The Changing Investment Ecosystem By 2025, institutional investors expect to see major changes that will reshape the investment industry, with technological innovation and organizational consolidation challenging the status quo. The Fidelity Global Institutional Investment Survey features the latest views of more than 900 institutional investors worldwide, with a wide range of institution types and sizes representing $29 trillion, or approximately half, of all global institutional AUM. The special theme of this edition attempts to paint a picture of how the investment industry may look in 2025, seven years from now. The survey gathered expectations for the future on several themes, including evolving strategies for asset allocation, impact of technology on the financial markets, and how investors and asset managers will likely work together as human interaction is increasingly replaced by data transfer. This special report focuses on one topic from the survey: How the investment industry itself will be transformed over the next seven years. 905 Institutional Investors 25 Countries The investment industry, like other industries, is a delicate balance of buyers and sellers. Pension plans, insurance companies, and other institutional investors seek the advice, guidance, and service of asset managers and consultants on how to best structure investment portfolios to meet their long-term objectives. However, these industry participants don t operate independently of one another any significant change in the business model of one can have ripple effects on all others. $29T Investable Assets Like many other industries, the investment industry may also be on the cusp of radical change. Institutional investors see a future that has new players emerging, new business models, and technological disruption that may introduce new systemic risks and change how participants operate. As the investment ecosystem evolves, the need to stay current and adaptable will be critical, and all participants should consider evaluating the training and talent they need to help them navigate this changing world. The cost of taking a wait and see approach may be missed investment objectives for some, and outright extinction for others.
Fidelity Research Institute About the Institute The Fidelity Research Institute presents forward-leaning thought leadership, curated for institutional investors and bolstered by Fidelity s experience in building and enhancing multiasset class portfolios. The mission of the Fidelity Research Institute is to help institutional clients find solutions that address their most pressing needs. By combining Fidelity s deep research expertise with a practitioner s mindset, the Institute produces thought leadership designed to give institutional investors the data, insights, and tools they can use toward solving their problems and exceeding their goals. go.fidelity.com/globalsurvey Technology cited as a key driver of change The Austrian economist Joseph Schumpeter once wrote that creative destruction was the essence of capitalism. 1 Innovation, he said, delivers better products and services for consumers, though some businesses or industries may not be able to keep up. Whether they believe the changes will be for better or worse, institutional investors are very aware that change is coming. A scant 10% of those we surveyed believe the industry will be the same in 2025. 2 The potential for artificial intelligence (AI), in particular, was frequently cited as a game changer for an industry that is already steeped in technology and massive amounts of data. In this context, AI generally refers to any technology through which machines can learn to perform complex and evolving tasks without being given specific instruction by humans. In this way, it is distinct from automation, which follows preset rules. One common example is natural language processing : the ability for a machine to speak to a person with the same understanding and flexibility as another human being, which could revolutionize many industries that depend on personto-person communication. Analyzing complex market data to determine optimal investing and trading strategies in real time would be another potential use. Globally, 60% of institutional investors said they expected AI to be augmenting or enhancing human efforts in investment roles by 2025, with many expecting INSTITUTIONAL INVESTORS EXPECT THE INDUSTRY WILL LOOK DIFFERENT BY 2025 Overall, 73% of respondents believe that it is unlikely the industry will be the same in 2025. However, certain regions are more skeptical that changes will occur. 73% 17% Neutral 10% 2
The Changing Investment Ecosystem AI involvement in activities ranging from monitoring investment performance and risk to determining optimal asset allocations. New players, new business models Seventy-five percent of institutional investors we surveyed expect non-financial services firms to enter the industry by 2025. Many would not be surprised to see leaders from other industries (e.g., Google, Amazon) leverage their technologyenabled operating models to create and distribute new investment offerings and provide a higher level of service at a lower price point. In perhaps a precursor to the kinds of shifts we may see, China retailer Alibaba shook up the banking industry with a spinoff of its online payment platform Alipay, which then created what is today the world s largest money market fund, with more than $200 billion in assets. The spinoff, now called Ant Financial Services Group, is valued at about $150 billion more than many Wall Street mainstays. Institutional investors generally expect to see more of these kinds of transformations continue in the next seven years. Perhaps having this example so close to home convinced more Asian respondents that non-financial entrants are coming soon, while investors from the Americas were most skeptical. LIKELINESS A NON-FINANCIAL SERVICES FIRM WILL DISRUPT THE INVESTMENT MANAGEMENT INDUSTRY 75% 12% 13% Overall Response Neutral 78% 88% 82% 89% 52% 33% 4% 4% 6% 1% Americas Japan Asia ex. Japan United Kingdom Europe ex. UK Survey Question: How likely is it that, by 2025, the investment management industry will be disrupted in one of the following ways? Non-financial services firm will enter the investment industry (e.g. Google, Amazon). See endnotes for response scale. 3
Fidelity Research Institute Investors also frequently mentioned the recent growth of fintech as a potential driver of high-speed change. Fintech generally refers to the application of new technologies to financial services and asset management, but the term is often used to mean the relatively recent ecosystem of technology-focused startups seeking to improve financial services and investing. The rising tide of fintech and insurtech [insurance] companies will rise even further in the future, said one leader of a European public pension. A large portion of the investment market will be overtaken by these companies unless larger institutions change or improve their services and products. In fact, global venture capital investments in fintech startups reached a record high of US$27.4 billion in 2017, an increase of 18% in one year alone, according to research by Accenture. 3 Although U.S. investment seems to have peaked in 2015, aggregate deal value in other parts of the world has continued to grow. Moreover, the massive wave of global fintech financing that began in 2015 (with US$21.2 billion in investment) has continued since then. The transformation as fintech developments become more widespread could seem particularly abrupt as those first major waves of investments begin to mature and reach the market. Already, partnerships between established financial services firms and fintech startups are blossoming: According to a recent report from PwC, 82% of incumbent financial services firms plan to increase fintech partnerships in the next three to five years. 4 However, rapid expansion of tech-driven decision-making with tools sourced from startups outside of investing may lead to unexpected risks and consequences, which few survey respondents acknowledge. For example, most institutional investors expect high-frequency trading algorithms and quantitative investment strategies to make the markets of 2025 more efficient, and expressed little concern about potential for future flash crashes or other anomalies. A world of asset owners and investment managers deploying an arms race of AI-powered strategies might create more market volatility (not less, as some think), swinging markets in reaction to real-time events or the complex interplay of competing algorithms. This is why in practice, concerns for the integrity of complex financial markets may act as a constraint, slowing the expected pace of innovation as applied to institutional investors. However, history suggests that such limitations on technological advances are often swept away more quickly than anticipated. More entrants will force consolidation Institutional investors do not presume the entrance of technology-focused players will further fragment their own industry. In fact, they expect the reverse: that consolidation will be the natural outcome. 4
The Changing Investment Ecosystem One expected change is that the distinction between asset managers and asset owners (i.e., institutional investors) will blur, as large asset owners provide more investing services to smaller owners. About 75% of investors surveyed expect to see larger institutions providing investment management services to smaller ones essentially competing with traditional investment managers. Large institutions may have built a customized set of investment skills for their objectives; for example, a large insurance company may be operating decision-making and investing systems that are highly tailored to the challenges of running an insurance portfolio. With many investors anticipating equity-market returns over the next decade that are lower than historical averages, large institutional investors could add to their revenues by becoming selective managers, while smaller asset owners could engage industry peers to invest for their particular needs. Indeed, the survey shows that larger institutions already have a higher proportion of assets allocated to internal management, and are significantly more likely than the smallest to increase their internally managed assets over the next seven years. In contrast, smaller institutions are currently using more external investment managers, and are more likely to keep their current ratio. Large asset owners will not stop at a certain level of growth, said a leader of a UK private pension. They will seek growth in the future too, and one of the options will be to manage the assets of smaller enterprises and keep the option of an acquisition open. Institutions also expect smaller asset owners to merge with larger ones for greater efficiency, scale, and expertise: 75% of institutions thought such asset consolidation EXTERNAL VS. INTERNAL ASSET MANAGEMENT: CURRENT ALLOCATIONS AND PERCENTAGE OF INSTITUTIONS EXPECTING TO INCREASE Current Allocations 2018 Overall Results Percent Increasing their Allocations to Each 2018 Overall Results (Increasing is a Score of 4 5/5) Under $1B External Internal 21% 79% External Internal 6% 9% $50B+ External Internal 33% 67% External 5% Internal 37% Survey Questions: Please estimate the percentage of your portfolio allocated to external/internal management today. What direction of change do you expect with each allocation by 2025? 5
Fidelity Research Institute LIKELINESS OF SMALLER ASSET POOLS CONSOLIDATING WITH LARGER ASSET POOLS TO BE MORE EFFECTIVE 75% 14% 11% Overall Response Neutral 78% 83% 89% 81% 60% 20% 10% 3% 4% 7% Americas Japan Asia ex. Japan United Kingdom Europe ex. UK Survey Question: How likely is it that, by 2025, smaller asset pools will consolidate with larger asset pools for better scale, efficiency, and expertise? See endnotes for response scale. was likely. Respondents from the UK and Asia ex. Japan are most convinced, while institutions in the Americas think it less likely. Smaller pools will find it difficult to breathe in the competition and will demand mergers with larger pools to gain better exposure in the market to draw returns, said a respondent from a small Asian insurance investor. Incumbent investment management firms may react to cost pressures from asset owners and potential competition from technology firms by consolidating as well: 77% of institutional investors believe there will be widespread consolidation into mega-firms that bundle together many of the financial investment services now handled by separate companies (e.g., consulting, investment management, benefits management). Such consolidation may be driven by the pressure for investment managers and consultants to acquire new capabilities (beyond their core expertise) to stay competitive. Management firms will be consolidated to occupy more market share, said a CIO at a European public pension. Traditional financial houses will do their best to compete with disruptions coming in from non-core entrants and fintech service companies. Once again, investors in the Americas were more skeptical that this transformation would happen in the next seven years, but more found it likely than unlikely (50% vs. 28%). 6
The Changing Investment Ecosystem LIKELINESS CONSOLIDATION IN THE INVESTMENT MANAGEMENT INDUSTRY WILL LEAD TO LOW-COST MEGA-FIRMS. 77% 13% 11% Overall Response Neutral 96% 88% 87% 86% 55% 28% 2% 3% 3% 2% Americas Japan Asia ex. Japan United Kingdom Europe ex. UK Survey Question: How likely is it that, by 2025, the investment management industry will be disrupted in one of the following ways? Consolidation will create a few mega-firms that offer all institutional investment services (e.g consultant, investment manager, benefits) at reduced cost. See endnotes for response scale. The future is here: navigating disruption Joseph Schumpeter described business strategy as having a role in the the perennial gale of creative destruction, the constant force toward change. Many investors who participated in Fidelity s survey are bracing for steep changes in the competitive landscape, expecting the rapid destruction of older approaches to make way for the new and setting their strategies accordingly. In particular, most institutional investors see a movement toward consolidation, leveraging greater scale to more effectively harness technological innovation coming from outside the traditional investment industry. The investment industry is a highly interconnected ecosystem disruption to one area has the potential to motivate changes in the whole environment. Even if an innovation such as AI has no immediate in-house application, institutional investors should be aware of the ways disruption may be coming to them second-hand, by transforming the processes of investment managers and consultants. In fact, institutions may have a fiduciary duty to understand how emerging technologies could be influencing their partners and the industry as a whole. We believe that in preparing for the future, institutional investors may benefit from exploring the training, talent, and resources necessary to help them navigate this changing environment. 7
Fidelity Research Institute As the industry plans for these transformations, all participants may also want to get ready for many other future opportunities and concerns, from a shift toward non-traditional return-generation strategies to the need to figure out how best to incorporate artificial intelligence and big data into investment decision-making. Over the coming months, Fidelity will explore these and other themes raised by the Global Institutional Investor Survey. Sign up for updates on new insights as they are released, at go.fidelity.com/globalsurvey. ENDNOTES 1 Joseph Schumpeter, Capitalism, Socialism, and Democracy. Chapter VII, The Process of Creative Destruction. 2 All institutional investor quotations and opinion data in this report are sourced from the Fidelity Global Institutional Investor Survey, fielded in 2018. 3 Accenture analysis of data from CB Insights, a global venture-finance and analytics firm, 2/28/18, https://newsroom.accenture.com/news/ global-venture-capital-investment-in-fintech-industry-set-record-in-2017-driven-by-surge-in-india-us-and-uk-accenture-analysis-finds.htm. 4 PwC, Redrawing the Lines: FinTech s Growing Influence on Financial Services, 2017. Response scale: Answers were given on a scale of 1 (very unlikely) to 7 (very likely). For charts, unlikely = 1 3, neutral = 4, likely = 5 7. For use with institutional investors, investment professionals, and plan sponsors. Views expressed are as of Sep. 25, 2018, and may change based on market and other conditions. To the extent any investment information in this material constitutes a recommendation, it is not meant to be impartial investment advice or advice in a fiduciary capacity, is not intended to be used as a primary basis for your investment decisions, is based on facts and circumstances at the point in time it is made, and will not be updated if facts or circumstances change unless you contact Fidelity and ask for a new recommendation. Fidelity and its representatives have a financial interest in any investment alternatives or transactions described in this material. Fidelity receives compensation from Fidelity funds and products, certain third-party funds and products, and certain investment services. The compensation that is received, either directly or indirectly, by Fidelity may vary based on such funds, products and services, which can create a conflict of interest for Fidelity and its representatives. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Investment decisions should be based on an individual s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice, and you are encouraged to consult your own lawyer, accountant, or other advisor before making any financial decision. Investing involves risk, including risk of loss. Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. If receiving this piece through your relationship with Fidelity Institutional Asset Management (FIAM ), this publication may be provided by Fidelity Investments Institutional Services Company, Inc., Fidelity Institutional Asset Management Trust Company, or FIAM LLC, depending on your relationship. If receiving this piece through your relationship with Fidelity Personal & Workplace Investing (PWI) or Fidelity Family Office Services (FFOS), this publication is provided through Fidelity Brokerage Services LLC, Member NYSE, SIPC. If receiving this piece through your relationship with Fidelity Clearing and Custody Solutions or Fidelity Capital Markets, this publication is for institutional investor or investment professional use only. Clearing, custody, and other brokerage services are provided through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC. 2018 FMR LLC. All rights reserved. 857019.1.0 FIAM-IA/BD go.fidelity.com/institute