Are your clients’ portfolios positioned for the profound changes that are likely to affect every investment they own, as well as the very foundation of our financial system?

In a provocative white paper published by BNY Mellon Investment Management, Future 2024: Future-Proofing Your Asset Allocation in the Age of Mega Trends, two secular trends were identified that will reshape the asset management industry and require financial advisors to consider future-proofing their clients’ investments.

The First Mega Trend: Artificial Intelligence (AI)

The view on AI is fairly well accepted and known—it’s expected to be the catalyst for a Fourth Industrial Revolution. AI presents four major investment challenges … or opportunities:

• The first is that product lifecycles will grow shorter, which not only demands higher research and development budgets, but can quickly turn a very successful company into a has-been.
• The second challenge is one of valuation. Namely, how do investors value a company that spans multiple industry sectors? Does an industrial products company with high-tech services sold on a subscription basis get the multiple of a cyclical or technology stock?
• Another effect of AI may actually come at the expense of emerging markets, as onshoring of manufacturing—thanks to 3D printing—disrupts supply chains.
• Lastly, intangible value within a company due to AI will grow, making price discovery more difficult.

The Second Mega Trend: The Environment

Another well-known trend, but not entirely integrated into investors’ portfolio construction or security selection process, is the environment. Admittedly, we already see a movement into Environmental, Social and Governance (ESG) funds.

The bigger challenge, however, is pricing large unknowns (e.g., future government policy and stranded assets).

Big Implications for Big Asset Managers

The trend toward passive investing and lower fees has been ongoing for some years now. However, with the emergence of AI and the environmental priorities, the asset management industry is likely to evolve by:

• Growing its participation in private equity to capitalize on AI-driven corporate restructuring, as well as for investing in green projects
• Alpha-beta decoupling will continue; falling costs will further drive passive investing, but AI will find new sources of alpha generation that may have previously been out of reach or out of sight
• Theme investing will grow, as future portfolios look to profit from these two massive trends
• Asset managers will converge around four distinct business models—beta factory, distribution powerhouse, alpha shop and solution provider—in which many will target an emerging investor population comprised of women and Millennials who hold different values and objectives from previous generations

To learn more about what may be in store for advisors and investors, we invite you to read the full white paper.

lease reference disclosures: https://blog-dev.americanportfolios.com/disclosures/