After contemplating the future of the NZ advice industry, Clayton Coplestone, Heathcote Investment Partners founder, wraps up with a think-piece on prospects for the local funds sector…
The global wealth management industry has entered an intense phase of uncertainty around markets and investor preferences with profound implications for NZ funds managers.
In this shook-up world the local investment market will be inundated by a rising tide of homogeneous investment structures predominately from offshore product suppliers who are struggling to raise assets in their countries of origin.
We have already witnessed the beginning of this tidal change amid a slew of new global fund launches in NZ over the last couple of years.
But while the vast majority of these offshore arrivals may struggle to build scale here, there will no doubt be a handful of unique capabilities and ideas destined to resonate with local investors and advisers.
UItimately, though, the state of the local and global economies will determine the future of the funds management sector.
The global economy today still operates in the shadow of the COVID years when the massive injection of fiscal and monetary stimulus distorted investor expectations and outcomes. More recently, investors have been presented with favourable risk-free options as they await the return of predictability and consistency in investment markets: they may be waiting some time if the growing sense that the current economic environment represents ‘normality’ proves correct.
Elsewhere, the funds management landscape has been significantly altered over the last decade by the widespread acceptance and implementation of sustainability investing.
The ESG movement has effectively established benchmarks for funds managers to mitigate risks but it seems that much of the heavy-lifting is now complete with the majority of managers appropriately adapted.
With most of the industry apparently now on board the sustainability train, passionate ESG managers may struggle to differentiate or justify any pricing premium as the emphasis resumes on after-fees-risk-adjusted returns.
There has also been plenty of noise surrounding the rapid advancement of technology in funds management. However, the tech revolution remain a ‘work in progress’ – albeit that it is coming. Artificial intelligence (A) and big data analytics are establishing themselves as integral tools for decision-making, rapidly enhancing funds managers’ ability to analyse vast datasets and identify investment opportunities with unprecedented precision.
Although the modern technology is driving down costs, these advances also heighten new challenges for fund managers such as cybersecurity risks or the recruitment of talent equipped with cutting-edge skills. The growing demand for expertise in areas such as data analytics, AI, and sustainable investing has led to talent shortages. Funds managers are now competing against each other for talent acquisition, retention, and development strategies.
As the ground shifts funds managers must strike a balance between embracing innovation and managing the associated risks to stay competitive in an increasingly digitalised world. Global firms with the deepest pockets appear to be well-advanced of many of the local fledgling participants.
Innovation is not the only force of change sweeping through funds management: regulators, too, are increasingly active in shaping the future of the industry. Evolving regulatory frameworks, both on a global and local scale, are influencing how funds operate, report, and disclose information.
Managers are burdened with more and stricter compliance requirements designed to enhance transparency and protect investors. Remaining aware of, and adapting to, regulatory reforms has now become a significant ongoing expense for local funds managers to ensure compliance.
New Zealand’s capital markets, while characterised by stability and a well-regulated environment, are relatively minute in comparison to larger global counterparts. The limited size poses challenges for domestic funds managers seeking diversity and growth opportunities.
Consequently, there is an increasing attraction for offshore investment where NZ managers gain exposure to a broader array of industries, access to larger and more liquid markets, and build a hedge against the inherent concentration risk in the smaller local market.
As global interconnectedness continues to grow NZ investors are being presented with greater offshore options that feed into the expansive and dynamic investment landscape abroad. The investment globalisation trend will only accelerate with many local funds managers already exploring avenues to effectively compete or collaborate in this space.
Passive investing – the winning investment style of recent times – has been quick to adapt to the changing environment but it is not immune to future threats. The predicted gyrations and market downturns will undoubtedly challenge most passive investment strategies that are inherently tied to the performance of the broader indices.
During periods of economic volatility or market corrections passive investors will experience significant declines in portfolio value without the ability to actively adjust their holdings. The more recent concerns about market concentration and overvaluation in certain sectors also pose risks to passive investment portfolios as they inherently mirror the market’s composition. This extremely competitive space will be dominated by a blend of ever-decreasing price pressure and large global brands.
Of course, irrespective of whether the investment philosophy is active or passive, both styles face the looming threat of the ‘democratisation of everything’.
The rise of low-cost fintech platforms together with the growing enthusiasm of retail investors are starting to have a profound impact upon the dynamics of funds management. Accessibility and user-friendly interfaces are now considered basic components for funds managers looking to attract and retain a broader investor base. This disintermediation is well underway in the NZ market with technology making it less relevant as to the domesticity of the fund manager.
Many established funds management brands everywhere are finding it difficult to compete amid weak performance and margin pressures.
The outlook for global funds management is characterised by a complex interplay of economic, technological, and societal factors. As the world undergoes unprecedented changes local funds managers will need to be agile, adaptable, and forward-thinking to thrive.
Limited in scale, these domestic funds managers may face hurdles in achieving the same economies of scale, operational efficiencies, and diverse investment opportunities that larger global players enjoy. The constrained size of the local market may also lead to challenges in generating substantial returns required to attract and retain investors.
In an era where global funds managers wield significant resources, technological prowess, and access to a vast array of assets, the small size of NZ funds managers could hinder their ability to negotiate favourable terms, offer competitive fees, or deploy cutting-edge technologies.
Despite their intrinsic understanding of local markets, these smaller funds managers may find it challenging to compete on a global stage, emphasising the importance of strategic partnerships, innovative approaches, and niche specialisation to carve a space in the fiercely competitive funds management landscape.