Change In Investment Industry

By M. Isi Eromosele

The investment industry has experienced a rapid change of pace since the end of the global financial crisis. In this new more complex investment world, it is not certain that all organizations are well equipped to take advantage of new opportunities that exist.

To be successful, investment houses would need to better align the strategies they choose to implement with an ability to adapt to a global financial environment where events are now constantly changing.

The global financial environment of the future will have an overriding element that will be pervasive: complexity. Complex events, including the ongoing sovereign debt crisis in Europe are buffeting the global investment industry, resulting in uneven transitions. In this uncertain environment, it is crucial that the investment industry establish a resolute and clear sense of purpose.

Institutional funds face a set of challenges such as:

• The vast majority of investment products carry too much costs for the value they deliver
• There is little long-term thinking in making investments
• There has been mostly poorly structured incentives and other excesses

There will be six major near-term trends that will impact the institutional investment industry

• To secure competitive advantage, pension fund governance will need to adapt to a step change in organizational structure, with more use of non-executive boards, delegated executives and fiduciary management
• Driven largely by demographics and the regulatory environment, there will be a major shift from the provision of DB to DC
• Increased pressure for institutional funds to practice responsible investing principles
• Product proliferation, primarily driven by players seeking competitive advantage in the marketplace
• Convergence between mainstream firms and alternative firms as their competitive fields overlap
• Categorization of active products into two types: relative return mandates and absolute return mandates
• Increased specialization, whether by asset class, risk level or investment style

Longer-term trends in the institutional investment industry

• There will be a new success measure for funds looking more at the key steps in investment design and measurement of risk
• Improved investment companies’ value propositions on a strong platform foundation, better investment design and technology supported engagement model
• Big moves away from reliance on fiduciary, boards and committees towards management by designated Chief Investment Officers
• Under pressure for better performance, investment organizations will need to develop new relevant competencies

Some trends are already established with increased use of short selling, derivatives and leverage. A key phase of the coming transition will be the growth of solutions and outcome - specified mandates which can be divided into part-fund and whole-fund solutions.

Part-fund solutions are more sophisticated products, such as downside protection funds and multi-asset portfolios. Whole-fund solutions involve the deployment of effective liability hedging, reliable alpha and dynamic and efficient beta. There is demand for a more sophisticated performance measurement framework which better accounts for risk.

The investment industry faces certain defining events in the future. This a world of opportunities for organizations well equipped to change, where success is increasingly being defined by the capability of companies to adapt and effectively apply innovative thinking.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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