- Asset managers slightly exceed investor expectations on risk/return and environmental, social and governance (ESG) aspects
- The environmental, social and governance (ESG) aspect is considered by all investors to be more important than fees
Tuesday 10 December 2019 - As governments increasingly step back from their role as financial providers, asset and wealth managers have been filling the financing gaps. Since the global financial crisis, the asset management industry has become more deeply involved in financing not only businesses and infrastructure, but also managing the funds that will ultimately finance people’s retirement and old age. In an industry under pressure from the forces of regulation, technological change and fierce competition, the importance of meeting investors’ expectations is paramount. PwC’s report, Asset and Wealth Management Revolution: Investor Perspectives - Rethinking Purpose and Performance, shows that investors are thinking in new ways about how their capital is handled. They’re embracing digital technologies, changing the way they interact with asset management firms, and are more interested in social responsibility.
Investors’ top priorities
To examine how satisfied investors are with asset managers’ services, PwC created an Investor Alignment Index, based on responses from 750 institutional investors and 10,000 retail investors around the world. The index measures how investors feel about six key aspects of asset managers’ performance:
For investors In Europe, North America and Asia Pacific, the top three priorities are firstly risk/return, secondly the macroeconomic and political environment, and thirdly ESG.
Reputation is everything
Every investor knows that geopolitical and economic developments can have a big impact on companies’ performance. Growth and recession, trade disputes and sanctions, droughts and floods, war and peace - all can have an enormous influence on results, and also on funds’ returns. And the age-old correlation between risk and return remains unchanged. It’s thus no surprise that managing macroeconomic and political environment factors and the risk/return relationship are the two most important aspects for investors.
Environmental, social and governance (ESG) investing has now risen to the number three priority of investors surveyed (as a general group), and outranks even fees. The asset management industry has already adapted to socially responsible investing, also known as sustainable, "green" or ethical investing - investment strategies which seek to consider both financial return and social/environmental good. Now many investors want environmental, social and governance (ESG) factors to be integrated into funds because they believe it can generate superior financial performance by mitigating reputational, operational and financial risks. Companies’ ESG records are no longer only being scrutinised by analysts and rating agencies. Investors are examining the ESG performance of the asset management firms themselves: questioning corporate pay, analysing labour and procurement policies, and thinking about how their investments affect climate change. ESG is now a fundamental priority for sophisticated investors across the globe. As a result of all this, PwC believes that overall ESG mutual fund assets will grow at a compound annual growth rate (CAGR) of 8.5% between 2017 and 2025, to reach US$ 2.08 trillion.
“As retail investors continue to align their personal interests and values with how they invest their money, ESG investing is now a ‘must have’, not a ‘nice to have’ option when building an investor’s portfolio. Already in 2018 BlackRock CEO Larry Fink drew the attention of the financial sector to this issue, predicting that within five years all investors would be using ESG criteria when determining a company’s worth. The European Commission is setting out a sustainable finance action plan to make the EU the global destination for sustainable investment, and is looking to enact further regulations in this context. Asset managers can no longer sit on the fence given the issues confronting our world. We estimate that asset managers steer the investment of roughly US$ 100 trillion in assets. They’re in an ideal position to ensure a continued focus on ESG aspects, which will be to the benefit of both the industry and society on the whole,” said Reinout De Clercq, Director specialised in sustainable finance services at PwC Belgium. “As wealth is transferred from baby boomers to socially and environmentally conscious younger generations who also want to invest by way of organisations that share their values, asset managers will struggle to attract and retain both clients and employees if they don’t take action.”
Meeting expectations - room for improvement
As regards the top three investor priorities, asset managers were able to slightly exceed the expectations of both retail and institutional investors on the crucial risk/return and ESG (environmental, social and governance) aspects. However, they fell slightly short of investors’ expectations in terms of the macroeconomic and political environment. The research underlines the extent to which investors no longer see financial return in isolation from other factors. For the investors surveyed, performance is no longer just about short-term financial returns; managing the impact of the macroeconomic and political environment is seen as absolutely critical for optimising risk/return. This is especially important for retail investors, who are generally the most vulnerable to a downturn, and who clearly expect more from asset managers.
When it comes to relationships, retail investors are also not satisfied with asset managers. A key element of why this is important to them is probably that they need communication and explanation to be reassured that managers are on top of the risks in the difficult market conditions ahead. Although technology can provide a partial solution, there is a need for greater focus on managing and improving the customer experience, particularly as market pressure increases. Unsurprisingly, fees are also a point of dissatisfaction among retail investors; the increased transparency of costs required by regulation is giving clients a clearer view on the impact of fees on their returns. Here too emerging technologies can help create a customised and differentiated experience, and deliver investment planning at a lower cost.
“There is an entire generation coming into contact with asset management for the first time, with an entirely different mindset from everything that has gone before. They’re confronted with a great deal of uncertainty about the future, including their financial security - and their expectations in terms of customer service have been shaped by their experiences with the world leaders in online shopping, travel and entertainment,” explains Damien Walgrave, Partner and Asset Management Leader at PwC Belgium. “How they expect to interact with service providers, in terms of flexibility, personalisation and convenience, brings an entirely new set of challenges for the asset management industry. And these come on top of the need to exercise proper fiduciary duty and comply with uncoordinated global regulation while providing consistent, sustainable, excellent investment returns.”
Download the full report here .
Erik Oosthuizen, External Communications, PwC Belgium
Tel: +32 490 582 284
Email: [email protected]