The 3 best buys in investment

Reading the pink pages over the last couple of weeks has reminded me of the three most important buys in the evolution of Wealth & Asset Management. I’m not referring to technology, leadership, culture or even fund performance. But Environmental, Social & Governance (ESG), retail customers and Asia. It’s about customers and their needs that is going to make or break each and every asset manager.

Best buys: ESG, retail customers & Asia

Given that ESG was originally a financial services term covering ESG factors, it’s taken hold in the wider public mainly due to the desire for sustainability, climate change and diversity improvements. This excellent [1] from Create-Research on addressing climate change in passive investing reminded us that three of the world’s leading pension plans stressed that focusing on short-term returns would create “potentially catastrophic systemic risks”.

For example:

54% of the 131 surveyed pension plan respondents recognise that climate change is “material to investment returns”.
57% expecting their ESG allocations to grow in excess of 5% per annum over the next three years.
However, 60% see data as a constraining factor.

Similarly, in their Feb 2020 Sustainable Investing survey, a key message is that “a new infrastructure of skills, data and technology is creating tailwinds for sustainable investing”. And now we come back to my specialist subjects: ESG is the customer driver, with “skills, data and technology” being the engine room. The growth of misleading environmental metrics aka ‘greenwashing’ demands that those asset managers marketing their ESG investment credentials can justify, with independent data, the reliability of their claims. I believe that this is now the cost of doing business in ESG and asset management.

Doubling down on value for money

With regard to retail customers, only 14.5m people in the UK have proactively invested (thanks to Boring Money’s Advice Report 2020 [2]). They will undoubtedly be those with more cash to spare than the average UK person but leaving the lack of ‘wealth democratisation’ for now, the battleground for (the richer) retail customer is hotting up. In this FT interview [3] with the new Investment Director at St James’s Place, Rob Gardner “is now leading a modernisation drive that will involve sharpening SJP’s focus on ESG, and making sure the wealth manger’s costs and charges are communicated clearly.” It’s pretty obvious SJP believe that the retail customer cares most about ESG and costs. Furthermore, there are “new competitive threats with US low-cost fund provider Vanguard preparing to enter the UK advice market and after the launch of a joint wealth management business from Lloyds & Schroders.” Some of the biggest brands in financial services are doubling down on serving end customers with value-for-money sustainable investment solutions. That is very good news.

Asia’s Gen Z has a billion voices

Last, but ironically, not least at all, we come to the sheer scale of the Asian market. To set the scene, as a proud and curious Gen X-er, I loved this article [4] from McKinsey about Asia’s Generation Z. They surveyed 16,000 consumers from Gen X, Millennials and Gen Z commenting that “the youngest generation of Asian customers is becoming a force”. Unsurprising, you might say. But, here are the tough points on Gen Zs: “customization is becoming an expectation, not a nice-to-have”, “a third spend 6 hours or more a day on their phones” and “they prefer ethical products, but only a minority are willing to pay more for them”. I don’t believe that *any* wealth or asset manager that I know of in the UK (and most of the ‘western’ world for that matter) has a business model ready for those demands.

By the way, if you thought that Gen-Zs are not yet important, please bear in mind that by 2025, “the group will make up a quarter of the APAC region’s population”. That’s well over a billion people, by my crude calculations. And to repeat the point, as of now, no UK provider can service that market at all.

As a more specific asset management example, this article [5] about Keith Skeoch’s replacement Stephen Bird as the CEO of Standard Life Aberdeen, this change is seen as “the beginning of a new chapter”. Alongside the benefit of being able to “undertake substantial M&A transactions again”, Mr Bird has significant “familiarity with Asian markets”. M&A is M&A, but Asia is not just Asia. And understanding the wealth needs of the 3 big players of China, India and Japan let alone the influential Singapore, Australia and the changing Hong Kong is, frankly, the exciting job of a lifetime. The centre of gravity is shifting rapidly towards Asia and every asset manager needs to know their role.

Become a world-beater, start with a data strategy

In summary, my 3 best buys in investment are to ready yourself for the demands of ESG, retail customers and Asia. They are too big, too inevitable and too daunting to ignore. They are also game-changing, enormous commercial opportunities and will make some firms into world-beaters. I don’t pretend to know all the answers, not least to be able to tailor that to your specific business. However, what I do know is that underpinning all of these is the need to improve your data strategy, your cloud usage and your technology infrastructure. The way forward is clear, the toolset is well known, all that’s needed is the confidence to start. Good luck!

Interested in talking about this further? Get in touch.