Three megatrends reshaping the world of investment management

Future investment industry leaders will require high levels of emotional intelligence and agile mindsets in addition to a keen understanding of data and how it can be applied

The investment landscape is changing, predominantly thanks to the advancement of passive investments that have increasingly replaced active portfolio management. In the US, passive overtook active around August 2018 and its market share stands at about 54 per cent. Globally, passives are predicted to overtake active within the next five years, as overseas markets gain favour following the pandemic. Global passive assets recently hit $15 trillion, thanks to the continued growth of investments in exchange-traded funds (ETFs).

The shift to passive investments is one of three significant trends currently transforming the investment space, according to David Ho, Head of Index Investments – Pacific at FTSE Russell, a global index provider owned by the London Stock Exchange Group (LSEG). Speaking to UNSW Business School’s Dr Natalie Yoon-na Oh, Senior Lecturer in the School of Banking and Finance, Mr Ho explained what skills graduates will need to succeed in this new world of finance.

Last year, Mr Ho and Dr Oh worked together on designing and running a course focused on industry research with an integrated learning component for UNSW Business School students. Students had the opportunity to work with a mentor in Dr Oh’s course Industry-Research Integrated Learning (I-RIL) as part of the Bachelor of Commerce. Simon Lee, a Bachelor of Commerce and Actuarial Studies student, gained a spot within the course, where Mr Ho mentored him. Programs like Dr Oh’s, said Mr Ho, are helping to prepare graduates for a future in finance by bridging the gap between university and industry.

1. The shift from active to passive investment management

In the past, active managers ruled the investment space. “Active managers and active investing are portfolio managers that usually go into a lot of research, speak to companies, CEOs, boards, supply chains, and vendors, and decide whether that company is worthwhile to invest in, so it's complete discretion,” explained Mr Ho.

But today, more and more, people are looking to passive funds for long-term gains that are exposed to fewer market fluctuations, like index ETFs, for example, which are passive investment funds. During the pandemic, the popularity of passive funds has grown significantly. As of June this year, there was a record $US8.4 trillion in passive funds, accounting for nearly one in two dollars in listed equity portfolios globally and the highest ever proportion.

“Over the years, the preference has slowly shifted to a more passive style of investing. It's almost like algorithmic portfolio management, where we collect a lot of information and data, put some rules and protocols around it and then come up with a methodology to include or exclude the investments. So, there's no discretion portfolio manager discretion, generally, in those investments,” said Mr Ho.

2. Sustainability and ESG: the next era of investment management

At the same time, the investment world has also witnessed an increasing shift to sustainably-minded investing. In Australia, and particularly in Europe, these investments are continuing to gather pace, said Mr Ho. Indeed, new investment opportunities continue to emerge for investment managers to adapt as investor preferences evolve.

Mr Ho explained: “People want to invest in accordance with their principles and their own beliefs, and they're making their wishes known to the asset managers that invest on their behalf – and these asset managers are listening. We see that through the number of enquiries and fund flows.”

And the focus is very much on investments that address climate change. “There's the Transition Pathway Initiative, the Paris aligned benchmarks, and carbon transition benchmarks… so there's a lot of focus on.” This trend spans from retail investors through to institutional large superannuation fund investments, he said.

3. Investors are increasingly demanding customisation

The third big trend is the growth of bespoke investment strategies and the customisation of existing indices.

“What we're seeing now is that investors are demanding or asking for more sophisticated and bespoke indexing strategies. So, it is still index-based, but they're looking for a point of differentiation between themselves and the next asset manager while also being able to cater to their constituencies and investment preferences.

“So, so we're seeing a lot more customisation of existing indices, in accordance with their investment philosophy,” he said.

What skills will managers need to succeed in these fields of investment?

With the investment industry becoming increasingly diverse and complex, Mr Ho said there will be multiple jobs and multiple roles combining different elements, which will require a diverse range of people with agile minds.

“It’s not always about stock selection, investment selection, or data analytics. There's a whole range, from administration to operational to risk compliance… I think it takes all types of people to be successful within this space,” he said.

“It's not one-size-fits-all. If I was to take a step back and think about what is most important, it would be that they [future employees] have an agile and nimble mindset; being able to shift and adapt, considering other ways of tackling a particular problem,” he said.

A diverse range of employees would also inject innovation and more sustainability into the industry. “ESG, for example, is so multifaceted. So, the only way that they [graduates] can prepare is to continue to keep informed, be curious, be persistent in their curiosity, analyse, think, be more critical about what they want, and apply that to what they're learning and what they're reading,” he said.

Data literacy and traditional numerical skills will continue to be important, depending on a graduate's chosen path. For example, there is a different level of data literacy required for a data scientist, analyst, or portfolio manager (where having a high degree of technical expertise and problem-solving experience is crucial) to someone going into distribution, strategy, or management, which require more EQ, as well as IQ.

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Nevertheless, understanding the uses and makeup of data, at least at a conceptual level, is paramount in the new world of finance. “As the world moves towards more data-led decision-making, more reporting, then understanding how that all works feeds into your own intelligence and being able to problem-solve and apply that in life after university,” said Mr Ho.

David Ho is Head of Index Investments – Pacific at the London Stock Exchange Group (LSEG). Dr Natalie Yoon-na Oh is a Senior Lecturer in the School of Banking & Finance at UNSW Business School. For more information, please contact Dr Oh directly.