Fund managers — never mind the stocks, mine the data
London — Asset managers are being squeezed as increased regulation drives up costs and investors shift more money into lower-cost investment products.
The solution? The greater use of technology and data-mining to defend margins, reduce expenses and win more client business.
For anyone contemplating their career in fund management, the message is clear.
The annual industry study published by Oliver Wyman and Morgan Stanley this month makes for bleak reading.
While assets under management rose last year, the growth was flattered by rising asset valuations. As a whole, the industry has seen outflows in the past three years, with smaller players suffering more than their larger peers.
One way big asset managers have been able to avoid some of the outflows inflicted on their smaller peers is by being more nimble in expanding their offerings of alternative investment products — things such as private equity, for example.
While alternatives still only account for about a 10th of assets, they contribute about 30% of revenue, and Oliver Wyman sees that growing to about 40% by 2025. This trend will continue to benefit the bigger players able to offer a wider range of investment strategies.
What’s more worrying for the industry as a whole is that the growth in assets under management isn’t translating into an equal increase in revenue. Costs, meanwhile, are rising at almost the same speed as income. Looking ahead, the picture isn’t much better.
In the report’s most bearish case, accelerating inflation leads to central banks tightening policy, driving down asset prices and putting active managers under even more cost pressure. Even under Oliver Wyman’s bull case, with asset prices benefiting from growing economies, passive strategies will under-perform and fees will be under pressure.
As for so many other industries, salvation may lie in better technology. While the use of data mining and artificial intelligence (AI) in investment selection grabs the headlines, these techniques will become increasingly important as tools for winning and retaining clients.
Asset managers that analyse their customer relationship information in conjunction with the asset allocation preferences of both existing and potential customers will gain an advantage. The bigger the firm, the more data it will have available and the more resources it can throw at improving its analytic capabilities.
This will change the nature of the workforce. Most obviously, it will get smaller. Of those workers who do manage to keep their jobs, up to 40% will need "fundamental retraining" on the use of analytical tools. But there should be a reward: the share of total compensation going to technology and data-management employees will grow fourfold in the next five to 10 years, the study said.
The study estimates that the total number of data scientists across 160 major asset management firms is about 340, up from just 45 at the start of the decade. Those same firms are seeking an additional 275 data scientists this year.
So, forget about honing your stock-picking skills. If you want to get ahead in the fund management industry, focus instead on your data-mining abilities.
• Gilbert is a Bloomberg Gadfly columnist covering asset management. This column does not necessarily reflect the opinion of Bloomberg or its owners.