There are two key issues that provide the context for the question around how asset managers are likely to evolve in years to come. The first of these is the pressure on returns. We previously lived in a world where nominal returns (returns before taxes, fees, and inflation) were very healthy and as a consequence, real returns (returns after adjusting for taxes, fees and inflation) were equally so. However, we are starting to ask ourselves the existential question of whether risk assets are able to deliver the kind of returns we saw in the past. While we believe this is still the case, it’s certainly no longer as obvious as it once was.

Following on from this is the theme of fee pressure. If nominal returns are lower one starts having to be a lot more judicious in how one manages the fee budget in order to create space for extra sources of return, such as alternative investments. Alternatives bring diversified sources of return, but also the opportunity for increased levels of nominal returns.

These themes raise the overarching question around the role of capital and the asset management industry in this new changing world. It is here we need to consider Environmental, Social and Governance (ESG) factors as critical components in the solution to this question.

In sketching out what the asset manager of the future will look like, we have to first recognise that, as asset managers, we exist exclusively to serve our clients; and the most significant role we play in our clients’ lives is the ability to generate returns that either meet or beat their expectations. What Old Mutual Investment Group has added in addition to this service, is the ability to integrate ESG considerations into our very DNA, allowing clients to allocate capital into their future at a rate that they feel comfortable with. This begins to speak to what the asset manager of the future will look like. In the end, it comes down to being sufficiently dynamic in how you answer the fundamental question of how to generate long-term return outcomes for clients to meet or beat expectations. 

What is really changing is how you define that expectation. What our clients are telling us is that they want to be able to measure the impact of their capital in a much more scientific way relative to the past. The kind of conversations that we have engaged in with our clients is very much about the transitions from purely focusing on risk and return, to now including risk, return and impact. So, the relevant conversation we need to have right now relates to what does that impact look like and how do we define it? What is the baseline we work off, what are the appropriate metrics and what kind of progress do we want to see over time?

An example of this would be the idea of participating in the path to a lower carbon-intensive economy and specifically, what this means for a client that measures their investment against the Capped-SWIX benchmark. What is the appropriate level of carbon intensity in a portfolio and how quickly should this decline over time? Globally this is a debate that has been happening for some time, with the EU working to define a Paris Accord-aligned benchmark that is consistent with a 1.5 to 2-degree world outcome – a goal that we should all be working towards. However, to be 2-degree aligned, as defined by the EU benchmark, for example, a country is required to have zero primary producers of fossil fuels, have a 50 percent lower carbon intensity relative to the benchmark and have a 7 percent decline in carbon intensity year-on-year in order to meet this Paris-aligned outcome. 

Not exactly relevant in the South African context, given what our economy looks like and our dependency on coal; but there is a need to have more conversations around what is relevant to our local situation.

There is an increasing need, in this regard, to start working towards measurable outcomes. This is very much Responsible Investment 2.0 – the next step towards making capital more intentional as well as working towards making this more measurable. In addition, the systemic shifts around what institutions such as stock exchanges, rating agencies and company disclosures are doing, means that we now have such a large volume of data that we can start reporting this information to our clients.

Ultimately, we are at an exciting tipping point in the shaping of the future. We don’t yet have all the answers, but the junction we’re at shows that this is not a path that can be shaped by only some members of the ecosystem. We all need to do our part and this starts with participating in more meaningful conversations that will take us towards a future that really matters. BM

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