The asset management industry will have to make some significant strategic changes if it is to stay relevant in the modern market, according to Sony Kapoor, managing director of Re-Define.
Speaking at the ALFI Conference in London, Kapoor suggested that Organisation for Economic Co-operation and Development countries are facing serious issue and a “demographic decline”.
In these countries, there are record levels of public and private debt, rising political risk and increasing asset prices, he said. Citing the increase in house prices, he pointed out that assets are being inflated to unsustainable prices, while returns are poor.
At the same time, a record number of bonds are generating negative returns, and the ‘baby boomer’ generation are starting to retire and so are withdrawing their savings.
He also pointed out that in non-OECD countries, the emerging economies, the demographics look very different. Here, political risks have been reduced, the population is primarily young, and the economies are not facing the same challenges that they may have in the past.
Kapoor said: “Most opportunities for the future in the funds industry are going to lie outside of the OECD and the faster you move there, the more expertise you develop, the deeper your efforts there, the more fantastic your returns are going to be.”
A significant part of this opportunity lies in sustainable investment. Although sustainability had a time as a buzzword in the industry, it never became a mainstream issue. “This has to change and it has to change now,” Kapoor said, adding that we are starting to see regulation around carbon emissions and environmental issues, and that this is only going to get tighter.
He used India as an example of an emerging economy, suggesting that here the general public missed out on having home landlines and leapfrogged straight into the mobile phone revolution. Similarly, about 25 percent of the population now have no access to electricity.
Kapoor suggested that, instead of connecting to the grid, these households are likely to move straight to being self-sustainable, using solar and water-generated power. This brings “amazing investment opportunities”, he said.
Kapoor also noted that: “The tolerance of misdeeds in the financial sector has really fallen.”
He pointed out that fines leveraged on large global banks have increased, and that, partly due to the global financial crisis, the general public has become less trusting and less tolerant, which has led to regulators becoming more responsive to inappropriate financial behaviour.
While there is very little that the industry can do about this, firms should make sure that there is nothing hidden from the regulators or from the public.
Finally, Kapoor suggested that the majority of issues affecting asset management on a global scale are related to one thing: “The failure of financial intermediation.”
As an industry, asset managers have historically failed to properly allocate investment into the areas where the best economic opportunities lie, he said. While the cost of capital is 18 to 22 percent, he pointed out that 95 percent of German bonds are invested in eurozone government bonds returning an average of 1 to 2 percent.
The fund management industry has to grow in its geographic reach and equity allocation and look for where the best long-term investments lie, while also harnessing technology to its advantage.
Kapoor concluded: “The future of asset management is bright but the future of present actors in the asset management industry is uncertain. If you are able to do the right things … your future will be bright. Else, you will be toast.”
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