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Transcript of "Global Asset Management Insights for the Post-Pandemic World"
Kathryn Graddy: Global Asset Management Insights For The Post-Pandemic World. We are all looking forward to a post-pandemic world. This is the third event in our multi-part Trends in Asset Management series. My name is Katie Graddy and I'm Dean of the Brandeis International Business School and the Fred and Rita Richman distinguished professor in economics. To those of you who are members of our community, alumni, faculty, students, staff, and friends, I'm so glad you have decided to join us. For those of you who have an interest in today's topic but are not formally affiliated with Brandeis, it is wonderful to have you with us for this important event, and we hope you remain in touch with our school and university. This series is sponsored by the Baupost group, and the International Business School's Rosenberg Institute of Global Finance. The Rosenberg Institute is an integral part of our school that was founded and funded by Barbara and Dick Rosenberg. As a Global Business School, we are very proud of our school's long-term strength in student and alumni outcomes in the global finance industry. I also want to acknowledge our India Initiative, which seeks to build and strengthen ties in India among academic, corporate, and alumni partners. My sincere thanks to Reuben Auspitz, Class of '69, a member of our Board of Advisors, for his vision and support of the India Initiative. We will be recording this event and sharing it on our various platforms in a few days, please keep an eye out for it and be sure to share it with your networks. I also want to remind our guests that today is Giving Deisday, Brandeis' version of Giving Tuesday, international day of philanthropy. Your gift to the International Business School will make a real difference in the lives of our students. Thanks to the generosity of one of our donors, all gifts up to $15,000 to the International Business School will be matched today. You can learn more at givingdeisday.brandeis.edu, the link is in the chat. Thank you very much for your support. Finally, I'd like to introduce our moderator for today's program, Professor Debarshi Nandy. Debarshi is the Barbara and Richard M. Rosenberg Professor, of global finance and the director of our India Initiative. Thank you Debarshi and please take it away.
Debarshi Nandy: Thank you, Dean Graddy for that introduction. I would also like to welcome everybody to this webinar, and we're looking forward to an exciting discussion today. Over the last decade, the asset management industry has faced several challenges. The most prominent likely being the shift from actively managed funds to passive funds over the last several years. This AUM of which has grown to roughly around 11.5 trillion globally at the end of 2019, beginning of 2020. This has led to margin compression for the asset management industry, and has likely influenced various industry consolidation and other decisions in the recent past. Over time, one might worry that if such trends persist, it might impact the efficiency of financial markets or even the standards of corporate governance in firms. If the largest passive funds end up being the majority stakeholders, shareholders in non-publicly traded funds, these worries might have different implications. On the other hand, during this time, the asset management industry has also seen great opportunities as well. With the emergence of niche focus areas such as ESG investing, climate finance, growing opportunities in private markets, and other areas. These challenges and opportunities have been impacted by this recent pandemic we are in the midst of, and hopefully coming out of it soon. While on one hand, it has dramatically sped up innovation and growth through digital channels, and on the other hand, as we stand today, the world faces an uncertain economic future with varying rates of expected economic recovery in different countries across the globe. As countries looked to emerge from this global pandemic and associated economic impact, corporate leaders across the asset management industry need to adapt to a variety of changes that have impacted the global business during this pandemic, as well as political, social, public health realities across the different countries. We have three excellent panelists who are joining us today from around the world, to discuss these and more issues surrounding how the asset management industry is looking to emerge from this pandemic. It is my pleasure to introduce them to you. I would like to introduce Deborah Bannon, who is the head of institutional distribution and consultant relations at BNY Mellon, who is joining us from Hong Kong. Deborah, hello.
Deborah Bannon: Thank you, Debarshi. Hello.
Debarshi Nandy: Hi, welcome, Deborah. Sanjay Sachdev, who is the former CEO of Tata asset management in India, and currently the chairman of ZyFin Holdings, who is joining us from New Delhi in India. Hello Sanjay, welcome.
Sanjay Sachdev: Hello, Debarshi.
Debarshi Nandy: Perry Traquina, who is the Chair of our asset management board at Brandeis International Business School, alumni of '78. Former CEO and chairman of Wellington asset management in the United States, and currently the Director at Morgan Stanley Allstate, and eBay. Welcome, Perry.
Perry Traquina: Thank you to Debarshi, morning everybody.
Debarshi Nandy: Good morning all. Deborah, if you could turn on your video. There we go. Great. Thanks. I would like to start off by asking each of our panelists a question on, what their current thoughts and interests are in the asset management blog, and what you think might be the main geopolitical challenges facing the industry as the world emerges from this pandemic. Are there any particular trends that we should look forward to, or any issues that we might worry about. Deborah, we could get started with you.
Deborah Bannon: Okay. Thank you. In my role as head of institutional distribution for the Asia-Pacific region, I am covering a lot at a very diverse client base across very diverse regions all the way from Australia through to North Asia in Southeast Asia, the one thing that I guess has been very interesting for us to consider here is how some of these really large asset owners have gone thinking about the impact of the pandemic on their portfolios. What that means for the, in terms of their longer-term strategic asset allocation, does it mean they need to reconsider more opportunistic allocations to things that they may not have considered before? If so how did they address the issues of being able to do due diligence on new managers, in a world where nobody can travel and portfolio managers are unable to visit the Asia region. What we have seen, particularly, if you'd have asked me probably back in January before this really impacted us on a global basis, was much more risk on environment. Very quickly became much more a risk of environment. Asset owners had to quickly think and they had to rely on their asset managers or their asset consultants, of how they were going to protect their portfolios. As it's going on, and in as being prolonged, the thing that we're seeing is they're realizing the traditional diversification in their portfolios hasn't really helped them to a certain degree, to protect on the downside. Obviously, this is a downside no one could have considered at the beginning of the year was going to happen, and the impact it has. Some of the larger asset owners we've seen in the region have certainly taken advantage of that. They've taken advantage of the dislocation in markets, and they've done very well out of that. Others have taken a very hands-off approach, decided that in the absence of being able to do any non-virtual type of due diligence, that they will stick with the existing lineup of investment managers. It's really been a bit of a mixed bag, I don't think there's been a particular trend. There's also been clearly now as this is very prolonged, we've seen, or certainly from my perspective in terms of investment firms that we represent in the region, we are seeing more demand for ESG. I think it's been heightened or highlighted that it's not only something that is for the greater good, it's also something that is a huge risk mitigator in this current environment. We've definitely seen increased demand from asset owners across the whole of the Asia Pacific region, and we have also seen some of the larger asset owners that looking at private markets in a different way and increasing their allocations to private markets. Thank you.
Debarshi Nandy: Thank you, Deborah. Perry, what are your thoughts in this?
Perry Traquina: I think the pandemic in some ways, hasn't changed several of the trends that were pre-existing coming into 2020. Debarshi, you mentioned several of them that the shift to passive pressure on fees, revenue pressures, cost pressures, the shift to alternatives privates. These trends were existent prior to March of this year and are likely to persist and like other industries the pandemic has probably accelerated certain trends and the ultimate impact on the industry I think is still to be seen but Deborah mentioned I hadn't focused on ESG DEI by institutional investors, work from home, how many of those folks will actually go back to the office is unclear. There's an opportunity there to rationalize expenses if you're large asset manager and find ways to be more efficient by shrinking your cost base via real estate. I think some of those trends are different relative to where we were coming into the year but for the most part I think the industry faces several structural challenges. It's mature, low growth and if you were running an asset management company today I think the trends were in place coming into the year or still the trends that you need to be focused on over the next five years.
Debarshi Nandy: Thanks Perry. Sanjay from your vantage point what do you think?
Sanjay Sachdev: I think that there's a little bit of both from what Perry and everyone said. I think that there's clearly been disruption the pandemic has brought in some element of disruption but a lot has not changed. These were trends that were continuing prior to the pandemic. If you look at ETF flows specifically from active to passive perspective. We've now seen the ETF industry wrote about 5 trillion in assets and this continues to surpass all expectations. The focus really is from an investor perspective to look at how they can access markets at a much more cheaper cost and a more efficient basis. While having said that I think that clearly from an asset management industry perspective this disruption is leading to what you would say is more opportunities in some ways in terms of trying to look out for more outside of their comfort zone and look at other markets to see how they can expand their scope. Disruption can be positive and negative I think in this case it looks it'll probably be a lot more positive over the years to come in terms of global integration.
Debarshi Nandy: Great I want to pick on one of the ideas that just came about. Deborah you mentioned about many fund managers given the absence of due diligence. The ability to do due diligence properly have relied on their past holding and all their past experience and gone with those that focus. Do you see that impacting performance going forward in time?
Deborah Bannon: Potentially yes if I'm being nice to a certain degree and part of that is the fact that and I'm, I'm speaking purely from what I'm seeing in the Asia Pacific region with the asset owners here. Part of that is that potentially asset allocation decisions were intended to be made to improve overall portfolio returns over time have not been made, they haven't changed, they haven't diversified they may have caused a little bit of concentration risk there within their portfolios as well.
Debarshi Nandy: Perry and Sanjay feel free to jump in at any time. What do you think this might have an impact as we look to emerge from this? Do you think there is a greater possibility of active managers coming in to take advantage of the current situation or to build strategies that might basically be dependent on the emerging economies and what I mean is that the different rates of development or the different rates at which economies emerge from this pandemic? Are there active strategies that might come up from that perspective that could help the active management site?
Perry Traquina: My two cents they are dollars, she's is always been pretty innovative you've had many industry formation, new company formation, new hedge funds have continued probably at a slower pace for the reasons that Deborah outline which is it's harder to do due diligence on a brand new startup when you really can't meet face to face or your disinclined to meet face to face but the industry is always had formations with people spitting out of they're all shop and creating their own firms and starting new. I don't think that necessarily has changed probably the dynamics around how that actually takes place today has changed because of the pandemic but I think that will continue.
Sanjay Sachdev: I think that to some extent Perry's right, absolutely, but I think that emerging markets by nature of their being are more inefficient. Active fund management can probably play a significant role comparatively but having said that, you are already seeing an influx of passives and not just passives but I think more alternatives and quantitative styles of management. I think this is going to continue for a relatively longer period of time but if you take a much more shorter term view of the justice you are alone. I think this year has been very devastating for active fund managers because it's has made difficult for them to beat the indexes and I think across the board not just in the US but also in emerging markets.
Debarshi Nandy: We have our first question from the audience which brings up the issue of the global supply chain, the risks of which was exposed during the pandemic and whether or not what impact might that have on strategies going forward for the asset management industry. Deborah, do you want to talk about, I mean, a lot of our huge part of the supply chain, I guess depends on China and goods flowing in and out of China. What what do you see or what do you think about the situation there that might have an impact?
Deborah Bannon: Yes. I think obviously it's highlighted the fact that if you rely on any one country as a key manufacturing center, it is going to potentially cause some issues. Obviously the ongoing US-China tensions have been something that will continue regardless of the current pandemic environment. Note to me, I think if I was looking now from a perspective to actually not reassess supply chains and whether or not, you could look to other countries. I mean, what we're seeing in Asia a lot has been, some of the smaller emerging markets that are benefiting from this. Maybe countries like Vietnam or Cambodia, etc. which I don't think is a bad thing. Do you think going forward, clearly, China is a force to be reckoned with? I don't think people will naturally just not consider whether or not China is their key manufacturer and whether or not they can trade with the country going forward. I think there's going to be a big fall out in that.
Debarshi Nandy: Thanks, Deborah. Perry.
Perry Traquina: If I could just add on that point. To follow up on what Deborah said. I think this is less pandemic really but I think the trade tensions and all of the tensions between say, the US and China have created a certain level of uncertainty regarding, how do you invest in China? Are companies exposed for bands or tariffs? We've seen what happened with TikTok. There has been talk about heightened audit standards for chinese companies in the US and whether or not they'll be allowed to actually be listed on the New York Stock Exchange and other Exchanges. I think all of that uncertainty is actually bad for markets. I would hope that some of that under the new administration would be ameliorated so that investors can go back to worrying about fundamentals as opposed to some of these political issues, global issues that theoretically could be quite damaging to some of these companies on a go forward basis. We are not talking about small companies, we're talking about large market cap stocks that could theoretically be impacted by this tension. I think that has been exposed here and probably creates risks and uncertainties for investors investing in some of those companies on a go forward basis.
Debarshi Nandy: Great. One of the things Perry, I also wanted to touch upon, I think all of you have mentioned actually, that there are opportunities internationally in terms of active management. In your view, as we go forward where do you see the equilibrium headed towards? Is the trend of movement from active to passive? Passive is going to dominate going forward or do you think that the managers would become more international and more globalized in their view as we go forward?
Perry Traquina: The trend that you just heightened the shift to passive. I mean, we're really talking about equities. Active equities versus passive equity. That's where the brunt of this has taken place. And I think last year was the first year on record where in the US mutual fund industry, the amount of assets in passive ETFs surpassed the amount of equity assets in active funds. That was a first that's likely to persist. The shift will continue but I think what we're seeing is, in addition to that there's been almost what I would call it a bar-belling, where institutional investors are shifting a significant portion of their risk budgets away from active equities, say to passive. At the same time they're shifting that risk budget to private markets. Whether that's private equity venture, real estate and all of the idiosyncratic risk that theoretically go with that plus liquidity risks because if your money is tied up in a 10-year fund, you expect to get paid for that because you have less liquidity. So that bar-belling, I think is what we're seeing from that. If all of your business or your AUM is in US active equities, you're fighting against the stream today. Your only option in even the hard one is to find a way to gain market share within a shrinking pie. If you're a diversified global manager, then there are other areas of opportunity. We've talked about ESG investing, we've talked about privates. Wealth creation in Asia is continuing at a pretty high rate to the degree that you can access those markets through the efforts of Sanjay and Deborah. There's a significant opportunity for growth there. I would say overall it's a mature industry but within the industry, there are several pockets of growth that you can pursue in order to get above the fray in order to produce above average growth. Even the largest asset manager globally, BlackRock, looking at the most recent results, that even a given their size, which is the largest, they have been able to produce organic AUM growth in the mid to high single digits. Which is quite extraordinary given their size. There are opportunities that exist but I think a backdrop is one of maturation and then managers needing to find vectors for growth of which there are several and trying to position yourself in some of those streams of growth.
Debarshi Nandy: Great. You referred to the potential growth in the Asia Pac region and Deborah and Sanjay, I would like to get your views on this. Just yesterday I saw an article in the Financial Times that mentioned that over the last decade. The number of people with well greater than 50 million in Asia Pac has gone up to about 46,000. That same number was about 15,000, about ten years ago. Currently, that is greater than that in Europe, which is around 32,000. The US is higher, still at double that around 90,000 and. The trend in Asia Pac has been this dramatic growth. What do you see both in India's South Asia as well as in Southeast Asia and China about how this trend is going to continue going forward? Sanjay, perhaps we can start with you.
Sanjay Sachdev: Sure. She's sitting in New Delhi, I can tell you that as Indians generate more wealth, there is a much more larger appreciation of the fact that they need to look at more of their asset allocation, more from a global perspective rather than just from Indian perspective. The government of India has opened up the market for Indians to invest overseas and with a small little window of about $250 thousand per year, per person, and we've started seeing, this target about five years ago, and last year, they had about 22 billion grow outside of India, in investments primarily in the US markets. This year that's substantially going to be higher. But you will coming back to what you said, I think that this whole active passive thing, it's not just specifically one against the other. Because there is a lot of opportunity for innovation, who could have thought five years ago that you could invest only in cloud computing, for example, or you could invest only in an automated vehicles or specific sectors, the growth of thematic investing is something that catches the eyes of the millennials a lot more and Gen-Z, and I think that's really what's driving things. Also, the ETF business is really a mix, is getting more and more into a mix of active rather than passive. There's a substantive growth, I think one of the fastest-growing areas for BlackRock today is the active VTF business actually. What we are seeing is that this disruption leads to innovation and I think from a cross-border perspective, specifically in South Asia and Southeast Asia, I'm sure Deborah had probably also can validate the trends, but there's a very big shift in terms of investors wanting to invest more into the US. Also the fact that because of these cheap trade relationship issues with China, there is a significant opportunity for US investors to start looking at diversifying and not just focus largely on China risk alone. There are opportunities to invest in other markets such as Vietnam, Singapore, Malaysia, India, and Southeast Asia.
Debarshi Nandy: Thanks Sachdev. Deborah?
Deborah Bannon: Yeah. I agree with everything Sanchez, just said, on the subjects of adjusting the growing wealth. I think that will continue, I think it's a trend that we work to see continue for a number of years. I can tell you where the money isn't going though. The money is not generally going into passive, the risk appetite of Asian retail or high net worth investors is much higher, and where we're seeing a lot of capital flowing to now, if you look at some of the broad reach data, for example, that's come out over the last year or so. It will show you that those retail flows are going into higher yielding asset classes, and in particularly into private markets. The Asians have always owned, always been bidding property anyway, but definitely on the private market side. Just on the topic that you mentioned before on passive versus active, I used to be an investment consultant at Mercer before I joined BMY. Investment consultants for many different reasons, do not believe in this trend that passive will ever overtake active for a number of reasons. I certainly don't see that happening in the Asia Pacific region. Not anytime soon. I think there has been a time and a place for it, but if you look at most large institutional asset owners portfolios across the Asia region, it's generally more like a 10 or 15 percent allocation that they make to passive versus active. You get a few exceptions that kind of skew the numbers. If you look at New Zealand CPR, GPIFs, people like that, then you're going to see that they have a much larger passive book. But I think there's a place for both in the portfolio. But if we go on in a minute and I'm sure we will talk about things such as ESG. That becomes a much more difficult conversations to have this, how do you fully and effectively implement ESG in a purely passive portfolio?
Debarshi Nandy: I think that's a great segue into talking about ESG, climate finance and the rest of it. There has been a trend all of you have talked about it. Where do you think that there are, opportunities here that one should or funds are focused on or that funds should look into. Lets also bring up on the table the definition of ESXi as currently defined. Is that the right way to go forward or do we need to drill down even more and really look into it critically. Perry, what do you want to start us off on this?
Perry Traquina: It's a broad umbrella, I guess, I think you need to try and tease out some of the aspects of that. Let's just focus, for example, on the G e-governance part. I think the large institutional owners of assets now are demanding certain principles, guidance or guidelines, policies regarding governance that all publicly traded companies will at some point need to adhere to or pay attention to it. Whether Board of Directors is sufficiently diverse, whether a company is sufficiently diverse in terms of its senior leadership team, philosophies, policies on how do you compensate leadership CEOs, whether a CEO should be both Board Chair or NCEO, these are all aspects of governance for many years actively discussed are focused on. But today, I think every board room, of a publicly traded company, is paying attention to these and making sure that they're doing their best to be on the right side of these metrics with respect to governance. Then the other two aspects of ESG, what's was focused on climate, environmental. I think there's a whole vector there for growth with respect to not only how you do research, how you think about investing, what are the risks associated with making investments in certain sectors or certain companies, I think all of this is now getting much greater attention and then funds will be created and had been created in large asset managers have created groups focused on this growth vector. I think this is just really the beginning. And I think it will permeate many of the conversations that investors will have going forward, and it certainly will occupy many conversations that publicly traded companies will have with respect to all of these metrics, because they are now being monitored and evaluated by not just a small group of investors, but increasingly a very large group of investors, including by the largest index providers who have all created, views and publish views on ESG and expect that the companies that they now own of which they own significant portions of will adhere to. I think this is a very important and big trend and one that we should all be paying attention to.
Debarshi Nandy: Great. Let me also get in an audience question that came in related to this. China recently opened the bond market for international investors. What is your views on managing risk given with regard to corporate governance, regulatory risk, and financial reporting of Chinese companies, and does the opening ultra provide an opportunity of Chinese local investors investing internationally, globally? Deborah, why don't we go to you, perhaps you can give us your views on ESG also, and talk a little bit about the China market and what it means for them opening up.
Deborah Bannon: Yeah, sure. Just to start with the SGI, everything that Perry had said is true. I think everyone is focused now not purely just on the governance and it used to be ESG brewer, a big focus on it. But what COVID has taught everyone or all investors, is that there needs to be much more of in focus on the environmental and the societal impacts. It's companies that are paying attention to those that are rapidly going to outperform and manage risk in the long-term. Definitely a trend that we see continuing as it relates to the China and asset management industry IPnote. Things have definitely improved. I've been in the asset management industry in one way or another, either as an asset consultant or in the asset management world, out in Asia for the past 25 years. When people first started looking at investing directly into China equity or China bonds. I think there was a lot of concern, especially around governance and for all the reasons why I'm aware of and that being talked about. I think things have, as China's starts to actually become more internationalized and they're looking to seek more investment from overseas. They've realized that they had to take note of some of the issues around not only ESG and governance in particular, but also what they do on CSR, corporate social responsibility in areas such as that. Even to the degree that they are now finally, looking at diversity and in a different way. I think it'll still take time for some of those issues to really play out, but I think over time, obviously they will. The other side of it is clearly international firms being able to operate in China this year alone. In another year. I think if we haven't had an environment like we've had co-varied happen. The market opening measures that China has taken this year alone would have gathered a lot more attention internationally than they have given this k1 environment. I mean, the measures they've taken, like allowing foreign asset managers to take a majority share in a joint venture up to a 100 percent. I think things like that you haven't really seen before. But what still hasn't really played out and what we haven't seen is obviously the China wealth, the retail high net worth investors, and what their reaction is to those wholly foreign-owned enterprises launching locally domiciled funds, and how popular they are, visibly the lightly damped sound funds that the Chinese asset management plans. As a way to gun.
Debarshi Nandy: Thanks, Deborah. Sanjay, what are your thoughts in particular, if you could touch upon from the perspective of Indian financial markets and how he or she is playing out there.
Sanjay Sachdev: Well, I would like to second a lot of what Perry you talked about. I think that the focus is really on gender rights and on making sure that there is a separation of responsibilities and so on. But I think that it's a little too early if you ask me, because even though ESG is very, very popular right now in the asset management world and everybody's talking about it and a lot of articles written on it. It's still work in progress because there's a lot of metrics that need to be defined and standardized so that the standards are still not in place yet. I think that you have the principle of principles of responsible investing, that the UN Charter and so on. But that's just the beginning. I think that in countries like India, specifically the g of the ESG is extremely critical. I mean, from an environmental perspective, India, just last week announced the Indian government announced that they had actually surpassed the Paris Accord Agreements in terms of meeting those targets. So comparatively, even though India had quite a bit of time to actually enter the Paris Accord of units, including China, which was just one of these part of it in 2030. But having said that, I think there's still a lot of work that has to be done on the governance side as far as India is concerned. I think that it's a little too early the fallacy that remains, and I think that's something that we have to all do something about is to remove this fallacy that because you are investing in ESG, that doesn't mean that you're not going to get market-related returns. Because ESG can give you also market-related return. So investors should not feel that just because they are looking at trying to do good for society that giving up something in return. Because that's not true.
Debarshi Nandy: Absolutely. So it can't be financially profitable as well? Absolutely. Correct. Okay.
Deborah Bannon: I think just on that subject, I think one of the key things that we're seeing, and this is probably on a global perspective is the more focus that goes into ESG and there is continued focus both from a retail on an institutional level. The more challenges the industry is facing. Because funds that are labeled ESG and not necessarily ESG, there is a little bit greenwashing going on here. I think a lot of that will obviously be sorted out over the next 6 to 12 months, especially as regulators or taken a much more active role now. In saying defining ESG parameters and what it means to fund managers across the world.
Sanjay sachdev: But there are, there are practical, practical issues because if you look at, say for example, I give you one example of Korea. There are less than three companies that have more than one Bueller woman board member, as far as Korea is concerned. So it becomes very difficult to find equal rights, gender rights, you know, those kinds of things in countries like Korea and others. So I think it becomes very difficult for an ESG Portfolio Manager to find the right businesses to invest.
Debarshi Nandy: Perry before I come to you, let me also, there's an interesting question from one of our audience members. So that touches upon this point about ESG and financial returns and links that to pension fund investments. Given that there are some funds have a so sort of like an implied, guaranteed or expected return component to it. The belief or the fallacy, Sanjay that he mentioned that he has by investing in ESG or kind of giving up a portion of your financial expected return. Do you think that might have an impact as impatient investors or potential investors? Or do you see that happening going forward? Perry, why don't we go back to the broader question than any thoughts you might have on the discussion we just had on the Asian markets as well.
Perry Traquina: I think Sanjay and Deborah covered that quite well. I guess the point I'm making is that this trend, I don't think is a fair. I think this is going to be with us for a while. I think it's going to be persistent. I think the expectation surrounding ESG with respect to regulatory bodies, for example, the PRA in the UK is very focused on climate risk. So all companies will need to be thinking about their impact on the environment that is not going to go away. I think increasingly you'll see that in the US as well, and that's from the SEC or the Fed, and so I think this is going to be persistent. It's unclear whether it has an impact on returns. I mean, we're talking about a very short period of time. I used to say when I was running an asset management firm, that the only way to really know if someone can add value or not as over a decade or two. But, you know, let's take fossil fuels. I mean, if for some reason fossil fuels as a sector and it hasn't been but did quite well for a period of time. I would guess that that would be a drag on all ESG investing investor returns relative to say just a broad index. But I just think this is going to be persistent and I think all publicly traded companies are going to need to have thought this through increasingly and have, and they will have to be thoughtful about ESG and their companies. So I think this is going to be part of the fabric of investing for quite some time.
Debarshi Nandy: Great. So in the interest of time, I do want to get in your, you know, I want to ask each of you to perhaps make one prediction or make one what your expectation is about the asset management industry for the next five to ten years. Any trends that you think might be coming up and that we should be paying attention to Sanjay why don't we start with you.
Sanjay Sachdev: Debarshi, I think that really in the middle of a very, would say that tectonic shifts in terms of global integration because the future really lies in Asia and don't have growth rates for the industry. I think that on the other hand, Asians wanted to find ways and means of accessing and investing in the US markets. So I think that you're able to see a lot more of a mesh and an opportunity for US fund managers, for Global fund managers to entrench themselves a lot more and be that very difficult markets. I think there has a lot more experience with that. But to access these markets is not easy. It's not going to be just looking at just institutions because it's really the real juices from focusing on high net worth individuals and the retail market. I think that the Gen Z and these countries, Gen X, Millennials are all very, very aspirational by nature, and they're looking at what's happening with global trends. So I think that this is going to lead to a lot more opening of the markets. If you look at the largest customer base of Facebook in the world is not the US, it's India. The second largest customer base for Amazon in the world. Amazon invested $25 billion, isn't India today. It could be China, but China's been uploads market. So I think that it's created a certain opportunity because of the mass numbers of people and the middle income people and wealth that is being generated in these markets. It's going to be a natural fit for asset management businesses to look at these markets.
Debarshi Nandy: Perry, What are your thoughts?
Perry Traquina: One trend that we really haven't talked about, which I think will be much more prevalent over the next five or ten years is I think the industry is going to consolidate. We have a mature industry. Typically what happens with mature industries that you see consolidation the asset management industry remains one of the most fragmented industries on the planet. So, given some of the trends that we've talked about, you know, fee pressures, cost pressures. Firms wanting to either expand their geographic footprint or gain access to new product vectors, whether that's alternatives or something else. I think it's probable that there will be significantly more merger and acquisition activity in the industry over the next five or 10 years. Some of these large firms look to grow, look to rationalize, typically when there is a transaction today, you see a summer between five to 15 percent synergies realized between the two companies in terms of the entire cost base. I think in an industry that is going to be lower growth, mature or we're talking about growth rates in the low single digits. Just like we've seen in the banking industry over the last 20 years, there's going to be in all likelihood, significantly more consolidation in what has historically been a very fragmented industry.
Debarshi Nandy: Thank you Perry for that insight. Deborah.
Deborah Bannon: Interesting. The one thing I was going to say was some consolidation. I absolutely agree with the apparent. We've seen it already, we've seen quite a lot of consolidation, especially with some of the larger firms. I think we're continuing to see my view five,10 years out is that there will be too distinct there. There will be the large global asset managers that have acquired or merged with others and just become bigger and have more capabilities. Then they're still probably be a place for the small niche firms, because I do see obviously areas such as private markets growing significantly over the next few years. Some of those smaller private equity firms, private credit, alternative credit hedge fund shops, maybe will continue to be able to operate on their own way. But the picker will just keep getting bigger.
Debarshi Nandy: Right. So one of the final question that I think we have a few minutes left and we have a question from one of our listeners about the rise in AIML usage in the asset management industry. I guess we did not touch upon it. But I guess there is a huge opportunity. I mean, what do you feel about that? Deborah do you want to comment on that?
Deborah Bannon: Yeah. I mean, I can start from an agent perspective and obviously being very close to China. We are seen that absolutely have to look at the significant right and especially during the COVID pandemic environment. I think it's highlighted it even more, the face-to-face contact has obviously ceased. But people are still looking to invest assets, especially in the retail high net worth market. The use of online wealth platforms, Fintech, digitalization, it's huge and the Chinese have been one of the best in early adopters of that technology. We saw it with Alibaba, Tencent, never seen it with subsidiaries of there's like New International in Hong Kong. You literally have to just click on your app, You can buy stocks, bonds, funds, everything you want, all online at low fees and I can see that trend definitely growing. In fact, as a large global asset manager, it's something that we're talking about at BNY Mellon to see what type of technology we need to be integration into our process right now so that we're not left behind.
Perry Traquina: I think you're coming also was sort of the utilization of AI and machine learning, big data in the investment process, at least. That's one thing that I've thought about it and you do see this. I'm not sure it's universal today across all of the large asset managers, but increasingly and I know this is true at my own shop at Wellington. There's now a pretty large group that's dedicated to this. So you have traditional, fundamentally oriented investment teams that are looking at companies and valuations, but they're increasingly being supplemented by inputs, either quantitative inputs or big data mining inputs that may at the margin reveal some interesting trends or information that will affect some of your investment decision-making. So I to think this is a an important trend on the investment side of a house that is increasingly taking hold.
Debarshi Nandy: Sanjay.
Sanjay Sachdev: Yes. I agree with what Deborah and Perry mentioned. I think that it's largely permeated the hedge fund industry. To a large extent, we've been seeing a lot of AI driven quantitative, long-short strategies being marketed in Asia and South Asia specifically on that basis. But I think it's something that will trend and will continue to grow.
Debarshi Nandy: Great. Thank you everybody. We are almost out of time and I would like to thank everyone for joining us as well today. Before we close, perhaps one of the things that I wanted to quickly summarize given this discussion and your thoughts is, there is a lot of ideas that they will be global integration going forward and consolidation going forward in the asset management industry. Along with increased usage or increased focus on climate science, ESG and other niche investments in the private markets, innovation on natural language processing, artificial intelligence and big data applications in the space as well. Very quick reactions from you. Perhaps we need one more hour to discuss the impact of what regulation might be on all of these issues, right? Because it has global integration and have regulators there. Consolidation, you have regulators there, use of non-standard prophecies you have a whole set of regulations there. Very quick reactions. What do you think? How should our regulators reacting to this in real time? Or is there something that needs further thought it to and further discussion? Perry.
Perry Traquina: It's a highly regulated industry already. Whether it's here in the US, the SCC, the Fed, but it's also highly regulated and many of the mature markets around the world, Hong Kong, Singapore, Australia, UK, I mean, it's very highly regulated. I think there'll be new vectors though for regulation and for guidelines. I can see that evolving in terms of disclosures regarding ESG and things like that, that could be imposed on publicly traded companies. But I think for the most part it's already a highly regulated industry. I know many of these large firms have significantly large compliance department, legal departments, I don't think that's going away and that there will be likely some new vectors for regulation going forward or disclosure that will be required.
Debarshi Nandy: Sanjay.
Sanjay Sachdev: I would second that I think that the cost of operating an asset management business, the largest cost of operating an asset management business is really that applies these now. In fact, that combines the fibers and multitaskers manager businesses is larger than even the back office for that matter, in some cases, or equal to that. I think that specifically your question, I think regulators are behind occur relatively more reactive and they haven't yet caught up with the ESG or whether it's with a lot of the trends that you see in total global integration. There really isn't a cohesive. What do you would say that regulatory framework out there or whether can you take a Japanese Fund and say for example, market that in Singapore. Okay, you take a US fund and market that. There's a lot of hurdles and that a lot of regulatory compliance to be able to do something like that.
Debarshi Nandy: Deborah.
Deborah Bannon: Yeah. Absolutely agree. We are definitely in a highly regulated industry already and we are all seeing that on one hand, the regulators are starting to step up. They're issuing circulars, they're issuing guidelines around ESG, around sustainability or labeling your funds sustainable. They're issuing circulars around, for example, electronic data storage and things like that, that we probably didn't have several years ago. But on the other hand, I agree with Sanjay, sometimes there is a bit more reactive rather than proactive.
Debarshi Nandy: Well, thank you. Thank you Sanjay, thank you Deborah, thank you Perry for joining us and thanks everybody else for joining us this morning. We will be sending out a short two-minute survey following this event and your feedback is important to us and will help us improve these virtual as well as hopefully in the future in person events as we continue. Have a great day and good morning and good evening to everyone. Thank you.