Trends in Portfolio and Asset Management

The COVID-19 pandemic has highlighted the potential for technology to reshape the finance and investment industry. Data harnessing, insights from analytics, automation, and personalized customer experiences are some of the initiatives that asset management firms have adopted to remain relevant in an increasingly digital world. Firms that cannot keep pace are at risk of becoming obsolete.

Today, investment and portfolio managers are engaging with clients in innovative ways not possible before. They utilize technology for client interaction through digital channels, organizing virtual meetings, handling queries through chatbots, building remote relationships, and providing customized reporting. Asset management firms that use technology to better client engagement are likely to grow faster and be more successful in the future.

Although automated gated processes remain pivotal for success, asset management companies are now looking for something more than speed. Companies need to manage their new and growing product portfolios for a more dynamic environment. The financial and money markets are no longer as stable as they were previously. The dynamics are shifting constantly.

COVID-19 has taught the world that change can happen extremely fast. In response, asset management companies must actively manage their product portfolios to be ready to change strategic direction when the circumstances demand it. The bottom line is to remain vigilant and move quickly when necessary.

The most relevant single metric in portfolio management has traditionally been return on investment. Recently, however, there has been a gradual shift from investment projects to product portfolios and from products to services. With asset management firms rethinking how to add and deliver the most value to their clients, they must also consider objectively measuring that value. The challenge facing many firms is how to shift toward a progressive model of adaptive portfolio management focused on value delivery while taking advantage of the traditional and agile approaches.

As digital assets increasingly become mainstream, asset managers are getting more inquiries from their clients about including these emerging assets in their investment mix. The bitcoin wave has altered how investors look at cryptocurrencies, marking a striking change from just several years ago, when digital assets were looked at with suspicion. But individuals seek to capitalize on the new frontiers, and portfolio managers will have to find ways to incorporate them.

As with any industry today, asset and portfolio managers must grapple with cybersecurity and risk management issues related to the security of customer information and their business. A breach or the actual loss of sensitive client and employee data can be disastrous to the reputation of an asset manager’s brand, not to mention a severe blow to clients’ trust. If investors are to continue working with an asset manager, the latest technology must be employed to protect sensitive data, including encryption and other security measures.

In the future, it will be critical to control asset management costs if profitability is to be maintained. That means adopting new technologies, particularly those that can help automate specific tasks that people previously managed. Also essential is acknowledging what an asset manager can do well and efficiently. The rest can be outsourced to those better equipped to handle it.

Managers should explore using robo-advisors and billing by the hour rather than charging clients monthly or annual retention fees. That will lead to a business model that allows the asset manager to control costs while passing the savings to clients in an increasingly competitive environment.

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The Growth at a Reasonable Price (GARP)

Investors looking for a good mix of growth and value would do well to look at the growth at a reasonable price (GARP) investment strategy. Popularized in the late 1970s by Peter Lynch, the famed investor, the objective of this strategy is to blend growth and value investing. Growth investing focuses on smaller or newer companies that have higher-than-average growth potential, while value investing is an investment strategy in which investors seek out businesses that trade at a discount to their estimated intrinsic value.

GARP investors seek to remain in the middle of the universe when investing in companies by purchasing equities that have above-average growth rates but trade at appropriate valuations that are neither too costly nor too cheap. GARP is an approach to investing in single stocks and should not be confused with a balanced portfolio of value and growth stocks.

The primary goal is to avoid the extremes of either growth or value investing. Under normal market conditions, this often leads GARP investors to growth-oriented equities with relatively low price/earnings (P/E) multiples.

The price/earnings growth (PEG) ratio is a fundamental formula for calculating GARP prospects. The ratio calculates the balance between growth and valuation by dividing its current P/E ratio by its earnings growth rate. The ideal PEG ratio is one or less.

For example, if a company's stock price is $100 per share, and its annual earnings are $10 per share, the P/E ratio is ($100/$10 = 10). If the expected earnings per share (EPS) increases by 20 percent this year, the PEG ratio is (10/20 = 0.5). This company is a suitable candidate for GARP because the PEG is less than one.

GARP aims to avoid the drawbacks or dangers associated with pure growth and pure value stocks. Growth stocks can be more volatile, falling as quickly as they arise. These growth firms can generate bubbles, resulting in significant losses for investors who acquired too late in the surge. In comparison, stock price appreciation in value stocks might take an extended period. These stocks may be fundamentally sound, but their stock prices may not reflect this, and it may be a long time before the market gains confidence in them.

GARP companies are stocks with high growth potential, but the stock market has not yet overpriced them. Investors seek the GARP middle ground to benefit from rising prices while avoiding the risk of a price crash.

However, GARP stocks can underperform growth stocks in a growth market and value stocks in a value market. GARP, on the other hand, can outperform these groups in mixed markets and over the long run.

When compared to either rigid value or growth investing, the hybrid strategy of GARP investing broadens the range of potential investments. GARP investors will beat the out-of-favor component in specific market scenarios where growth factor equities outperform value (or vice versa).

One disadvantage of pure value investing is that investors must constantly look for fresh ideas as low-growth companies approach their inherent value. This turnover can put decision-making execution at risk.

GARP investors understand that high-quality companies attract higher market values and pay a premium for growth in solid companies. The hybrid GARP strategy lets investors experience more predictable returns across market cycles by widening the investing universe to include both growth and value firms.