On August 19, 2020, members of CFA Society Chicago, among others, gathered on Zoom to listen on a discussion about the Future of the Asset Management Business between Suni Harford, President of UBS Asset Management, and CFA Society Chicago’s own Thomas Digenan, CFA, Head of US Intrinsic Value Equities for UBS Asset Management. The discussion started with coverage of the current state of Asset Management, progressed to the major trends in Asset Management, and concluded with the future of Asset Management. The discussion was then followed up by a spirited Q&A.
Starting off, Harford stated that there is still a need for active advice in investment management—especially in times of high volatility such as the current environment with the COVID pandemic. Digenan responded to this statement by noting how expensive it is to be an active manager and asked Harford to offer some insight on where she sees cost compression in the investment management space. Harford stated that some cost compression comes with scale, certainly, but much of the cost compression has come with the advancement of technology. Technological advancement in the space has allowed for low-cost and real-time tracking of risk and ESG metrics—a previously expensive endeavor that is in high demand.
Harford did warn, however, that the investment management space—as well as the finance industry more broadly—has, at times, mistakenly identified itself as a tech industry. She noted that it is important for the industry to remain human-intensive and that outsourcing has been a quick and low-cost way to quickly incorporate tech advancements. Harford conceded that developing some coding skills is important to remain current with industry trends, but having deep coding expertise is not paramount for finance professionals. Instead, professionals should remain apprised of tech advancements and maintain skills sufficient to promote collaboration with technology professionals to advance technological innovation in their practice.
Dinegan then shifted the conversation to focus on diversity in finance—how does the industry tackle it? Harford noted that the industry has evolved significantly over the years, but believes that advisor diversity should reflect client diversity. Basically, the makeup of financial advisory should be representative of the clients that they advise. In order to achieve this diversity in the industry, Harford noted that finance professionals need to urge younger individuals of diverse backgrounds to develop an interest in studying finance. Such early exposure will ensure the industry has diverse talent pool.
The conversation then moved to sustainability and ESG investing. Digenan asked Harford to offer her perspective on sustainable investing, and Harford was quick to admit that she was skeptical of the ESG trend just four years ago. However, her mindset has changed in light of recent research on the topic. Harford noted that UBS has had a sustainability portfolio for 25 years and that data across the investments industry support the contention that sustainability-focused investments are themselves sustainable. Harford pointed attendees to an article that UBS published earlier this year titled “Investing in an ESG World,” which contends that it doesn’t matter if ESG risks are real because the markets behave as though they are. She continued this discussion of ESG by pointing out that as funds have flowed out of investments during the current pandemic, fewer funds have flowed out of ESG investments. She elaborated on this point saying “ESG has to be considered” and it is at UBS—where they have pivoted from a “check the box” mentality to a true measurement mentality.
Dinegan followed up all these points by asking Harford what she believed would be the changes to ESG investing over the next five to ten years. Harford responded by stating she believes ESG will become a fully integrated feature of all asset classes and that measurement won’t only be focused on financial performance but also on the level of non-financial impact of an investment. She provided two recent events to support her vision: first, she pointed that out that companies during the current pandemic passed on issuing dividends in order to retain furloughed employees and perpetuate philanthropic interests. The market’s response to these actions was not to penalize, but to reward these companies—or at least not harm them. Second, Harford pointed out a trend of increased engagement with portfolio companies to implement ESG philosophies and a trend of reporting on voting activities within portfolio companies. These actions lead investment managers to play an active role in driving ESG initiatives at companies. After this look toward the future, Dinegan opened up the discussion to Q&A.
Q: What trends from the COVID Crisis will remain?
Work from home will become more popular, especially with the increased ability to collaborate across tech platforms. While working from home full-time may not be sustainable in the long run, Harford expects “partial” work-from-home may become a persistent trend. She also pointed out that such a change in the work environment could broaden access to a larger talent pool.
Q: What are your thoughts on Active vs. Passive management and the trend toward more passive management?
Active managers face pressure from fee compression, but they also face an opportunity in the face of increased market volatility. Regardless, active managers must break down performance attribution, provide low-cost beta, and charge fees commensurate with the alpha they provide their customers.
Q: How does servicing more informed investors impact advisors?
Advisors now need to develop the ability to filter information for their clients. Clients are inundated with information from endless internet sources but often don’t know what is applicable to them—advisors can provide value by helping clients focus their attention. Additionally, robo-advisors are growing in popularity as people become more informed about investing and desire more control over their investments.
Q: What is the requisite skillset for a new hire out of college for Asset Management?
Creativity, some exposure to coding (especially python), and a willingness to try new things. The shift to remote work will inevitably change the sales culture so prospective employees also need to be self-starters in a remote working environment.
Q: Can boutique asset managers survive recent margin cost pressures?
While scale certainly helps to combat margin cost pressures, outsourcing tech innovation can also reduce costs for active managers. Regardless, active managers must be great at what they do and actually provide alpha to provide value-add over passive managers.
Q: What new products are you interested in?
Liquid alternatives, distressed debt, SPACS, and the assets arising from the democratization of real estate. Amid all of these developments will be a major revolution in Asset Allocation.