Fixed-income markets are certainly different than they were 20 years ago—or even 10 years ago. Now, many of investors’ needs are the same. They want to earn a reasonable return. They need income. They want to do it without taking on a lot of volatility. But many other things in the marketplace have changed.
Firstly, we’ve had low rates for a very long time now, probably about a decade. And that does make it challenging to source returns for investors with reasonable risk. The other big change is that, historically, very high-quality fixed-income securities such as US Treasuries acted as an anchor to windward for equity holdings—meaning when equities were selling off, they did very well. So, it balanced your portfolio in a very nice way. That's much more challenging. Starting at these low level[s] of rates, you don’t get the same protection in times of volatility.
There are many advantages to the evolution of fixed-income markets over the past decade or so. One of them is the increased opportunity set that we can utilize for the benefit of our clients. One such example is in the emerging-market corporate-debt space, where corporations have issued about two and a half trillion dollars of debt. Now, to put that in context, that’s greater than the combined market value of the US high-yield and the European high-yield markets—the markets that people typically think of as high yield. Certainly China emerging as a bigger part of that universe is an important factor of that as well.
Another example of a growing market is in the ESG space, also known as responsible investing. It’s not just about the traditional metrics that we’ve been focused on for a long time as they impact companies and countries; it’s also about a whole new class of bonds, known as green bonds, that tie the proceeds to specific goals.
The evolution of the capital markets is just one part of the story. We’ve identified several megatrends in the asset-management industry as it relates to what our clients are going to expect tomorrow versus what they expected yesterday.
Clients want unified approaches to their portfolios. Gone are the days of slots and roles, where they take one investment here, one investment there, and try and put them together. They expect a very holistic approach to their portfolio to meet their needs, their wants, their objectives.
Clients want the ability to customize their investment portfolios based on what’s important to them. No longer just about the return and the risk, it’s really about meeting the needs of our clients.
Clients want more direct ownership of their assets. That means that there’s going to be less room for intermediaries and less friction. That’s also something that goes hand in hand with customization.
Clients also expect full engagement, alignment and responsibility around ESG. Whether that’s understanding the different ESG factors—be it the carbon impact of a portfolio—or us taking a very strong stand in engaging with companies and countries to do the right thing and only lend them money if they’re willing to do so.
Investors are setting a high bar for their managers, and rightfully so. We at AB have undertaken a major investment in digital technology over the past several years to address these needs. Cutting-edge trading and portfolio-management systems allow the right information to get into the right hands at the right time, to enable us to make better decisions for our clients. It also helps with transparency. It allows for portfolio optimization, such as tax optimization, without having a very manual process that eats up a lot of valuable human inputs.
The technology that we’ve developed enables us to build more robust portfolios for clients and lets our investment teams focus on what they do best—the strategic and analytical work, getting research into the portfolios. And finally, our tech initiatives aren’t, and they really can’t be, a “set it and forget it” type of approach. It has to be ongoing, continuing, learning, evolving, anticipating future market trends and clients’ needs. That’s what it means to be fully invested in better client outcomes.