Tackling the new risks and challenges in a post-pandemic world for asset managers

By Maryna Cherenko 

Maryna Chernenko is Managing Director of UFG Capital

2022 has been anything but normal. We are nearing the halfway mark of the year.

Yet, we have already experienced global events that only happen once in decades and have set in motion a series of tectonic shifts that will significantly impact humanity in the coming years and decades.

For instance, we have experienced a pandemic and a war, there have been talks of deglobalisation and questions around the US Dollar as the reserve currency, and the possible end of the 40-year low-interest-rate environment and bond bull cycle.

These events have immense implications for the asset management industry, as decades-old financial maxims such as the 60-40 equity-bond portfolios may no longer be fit for use in the new environment.

Today, the waters are choppy, the fog is dense, and the conditions are unpredictable and volatile. Successfully navigating such an environment will require good risk management to come to the fore.

Traditional risk management methods no longer sufficient

Firstly, in the post-pandemic world, the transformation of how we go about our daily lives has only just begun.

There will be significant overhauls of global supply chains, global trade, and how we live, work, and play, and missing these monumental moves will be disastrous for asset managers.

In 2022, as the financial industry faces the challenges of evolving disruptive forces it has become clear that a paradigm shift in risk management. This change must mitigate the risks to organisations to allow businesses to take the acceptable risks to achieve strategic and tactical goals.

Besides being proficient in traditional risk management, the role of risk managers has changed and in today’s reality must take on a more top-down and strategic view of the world and industry to understand the transformational changes that are taking place.

The regulatory clampdown in China is an excellent example as it took so many investors, even local ones, off guard.

If we look at the following chart, the traditional figures such as revenue and operating profit will paint a very healthy picture of the Chinese company Alibaba.

However, despite growing revenue by 13x over seven years, it took less than two years for Alibaba’s share price to fall from a peak to a price even lower than the IPO price.

The next risk that asset managers must confront is inflation. There has been great uncertainty around how to deal with it, as the last time we had such hot inflation readings was more than 40 years ago.

A key concern is the skyrocketing oil price, as energy feeds into every element of human activity.

With global central banks now taking on a more restrictive monetary policy, there are many new risks that we have to contend with. For instance, there has been a profound effect on asset valuation.

Most asset managers also have not experienced a stagflationary environment.

Further, although central banks can impact demand, they cannot fix the supply-side issues such as energy under-investment and deglobalization which are key drivers of inflation.

Thirdly, ESG has evolved from a mere concept to a regulatory requirement that touches almost everything we do.

For asset managers, sustainability factors must be integrated into both the investment frameworks and risk management frameworks.

Thriving in the post-pandemic paradigm

The last two years of lockdowns and working-from-home have taught us that with the power of technological tools today, we can afford to adopt a hybrid working model that promises to raise productivity and improve the resilience of the business model.

Going further, asset managers should begin the digital transformation journey as early as possible and raise productivity without needing to increase staffing costs.

A digital infrastructure also connects teams and databases more intimately, allowing risk managers to keep a close eye on the pulse of the company. Asset managers can also build digital capabilities that provide customers with a seamless and customised experience.

Next, asset managers must look deep and craft creative solutions for clients to mitigate the impacts of inflation.

Beyond adjusting the asset mix to include natural inflation hedges such as real estate, commodities, and gold, asset managers can go deep and identify companies or sectors that are well protected against the scourge of inflation.

To navigate this new paradigm, risk managers must also examine every financial dogma, model, and portfolio management process to see if they are still applicable today.

Finally, with global ESG assets expected to surpass US$50 trillion by 2025, or one-third of projected total assets under management globally, asset managers must integrate ESG principles into every part of the investment process and company operations, beyond just using ESG as an exclusion checklist.

Consistent and refined methods of measuring ESG impact will also be needed to track progress better and avoid accusations of greenwashing.

Conclusion

The term VUCA – volatility, uncertainty, complexity and ambiguity – has never been more relevant today. If we may say, asset managers have had it easy in the past decade with low inflation and low interest rates.

Today, both inflation and interest rates are expected to remain high, while ESG requirements are only going to be more stringent. As such, asset management companies must start confronting these challenges before it is too late.