Business

Two Sigma: Asset Management Outlook

The asset management industry has experienced profound changes in regulation and technology in the decade since the financial crisis. With managed global assets expected to reach $145 trillion by 2025, how can asset managers best position themselves to capitalize on shifts in regulation, human capital, new technologies, and customer preferences? Are investors’ risk appetites changing, and how are asset managers adjusting their strategies or models for the coming year? What role can asset managers play in fostering good corporate governance? How are emerging technologies like automation and artificial intelligence reshaping asset management?

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Asset Management Outlook
Image source: YouTube Video Screenshot

Moderator

Kate Kelly

Reporter, New York Times

Speakers

Steven Goulart

Executive Vice President and Chief Investment Officer, MetLife; President, MetLife Investment Management

Nobel Gulati

CEO, Two Sigma Advisers, LP

David Hunt

President and CEO, PGIM, The Investment Business of Prudential

Ron Mock

President and CEO, Ontario Teachers' Pension Plan

Ronald O'Hanley

President and Chief Operating Officer, State Street Corp.

Two Sigma Advisers: Asset Management Outlook

Transcript

We were founded on a very simple vision which is that data and technology was going to affect every industry including investment management. And so our company was founded in 2001 right around the time where this profound change was effective. The U.S. equity markets but what started there has really propagated to every market around the world many many equity markets around the world many futures and options and in markets and one by one we see that the regulation the transparency the the data the electronic vacation allows for more scientific approaches to prevail over you know historical ones. It's more of a level playing field in more efficient markets and that is true. I think that looking at from the asset allocators perspective the same is true as well. I think we're going to see is technology there two things are going to be. One is the low rate environment that we're facing now which I think is shedding the light and to focus on the part of our clients to really ask some hard questions that maybe didn't need to be asked over the last couple of decades. And the second is the same technology that we are using to select securities. I think that is now available in enabling asset allocators to think through how they achieve their goals. Ultimately there is a finite number of goals is a finite number of constraints that investors have. And yet the industry hasn't done them a service by offering them thousands and tens of thousands of seemingly undifferentiated and often not value added products specially net of fees.

And so if you put the power back in the hands of the allocator which I think technology is doing and will do people who are going to have the opportunity to kind of rethink completely what how to achieve their goals and how to deploy the 140 trillion dollars worth of assets and then probably think in terms of risks. And so the whole definition of alpha beta et cetera passive is passive. That's fine. And I think that that today stands at around 25 percent of the world's assets maybe it'll grow a little bit more. It's fine. I don't think it's going to get to 80 percent. I don't think that we're going to see that but it will grow a little bit more. The real reclassification we're starting to see now is within active there is starting to become a bifurcation between true alpha which is very very rare and effectively various forms of risk premium collection. And I think investors are becoming more savvy and more demanding on that transparency on paying the appropriate fees on achieving the the right alignment and so on. So I think that's going to be a tremendous trend which ultimately will favor investors over the next decade. David Hunt you manage over a trillion dollars that you guys put out a ton of research on the markets. The trends that you're perceiving how you're positioning yourselves to respond to what's happening. What are your thoughts on the active versus passive trend and how are you guys adapting to that. Sure.

I think that the single biggest trend that we see in the industry right now which builds on the growth that you were talking about is the fundamental blurring of alternatives and private's together with public securities. The two grew up in history very separately so there was a way of managing long only assets. There was a way of managing alternatives. There were pay approaches and carry and other things that went with one group and not another. The industry even was covered by different analysts if you actually read the coverage from the from the sell side. And that is really starting to change and we always felt a little bit that we were an odd duck because we have kind of a mix of both. We have a big real estate business big private's business a big infrastructure business and we also have a big public securities which is mostly in fixed income. But what we're seeing is that actually more and more people now are coming in. So the alternatives guys are deciding they'd like to get into long only. Thank you very much. There's a long list of that and the lonely guys are deciding that they'd really like to get into private spreaded and you've seen quite a lot of quite a lot of that. So these things are coming together. And last week quite an amazing fact actually the valuations of these two universes came together at the same number. So it's always been the long only guys were valued at a much higher levels usually you know at a at a premium to the market. Recently it's been at a discount the alternatives guys were never given much respect and always had a really low multiple. Those now converged. The current the current P E is 11 for both of those groups.

And so the market is now deciding that while performance fees and the accounting that goes with the alternatives is difficult to understand the growth that's inherent in it is actually more than making up for that. So we're really seeing these coming together and the question for.