be an interesting future for all!
Professor David R Gallagher is the chief executive of the Centre for International Finance and Regulation (CIFR)
