Institutional investors expect transformation from emerging technologies

Respondents to a global poll also consider new market entrants and consolidation as forces to watch

By Leo Almazora

Oct 12, 2018

Institutional investors around the world expect the investment industry to be reshaped significantly by technology, new entrants to the market, and consolidation within seven years.

That’s according to the most recent edition of its Global Institutional Investor Survey, which looked at the top-of-mind concerns for 905 professionals involved in their organization’s investment decision-making process. The respondents to the survey represented 25 countries, and managed US$29 trillion in assets overall.

Institutional investors expected that by 2025, there would be more rapid, accurate, and efficient markets and decision-making. Part of that comes from the belief shared by 73% of respondents that technological advances will reshape the industry by 2025. More specifically, 62% per cent thought that trading algorithms and sophisticated quantitative models would make markets more efficient, and 79% predicted that blockchain and similar technologies would lead to fundamental changes in the industry.

While artificial intelligence is seen as a major catalyst for competition in the investment industry, some institutions have not yet allocated resources toward the technology. Around one-third of institutions surveyed by Fidelity said they’re not currently testing or examining the benefits of AI and advanced analytics to their investment process; in the US, the number jumps to 77%. Those institutional investors who expect to rely more on AI in the near future said they expect to apply it for:

Asset allocation (69%);
Performance/risk evaluations (67%); and
Creating custom portfolios (39%)

Three-quarters of respondents also cited the possible entry of non-financial services firms as new competitors to traditional players in the investment industry. As markets mature and growth slows around the world, a majority of investors see more fintech firms offering investment and banking services. Along with that, there’s an expectation of widespread consolidation, strategic shifts in products and pricing, and many other dramatic changes in the way services are offered.

Investors also expected new and enhanced alpha generators that would better suit fast-paced, data-driven strategies; 70% said they anticipate new asset classes to emerge from technology, such as cryptocurrencies. AI may be used to decompose traditional alpha to identify and exploit different drivers of returns. The evolution of active and non-traditional passive strategies, as well as the growth of socially responsible investing, is also expected to prompt investors to re-evaluate their asset-allocation exposures.

Despite the widespread agreement on the impact of technology, many respondents didn’t see it supplanting human portfolio managers. Data sets are expected to expand sharply and computers are seen to play a larger part in decisions. However, the respondents were split evenly between those who believe they’ll make allocations without any human contact from asset managers, and those who believe the opposite.

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