The New Normal: Why Traditional Investment Strategies No Longer Work

The new normal refers to the new market conditions that have emerged in the first six months of 2022. In this new market, traditional investment strategies like 60/40 portfolios and target date funds are no longer effective. Both investors and asse[...]

McKinsey on The Great ResetPhoto credit: McKinsey
The Great Reset is an opportunity to build a better world.

Looking ahead to 2022, both investors and asset managers are resetting their expectations for returns in a new environment. After a difficult 2020, during which the S&P 500 index declined by more than 20 percent, and fixed income declined by 10 percent, both asset classes are likely to see more modest returns in the coming year. Although market conditions are still uncertain, the overall outlook for 2022 is positive, with continued growth expected in the global economy.

In their annual asset management report released last week, "The Great Reset: North American Asset Management in 2022", McKinsey discusses a changed markets environment with three major impacts on the North American asset management industry. The first impact is the rise of digital-native asset managers. These firms have been built from the ground up to take advantage of digital tools and platforms, and they are starting to gain market share. The second impact is the increasing importance of environmental, social, and governance (ESG) factors. Investors are becoming more aware of the impact of their investments on the world around them, and they are increasingly looking for firms that align with their values. The third impact is the growing importance of data and analytics. As data becomes more readily available, asset managers are able to make use of it to make better investment decisions. All of these factors are likely to have a major impact on the North American asset management industry in the coming years, and firms that are able to adapt will be best positioned to succeed.

  • The asset management industry is poised for strong growth in the coming years, with North America leading the way. Industry experts expect assets under management to reach a record $126 trillion by 2022, representing 28 percent of global financial assets. This growth is driven by strong inflows and performance from 2021, and North America is expected to see the highest growth in revenues and assets under management. This growth is expected to continue, with North American asset managers reaching a record $526 billion in revenues by 2022.
  • Institutional and retail investors are under immense pressure as traditional investing paradigms have been upended. This has led many to seek out alternative investments that can provide stability and upside potential in these uncertain times.
  • The asset management industry has been defined by some key trends over the past ten years, including the internationalization of products and clients, growth of risk-on and leverage-oriented business models, and commoditization of bulk beta. However, the current investment environment has called into question the sustainability of these trends, raising doubts about the future of the asset management industry.
The Great Reset: North American asset management in 2022McKinsey
In 2022, North American asset management will be in a great reset. The industry will have gone through a period of major upheaval, and the landscape will be radically different.

Looking ahead, the report from McKinsey predicts that some long-standing industry trends may shift course in the near future. However, much is expected to stay the same in the meantime. This provides an interesting glimpse into what could be coming down the road for businesses and industries worldwide.

  • Active management faces challenges, but there is hope that recent market activity will help turn things around. So far in 2021, 55 percent of active equity managers have lagged behind their benchmarks, but this is still an improvement from 2020. With any luck, active management will make a comeback in the second half of the year.
  • Exchange-traded funds (ETFs) are poised to take over the investment world in 2021, with cumulative flows reaching a record $900 billion. A notable pattern to watch is outflows of active funds followed by inflows into corresponding ETFs, such as for tax loss harvesting. This trend is likely to continue as more and more investors realize the benefits of ETFs over traditional mutual funds.
  • Investors are searching for yield in an environment of low interest rates and are increasingly turning to private markets for opportunities. In particular, private markets strategies that are focused on yield and inflation protection are expected to be in high demand in 2022.
  • In the long run, sustainability is becoming increasingly important to businesses and consumers alike. In the short term, however, there is still some uncertainty around the rules and regulations surrounding sustainability. As data quality and standards improve, this will become less of an issue.
  • Preference for total portfolio solutions, rather than one-off investments, is growing in importance. This is because portfolio solutions offer investors a more comprehensive and diversified approach to investing, which can help to mitigate risk and maximize returns.

In its recent report, McKinsey concludes that the best approach for asset managers to manage today’s uncertainty is to build “all-weather” asset management platforms that are flexible, stable, and scalable. This recommendation strikes this columnist as most realistic for the already-market-leaders. Building all-weather asset management platforms will allow asset managers to weather any storm, so to speak. These platforms will be flexible enough to adapt to changing market conditions, stable enough to provide consistent performance, and scalable enough to accommodate growth.