With the outlook for the global economy clouding over and a challenging market environment asset managers are facing new challenges.
The cocktail of concerns is extensive and well documented by now. Inflationary pressures at multi-decade highs in many countries, aggressive tightening of monetary policy and associated higher borrowing costs rising food and energy prices, and uncertainties caused by the war in Ukraine.
Uncertainties in the financial markets are correspondingly great. But how do asset managers meet these challenges? This is the question that the consulting firm Mercer explored in its «Global Wealth Management Investment Survey 2022».
Pandemic as a Catalyst
The survey, conducted in the first quarter of 2022, shows the pandemic accelerated some key global macro trends that began to emerge before 2020. Among them, are lower expected investment returns and higher market volatility. In addition, the pandemic has brought inflation into the spotlight.
Concerns about low investment returns and market volatility remain the industry's biggest concerns as it looks ahead to the next two years. Fifty-seven percent of respondents said inflation is the biggest challenge to investing globally over that timeframe.
Varying Perceptions
One in two asset managers expects investment returns to be lower over the next two years, while fifty-nine percent of respondents believe the biggest investment opportunity is to diversify portfolios away from traditional stocks and bonds.
Meanwhile, market challenges are perceived differently in the three regions surveyed. The Americas are most concerned about low investment returns, while Europe and the UK are most concerned about high inflation with market volatility topping the concerns in Asia-Pacific. However, all regions agree these challenges are more likely to worsen before they improve.
Yield Hunters
With investment returns expected to be meager, asset managers are exploring alternatives, particularly private markets, to further diversify and boost returns. Exactly 73 percent of respondents are currently invested in illiquid assets or are considering investing in them over the next 12 months. Eighty-five percent cite the search for better returns or higher investment income as their primary reason for investing in illiquid assets.
Bigger Shift
Over the investment spectrum, private equity continues to be the most in-demand, followed by real estate and private debt. Regionally, some 75 percent of asset managers in the Americas have their largest exposure in illiquid assets.
Their counterparts in Europe and Asia-Pacific, 51 and 54 percent, respectively, are likely to catch up over the next 12 months as a large proportion of asset managers in these regions are planning a major shift to this asset class.
Hurdles as a Barrier
Asset managers express concern that growth prospects will be hampered by increasing regulatory challenges, ongoing fee and margin pressures, and disruptive technologies. One in two see regulatory challenges posing the biggest threat to their firm's growth.
Forty-five percent want to outsource parts of their portfolio operations governance or seek third-party support, especially when it comes to improving ESG investment offerings and integration.
Bitcoin & Co
Cryptocurrencies as an asset class continue to polarize asset managers into two camps. A whopping 92 percent of respondents do not invest in cryptocurrencies for client portfolios due to a lack of regulation and transparency, high volatility, and other reasons.
Meanwhile, when asked how likely it is that cryptocurrencies will become an institutional-type investment in the next five years, 44 percent of interviewees agree that it is likely or very likely, the same number that says it is unlikely or very unlikely.
