Anne Richards, chief investment officer and head of the EMEA region at Aberdeen Asset Management, believes that while the asset management industry is “facing disruption from every point on the compass,” there is an opportunity for the sector to mitigate these difficulties through the consistent need for well-structured investment advice.
Opening the second day of the European Investment Conference, Richards focused on several sources of dislocation in the industry and how professionals can adapt to these fast-evolving challenges
Though she noted the shift towards passive management over the last several years, Richards said that “the death of active management has been greatly exaggerated.” Acknowledging that for certain investors there are obvious benefits in passive products, Richards also highlighted the fact that these investments do not allow for an efficient allocation of capital. Despite this, quantitative strategies, such as alternative risk premium or smart beta, are responses to this challenge and allow for a level of discrimination for capital. In her opinion, these strategies can “provide a route towards emancipation of the current enslavement purely to relatively arbitrary market cap-weighted indices that bear little similarity to the wider economies of listing.”
Richards also cited the challenge of regulation as another source of disruption. A lack of faith in the asset management sector led to regulation that was necessary in the aggregate but rather granular in its focus. Richards noted that there had been little attempt to connect the dots of this regulation, with the result that “slow or patient long-term capital” has been harder to find. These rules have led to the emergence of a new financial system that resides outside the regulatory framework, and it remains to be seen if these measures will act as a barrier to entry or as a deterrent to innovation by incumbents.
Richards said that central bank policies have also led to dislocations in the markets themselves. She described the market as “living through the biggest monetary experiment in generations,” with regulations encouraging investments in vehicles that have relatively limited liquidity. With new rules reducing the number of proprietary trading desks and market-making activities, it makes it that much more difficult for investors to get out of these vehicles in the event of a crash. As central banks look to trim back their balance sheets, no one knows exactly what the effects on the markets will be, setting up another potential disruption.
Richards concluded her talk by exploring ways to mitigate the risk from these various challenges. She believes that asset managers need to recognize that risk does not come neatly packaged in one precise number. Instead, managers need to develop a holistic understanding — particularly during key market events, when statistical models fail.
She added that asset managers do not do enough to encourage and listen to alternative opinions, an approach that is risky in itself. For a better idea of what opportunities and risks arise from these disruptions, asset managers need to seek out diverse views and build teams of individuals with differing viewpoints and thought processes.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: Harry Richards