By Kimberly LaPointe, head of PGIM Investments International
The Covid-19 pandemic has had a profound impact on the way we live, work and interact.
While the asset management community has fortunately been spared the hardship still being witnessed in other areas of the economy, the industry was forced to undergo a major transformation a year ago, particularly in relation to technology to support a remote workforce.
Even though increased use of tech and more home working will likely endure post pandemic, there are a number of other asset management trends we expect to continue evolving as we hopefully return to a more normalised environment in the months and years ahead.
Increasing regulatory requirements
The Covid-19 pandemic has magnified awareness of the challenges faced by society and investors are showing an increased willingness to take action. With momentum for change, regulators have been on the front foot to ensure the investment community directs capital towards sustainable areas.
For example, the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which is part of the EU’s wider sustainable action plan, came into force earlier this year. For asset managers, it means numerous fund disclosure-related requirements, which will help investors better understand the sustainability profile of the strategies they are investing in. Doing the right thing for our clients, our people and our communities leads to better results for all stakeholders – so we welcome the implementation of this regulation.
However, while the SFDR is a positive step forward in terms of sustainability, it is important to remember that we are only in the early stages of regulatory change and adapting to new requirements will be an ongoing feature of the years ahead. Until we have more standardised classifications for sustainable funds, interpretations across the industry are likely to remain quite wide. So, it is important investors continue to look under the bonnet to determine whether each individual strategy is truly meeting stated sustainability objectives.
ESG product development
The European asset management industry is currently witnessing a wave of demand for ESG strategies, with the Covid-19 pandemic accelerating investor interest in this area. Through our conversations with clients, it is clear ESG considerations have become central in the decision-making processes of most asset allocators.
While our industry has a history of succumbing to fads – such as the mad scramble to launch tech-focused funds at the height of the TMT bubble more than two decades ago – the current clamouring for ESG is the polar opposite to this. ESG is now an integrated element of our businesses and is becoming increasingly entwined in our investment processes. Some market participants estimate upwards of half of all fund assets will be in ESG-aligned strategies by 2025. This is a major shift in the current asset base, requiring product development to evolve as client needs continue to progress.
Across PGIM’s businesses, ESG factors are already an integral part of investment processes, and our existing solutions are continually strengthening their sustainability footprints. In addition, we added two dedicated ESG strategies to our fixed income range last year, the Global Total Return ESG Bond and Global Corporate ESG Bond funds. These funds utilise a proprietary ESG impact rating framework, which assesses an issuer’s impact on the environment and society. We plan to expand our fixed income suite with the launch of further strategies with explicit ESG objectives in the future, which will be fully aligned to the sustainability requirements outlined by regulators.
Partnering – doing more with less
Today’s clients are diverse and sophisticated, with individual needs and expectations. Outcome-based investing and enhanced client service have come to the fore, with clients seeking to partner with skilled asset managers able to deliver both elements. As client preferences change, it is incumbent upon asset managers to evolve to manage these shifts in behaviour.
Partnering on ESG and thematic investing is another trend we expect to develop in the years ahead. For example, we are seeing increased client demand for bespoke fixed income mandates with explicit climate change objectives. These mandates are likely to incorporate sizable allocations to areas such as green bonds – a rapidly expanding subset of the fixed income universe. While global private banks have been active in working with asset managers in developing bespoke portfolios for many years, smaller regional entities are also now tapping into this expertise.
In our view, the days of being a simple provider of investment portfolios are over. With asset managers and clients increasingly looking towards collaboration and co-creation, the result is likely to mean clients will do more business with fewer providers. Investment partners also offering best-in-class asset servicing – such as enhanced reporting, access to investors or customized collateral– are better placed to succeed in the years ahead.