Part 1: Megatrends and the changing opportunity landscape for investors

Key trends and their implications on investment managers—impacting both asset owners and asset managers—include:

• Climate change: Greenhouse gas levels and global temperatures are rising, while extreme weather events are becoming more frequent. Regulatory bodies, including the Securities and Exchange Commission (SEC), are developing climate disclosure policies that are coming into effect during the 2023 fiscal year. New subsets of climate litigation targeting climate-related commitments, such as net-zero pledges, are mounting. Horizontal climate capabilities that enable both impact and transparent reporting are becoming table stakes for asset managers, while ESG value creation strategies are increasingly becoming a differentiator in key sectors, especially those impacted by energy transition.
• Technological disruption: As frontier technologies, such as machine learning and artificial intelligence, enter the mainstream, the role of technology across the value chain is evolving from a siloed input factor to a differentiating capability. Successful integration can drive productivity, but organizations must be aware of inherent risks, such as technical debt and cybersecurity. Years of investing in point solutions, many of which haven’t yet moved to the cloud, mean next-generation technology capabilities are still out of reach for many investment managers.
• Demographic shifts: An aging population, declining birth rates, declining workforce participation and advances in health care are increasing the age dependency ratio (population of 65-year-olds relative to those younger than 65). Asset owners with age-related liabilities, such as pension funds and insurance companies, will see an increase in their payout and liability commitments. With persistent inflation, these organizations will need to rethink their investment strategies with increased focus on real returns, entering new asset classes and global coverage, among others.
• A fracturing world: The ongoing war in Ukraine, geopolitical tensions and domestic polarization have resulted in a fracturing world, with shifting allegiances and trading partner relationships, risks to supply chains and materials access, and slowing economic growth. As financial and migration flows continue to fluctuate, investment managers may no longer benefit from geographic diversification in the same way as they have in the past. In addition to limited access to foreign investments, polarization exacerbates liquidity constraints. As a result, some managers may need to place greater emphasis on their domestic market, while others will need to consider different geographies or strategies.
• Economic instability: The megatrends mentioned so far collectively drive economic and broader societal instability. The hangover from pandemic economic policies, inflationary pressures and geopolitical shocks have combined to paint a challenging economic outlook. Accelerating recessionary sentiment has curbed market performance, while inflation and increasing operational complexity have increased costs as a share of returns across asset classes. Successful firms will need to manage the simultaneous need to enhance operational effectiveness and cost efficiency while innovating to access enhanced returns and selectively taking on increasing risk.

The opportunity ahead

While current market trends add complexity for investment managers, they also open up opportunities. Historically, organizations that proactively enhanced resiliency and cost management while cultivating value-driven growth and agility have sustained and propelled market positions through challenging periods. Our market research has identified five strategic opportunities that can help investment managers respond:

• Rethink asset allocations and investment strategies. Given the aforementioned trends, many portfolios will likely need restructuring to thrive in this new environment—whether it’s rebalancing active vs. passive strategies and/or geographic focus areas, introducing leverage or growing private markets allocations, especially in private equity and real assets. Beyond shifting allocations, developing new strategies while maintaining effective pacing, correlations, volatility and liquidity will be key to creating successful outcomes.
• Implement a total portfolio approach. Managing risk and return on an aggregate level across the entire portfolio—which increasingly will include a diverse mix of both public and private assets to optimize capital allocations for real returns—is a differentiating capability for investment managers. Those who can effectively build out human, operational and technological capabilities to dynamically execute total portfolio management to respond to geopolitical risk, climate-related factors and a diverse set of inflation- and liability-driven investment scenarios will outperform.
• Redesign operating models to support shifting strategies. Investment management organizations will need to transform to adapt their operating models and business capabilities from front to back office. This requires identifying which capabilities are needed, along with effective operating model design, organizational design and implementation—often with a phased approach. This gives rise to critical enablement questions related to large-scale technology implementation, outsourcing, offshoring and talent upskilling, each with pros and cons.
• Consolidate and simplify technology infrastructure. Technology is no longer a supplementary capability—it’s at the core of organizations. For investment managers, effective technology choices are the difference between survival and collapse. Leading investment managers are enabling all aspects of productivity by coordinating and unifying existing applications and platforms against core business capabilities and enabling a single source of intelligence by leveraging data and analytics.
• Align purpose, culture and ways of working. As the old adage goes: “Culture eats strategy for breakfast.” This is never truer than at times of market disruption. Organizations that establish clarity of mission and purpose, combined with a common understanding of how to work together, will be able to foster an environment that embraces innovation and subsequent transformation. They’ll be faster to adopt frontier technologies and minimize routine work, focusing on higher value-add activities, which in turn attract and retain investment and operations professionals.

In Part 2, we’ll reflect on the implications of these megatrends on investment management organizations—and what this means for leaders and their priorities.