What to Expect When You’re Investing - Bloomberg

What to Expect When You’re Investing

By John Gittelsohn , Bei Hu , Charles Stein , and Yuko Takeo

December 15, 2017

Top money managers weigh in on the biggest changes to come

This is the final story in a series on the future of investing

The rise of passive funds and computer-driven trading has brought us to an inflection point in the history of investing.

We asked giants of the industry—from Manny Roman to Roslyn Zhang—what changes they see coming and how they plan to adapt.

What do you see as the biggest changes in investing over the next 5-10 years?

Roman: “You will continue to see more consolidation among asset managers, particularly among active-equity managers, which have struggled to generate out-performance over the long term. If you are a medium-size asset manager with no particular specialization, scale or depth of resources, you are going to struggle. The question, though, is whether these mergers are good for investors. I suspect in many cases they might be OK for shareholders, because of cost-cutting, but not clients. We at Pimco have no interest in big deals like these, but the industry consolidation does offer an opportunity to hire some great talent. Another key area of change will be the growing role of technology and big data in the industry, and there may even be the opportunity for a really disruptive outsider with a technology focus to come in and shake things up.”

How do you see the hedge fund industry changing over the next decade?

Lasry: “In a benign environment like we’ve been in, it’s hard to outperform the market. Right now what the investing world offers you is niches, and to find these opportunities you need a big team. This trend of bigger firms will become more pronounced. So will requiring longer lock-ups for investors. As a longer-term investor, your out-performance is due to the fact that people need liquidity—I’m buying when others want to sell.”

As an investor for a $814 billion sovereign wealth fund, what’s the biggest challenge hedge funds face in the future?

Zhang: “One common pressure is on the fee side. The average profitability of the industry should come down as management fees are pressured lower. The industry needs to be more cost-efficient, otherwise the business risk is high.”

How will hedge funds have to change to adapt?

“Very simple—they need to put investors first, treat investors better. Hedge fund managers in general are very smart people, but one common problem is the misalignment of interest. As Warren Buffett recently commented, why do hedge funds fail? Because of the fee structure. I’m completely in agreement. Hedge funds shouldn’t get rich before their investors get proper returns. If the industry doesn’t change the fee structure, if the misalignment of interest continues, investors will leave.”

Hiromichi MizunoPhotographer: Patrick T. Fallon/Bloomberg

As investment chief at GPIF, the world’s biggest pension fund, you’ve advocated for incorporating environmental, social and governance into investing. What’s the future of ESG?

Mizuno: “In the long run, ‘ESG-themed investment’ will be irrelevant, as the whole market starts to use it for pricing in their investments.”

What’s the biggest shock the industry doesn’t see coming?

“I won’t be surprised if Google and Amazon become asset managers, but I think a lot of people in this industry will be. I take it for almost granted that they will come into this market because they have cutting-edge AI technology and they now capture all the big data of what’s happening in the market.”

What’s the best opportunity the industry is overlooking?

“AI and human intelligence working together. So far I haven’t heard from asset managers that they are using AI other than just replacing their analysts. ”

What’s one of the big changes you see ahead in the industry?

Marks: “Prospective returns may be below the levels of the past, like they are now. That means some asset owners will have to lower their expectations. The low prospective returns are likely to result in continued or increased demand for alternative investing. But (a) alternatives are not infinitely scalable, (b) success in alternatives is highly dependent on manager skill, and in particular (c) there will be issues surrounding how alternative investing is made available to individual investors. The low prospective returns are likely to bring downward fee pressure, at a minimum because the prior fees seem like a burden relative to the level of returns.”

What may be one of the biggest future surprises not foreseen by the industry?

“The surprise may be that there will be years when active managers beat passive, something on which many people have thrown in the towel, and active managers who charge moderate fees and-or produce exceptional performance will succeed. Likewise, there will be a time when today’s darlings stop leading the market. It always comes eventually, but in the interim people act like it never will.”

What are your biggest growth opportunities?

Armour: “We’re going global. Our objective over time is to deliver the same investment objectives we have in the American Funds to investors in Europe, in Asia, in Latin America, around the world. We don’t use the ‘American’ brand. We use ‘Capital.’ To call something the American Funds you’re offering in Europe or Asia, that probably wouldn’t sit quite as well.”

What’s happening with fees?

“Right now fees is the key issue that everybody wants to talk about. We think that the industry is going to focus much more on bottom-line results over the long run. We think there’ll continue to be downward pressure both on management fees and advice fees. But we think it’s really important for people to get good advice and use advisers. When times get tough, they get nervous and need support. And this is when people get hurt the most, when they sell in difficult times, whether it’s in a passive fund or an active fund.”

Are there threats on the horizon for the large index players?

Bogle: “There is a real concentration in indexing. You have the big three—Vanguard, BlackRock and State Street. It is pretty much an oligopoly. When you get big, you get challenged. Government will turn its eye to that concentration. So will academics. We will have to be able to defend the value of what we offer from challenges like that.”

What’s the most important development we are likely to see in the next decade?

“I am quite confident we are going to see lower stock market returns than we have had over the past decade or the past 30 years. Four percent a year is a reasonable expectation. That is based on the current dividend yield, the growth in earnings and a likely decline in the market’s price-earnings multiple. I look for bonds to return about 3 percent annually.”

— With assistance by Katherine Burton