Artificial intelligence (AI) will likely emerge as the most dominant theme impacting asset managers around the world in 2019.
This is according to Hywel George, director of investments at the Old Mutual Investment Group, who has highlighted four global investment trends for the year ahead.
1. Have some passive in the mix
There has been a significant drive towards indexation globally – particularly in the US equity market, with almost $1 trillion flowing from active to passive management over a 10-year period, largely driven by fee considerations.
Yet active management still holds the lion’s share of assets and has been growing, probably because markets have been strong.
George says this is also having an impact in South Africa.
The chart below shows the growth in index investment strategies over the last 10 years.
“It [growth in indexation] has really exploded over the last three years,” George says.
The debate around active versus passive management has evolved to a point where investors are not merely debating the merits of the strategies, but also how to blend them in portfolios to reduce fees while allowing for some potential upside.
2. Look for returns elsewhere
There are merits – particularly in a relatively low-return world – to including alternative assets like infrastructure, private equity, agriculture and real estate assets in portfolios, George says.
Globally several trillion dollars have flowed into real assets, private equity and hedge funds, but investors also need to be careful when buying into this area, he adds.
In a global survey conducted among end-investors covering the four years from 2013 to 2016, 66% of respondents said hedge fund performance had fallen short of expectations in 2016, up from 33% in 2015.
“Hedge funds have – I would say – disappointed generally, and whether hedge funds can work in South Africa I think is an open question. We do manage hedge funds within Old Mutual. It’s an ongoing debate: Are they right for clients?”
George says private equity has done very well globally, but it is important that investors identify the right investment.
Global investors seem to be more familiar with alternative assets and willing to allocate capital to the asset class.
In South Africa, only around 2% of institutional assets goes to alternative assets, George says.
“We really need to do more here [in South Africa] in terms of allocating – particularly, in my view, to real assets.”
Using clients’ savings for investments in infrastructure in South Africa and in the rest of Africa can really benefit societies and improve the lives of savers, he argues.
3. Integrate ESG into everything you do
George says environmental, social and governance (ESG) factors are increasingly being integrated into the management of client assets. Investors, particularly millennials who want to make an impact while investing, do care about this.
It has become clear that by integrating ESG into investment strategies, managers can add alpha, he adds.
‘If you invest in sensibly managed companies – those that are well-governed, have a social conscience, and which protect the environment – you will generally get better quality companies; those that outperform.’
The trend is most pronounced in emerging markets because the prevalence of quality is less pronounced than in developed markets, he adds.
“When you find it, it generally does much better.”
This is also true in South Africa, where the ESG SWIX Index has outperformed the vanilla SWIX over the last few years, George says.
4. Understanding and integrating AI has become crucial
AI will have a profound effect on people’s lives over the next five to 10 years and will be integrated into the investment process to improve outcomes, George predicts.
This will have an impact on a few areas – fund managers will be able to source more real-time data and mine the data for interesting investment trends.
“AI should be able to help us construct portfolios in an even more intelligent way and identify potential risk clusters that could be harmful, which may be now hidden to us.”
George says AI should help fund managers where they have suspicions around a specific company to find it in the data and help fund managers make better stock-specific decisions.
“If we can get that human plus machine relationship right, we will do an even better job for our clients.”