Despite a raft of reforms and changing social norms that reined in much of the asset management industry’s excesses after the global financial crisis, professional investors working in large institutions are still on a good wicket. It’s a great gig if you can get it. But the future of the investment profession as we know it is under threat.
The outlook for financial markets has been fundamentally altered by a decade of radically easy global monetary policy in the wake of the GFC. Meanwhile, other forces are reshaping the investment profession as well, including the rise of low-cost passive managers and robo-advisers powered by artificial intelligence, a public image problem, and the changing power dynamic between asset owners and their managers.
Two doyens of the local industry, one from the buy side and one from the sell side, mused on these issues at the 2017 CFA Australian Investment Conference, held in Melbourne last month.
Mark Delaney is deputy chief executive and chief investment officer of AustralianSuper, which has $130 billion in assets under management, making it the nation’s largest industry super fund. He reflected on how fortunate he was to have begun his career during the heydays of the early 1980s.
“The industry has basically boomed right through the whole 30-year, nearly 40-year, period [of my career],” he said. “What worries me is that I don’t think the prospects look anywhere near as optimistic for the next 20 years.”
Delaney named three reasons for this: “the rise of indexing” at the expense of active management; robo-advisers displacing the CIO’s role in portfolio construction; and the reputational issues facing the investment profession. He warned the gathering of investment professionals that whether they’re in securities selection or portfolio construction, their roles are at risk of being displaced by technology in the years ahead.
“The only response the profession has is to embed itself in the technology,” Delaney argued. “Be better than indexing. Be better than robo-advice. If you’re not better, you’re not going to survive. Technology is coming to investments and, I suspect, it’s going to take a chunk of the market share. A chunk of the jobs, and a chunk of the income.”
Rise of the robots
Colonial First State Global Asset Management chief executive Mark Lazberger joked that Commonwealth Bank’s $218 billion wealth-management arm was already looking into whether artificial intelligence could produce a better CEO than him. But on a more serious note, he said it was increasingly apparent that while technology is becoming a constant and critical part of the industry, few people understand how that will play out for the profession and its activities.
How and when AI is used to automate back-office functions and sort large data sets, and how that feeds into decision-making, represents a big opportunity for the sector and how firm’s embrace these technologies will be crucial to their future success, he said.
Lazberger drew parallels between the current failure to delve into this issue and the failure of the industry 30 years ago to question the motives of those selling portfolio insurance, which is often considered a precursor to the 1987 sharemarket crash.
“All of us need to have… a preparedness to question. What are the reasons? What does this really mean? And fundamentally, what are the consequences of these sorts of changes?” Lazberger said.
He predicts, like many, that technology will change the way individuals think about investing. The challenge for those in investment management firms is to be clear about their own position, and ensure their ongoing relevance.
“That length, complexity and disconnection [from professional to client] concerns me considerably…I’m not saying it’s insurmountable but it is a challenge,” he said. “It only takes a couple of seconds to realise that we’re part of a massively individuated…intermediated value chain.”
Lazberger and Delaney made their comments during a panel titled The Future of the Investment Profession, facilitated by Investment Magazine editor Sally Rose.
The investment conference crowd was keen to hear the pair’s views on how the growing scale of Australia’s $2.3 trillion superannuation industry, and the trend for big funds like AustralianSuper to in-source more of their investment management, is changing the relationship between asset owners and their external managers.
The big four banks are stepping away from vertical integration, selling parts of their wealth-management and insurance businesses, and investment management firms are stepping in. It has been widely reported in the media that CBA has CFSGAM up for sale.
Delaney noted that the uneasy tension between those who gather assets and those who invest the money is always present and said the approach needs to be reviewed as a fund grows and achieves different benefits of scale. This has been at the forefront of his thinking recently, as AustralianSuper has increased its funds under management by almost one-third over the last 18 months.
“In a well-run organisation, where [the investment business and the investment profession] do work in harmony, there should never really be an issue,” Delaney said, adding that there is “no magic number” where efficiencies and scale meet, rather it’s a constant question of adjustment.
“What you do know is, you can’t wear the same shorts you wore as a 17-year-old when you’re 21. They just don’t fit. So you have to change the clothes you buy,” he said. “As long as you change what you do and adapt to the circumstances, you can keep on making money.”
Lazberger agreed with the notion that an ability to embrace change is vital to success. Both Delaney and Lazberger stressed that, in light of the many challenges facing the industry, it is more important than ever that investment professionals act to preserve the industry’s reputation.
“…It’s always easier said than done,” Lazberger said of raising the next generation of captive asset managers in the right culture. “If you find that you’re being challenged by your owner, the larger organisations, your partner or whatever, I think all of us as professionals have a responsibility to…meet that whole issue head on.”
Delaney warned that, amid a proliferation of mass-market, cheap products, professional investors have to be able to position themselves “like any luxury product” – with a reputation for quality.
“The whole business model and framework [in which] people thought about investing, I think, needs to change,” he said.
That is why remuneration and incentives are critical because, as Lazberger said, they drive behaviours.
However, Delaney cautioned against the idea of any single remuneration design program being perfect. Rather, it must be a process of continual revision to shape the program to encourage a culture that puts responsibility to the client above all else.
Another point on which Delaney and Lazberger agreed was the urgent need for the investment profession to improve its gender diversity.
There are only about 10 female CIOs at the top 100 largest asset owners in the country. And a dearth of young women coming through the ranks indicates the imbalance is likely to persist for many years. Only 12 per cent of local CFA charterholders are women.
Still, Delaney says the culture is changing, albeit it too slowly.
“When I first got into investments, it was like an old boys’ private school stockbroking culture, where the people went to lunch and they all knew each other. It was like a gentlemen’s club,” he says. “The world is nothing like that today, thank goodness.”
He believes the profession needs to do a better job of selling its appeal to women.
“It’s inherently interesting. It’s not that demanding a job to do. And it’s well paid. So, I would think everybody would want to do it,” he says.
Lazberger has “an unproven hypothesis” that unconscious biases are disadvantaging women in both hiring and promotion processes.
“When we’re hiring people, we tend to hire people in our own image,” Lazberger says. “And, given that the starting point is very male-dominated anyway, I think that, quite frankly, has actually been quite an inhibitor in terms of seeing organisations – firms small, medium and large – actually make much progress on this issue.”