Asset Management in the Digital Age

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Technology is transforming the industry but evolving equally quickly are investor desires. Rachael Revesz talks to BlackRock’s Stephen Crocombe, who explains that no one can afford to stand still. 

Over the past decade, a lot has changed in the world of asset management – and one of the main catalysts for that change is technology. Now, instead of buying single, expensive funds to build a portfolio, companies are able to leverage their scale to provide diversified and innovative portfolios at a fraction of the price. Not only that, but investors can often access their portfolios via a phone app and view a breakdown of fees and holdings – a development that might have seemed impossible a few years ago.

But ‘going digital’ has not been a smooth ride for everyone. Some firms offering robo advice and who lack brand recognition have struggled to gain a solid customer base, even after 10 years in the UK, while those with the resources to provide human interaction have arguably seen more success than pure DIY options. And amid all this technological change, a growing adoption of ESG (environmental, social and governance) funds means digital-oriented and robo services cannot remain static; they have to keep abreast of evolving investor desires.

An expert in this field is Stephen Crocombe, managing director, head of client portfolio solutions EMEA at BlackRock. He has seen first-hand how BlackRock has evolved from building its first exchange-traded funds (ETFs) to offering customised and off-the-shelf portfolios. Clients can, as Crocombe describes it, “slot the portfolios into their robos”, whether those clients be banks, asset managers or fintech firms.

“I’ve always found the concept of democratising the building blocks of investment very inspiring, and we saw that as we developed our ETF range,” he says. “The problem then became, for people like my mum, how do we build a portfolio? It’s all very well having the ETFs, but when we look at some individuals’ portfolios, they’re quite challenged – they don’t have the asset allocations basics built in there.”

That challenge remains, no matter the range of ETFs available – currency-hedged, fixed income, factor-tilted exposures and even ETFs with an ESG lens. Instead of picking funds, Crocombe found that many clients simply wanted either off-the-shelf portfolios they could offer their end investors which did not compromise on quality or price, or they sought guidance on security selection and asset allocation.

“From an investor perspective, you need to move to the ‘whole portfolio’ approach,” he says. “People are no longer asking me so much about how XYZ fund is performing. Now, we want to tell an investor, ‘You’re a risk three, therefore we’ve built you this portfolio, and this is how it will perform in different scenarios.’ That is a fundamental step forward because you’re talking about the suitability of the portfolio rather than what’s in it.”

“We are on the cusp of a very exciting development – how do we get fantastic portfolio visualisation that means something to end clients?” says Crocombe.

One way to get investors more engaged with what they own is through an increasing focus on ESG.

“I don’t think it’s a fad; I think it will fundamentally change the way we invest across our portfolios,” adds Crocombe.

After nine months of work, BlackRock has recently revealed the ESG scores of all its ETFs on its website, allowing investors to see what percentage of their fund is invested in fossil fuels, for example, or the overall carbon footprint.

“It’s about trying to find the relevant lenses through which investors want to view their portfolios and representing that information in a graphically engaging way,” Crocombe says. “We want to move it from something that’s scary to something that’s visually appealing – gamified, if you like. I’d like that to be the next step.”

Now clients have the option to buy a cost-efficient, low carbon-footprint product, such as a greener version of the Euro Stoxx 50, that has limited tracking error to the parent index and without a heavy sector risk. Not only can they buy it, but the new public information helps clients understand those funds better, too.

“Client’s are moving from having a niche interest in green issues to asking themselves, why wouldn’t I invest in ESG? In other words, we’re moving from a ‘why would I’ to a ‘why wouldn’t you?’” says Crocombe. “That shift then leads to the mass adoption of ESG, which I find super exciting.”

The next phase of ESG will be, according to Crocombe, less about excluding certain companies and sectors but rather including securities that contribute to and promote the issues that investors care about.

“People are just beginning to say, I understand I don’t own coal or cluster munitions and I do own a higher percentage of the industries that create jobs – or whatever I’m interested in – now tell me what you’re doing at an asset allocation level to make a difference here.”

In response, BlackRock now works to provide thematic rotation in ESG portfolios, but Crocombe stresses that the more nuanced work is “cutting edge” and will take time to develop.

Despite advancements in the use of technology and investments like ESG, Crocombe insists that the price must still be competitive. Over the next 10 years, rather than a race to the bottom on prices, companies will look to offer the best deal they can while keeping the investor’s risk profile front and centre.

“I think you’ve got to offer killer value for money – that’s what the regulator expects and that’s what the consultant expects if you’re thinking about defined benefit pensions,” he explains. “Value for money involves a price point that’s linked to a quality set of features. Let’s use the car analogy: look at Skoda, VW, Audi – they all have different price points in the market, but they’re all great cars that win in their own classes in terms of quality.”

Some clients may assume that investing in a cheap robo service means making sacrifices in terms of risk management and asset allocation, but Crocombe insists this should not be the case. He does say, however, that a higher price point can bring in other features, from tactical asset allocation, more focused underlying securities and thematics to liquid alternatives.

“As the price point goes up you want a clear improvement in risk-adjusted return,” he says. “What you don’t want to do is add features that look complex but don’t deliver a clear improvement in that sense.”

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