CFA Institute’s mission includes the provision of innovative ideas to help guide our members through a rapidly evolving financial landscape. We generate and share those ideas through research efforts that we make available through the Financial Analysts Journal, the Future of Finance Initiative, and the CFA Institute Research Foundation. Not all investors are inclined, understandably, to pursue details of their profession to the level presented in some of these forums. But providing an overall understanding of the scope and subject matter of our research, however, does serve to inform all investors about the levels of expertise and innovation associated with our profession, and how investors might be better served by them.

As the investment profession continues to experience significant disruption—including the introduction of digital advice and the commoditization of asset management—we needn’t look far to find articles of significant interest to both professional and novice investors. In 2018, the CFA Institute Research Foundation published The Future of Investment Management by Ronald N. Kahn, managing director and global head of systematic equity research at BlackRock. Immensely readable, this book is an overview of investment management in three parts: its early history, current insights into the profession, and current trends with an eye to the future. The timeliness of the last part cannot be overstated, as practitioners and the investing public continue to grapple with the accelerating pace of change in investment and finance—and the impact this change has had on their lives.

Kahn’s book is a lively jaunt through the history of investment management, starting with its roots, 4,000 years ago, and moving through major developmental milestones, including the creation of the first public companies, the world’s first mutual fund (in 1774!), and the beginnings and evolution of big data.

Twentieth-century developments in finance are well known to investment professionals but less so to the public, although many people do know that more than one Nobel Prize has been awarded to the “rock star” leaders of our profession—including Markowitz, Sharpe, Fama, and Schiller—who have pushed the frontiers of finance forward. Here, Kahn demarcates the emergence of security analysis in the 1930s as the point where investing evolved from speculation to a systematic process—a discipline that has grown by quantum leaps and bounds in the last 90 years.

Kahn takes a rather deep dive into academics in a later chapter, titled “Seven Insights into Active Management.” This chapter is an exploration of the mathematics behind active management and whether alpha is possible or even exists—and it’s a nice refresher for investment professionals. For the more general reader, Kahn’s analysis will serve as an insight into how active management is measured, what its components are, and how difficult it really is. All investors should have some concept of active management when they choose the investment professional who’ll be selecting their investments, and should certainly understand what they’re paying for—and if they’re receiving value.

The chapter that should have the broadest appeal, “Seven Trends in Investment Management,” smartly summarizes the major forces shaping our profession today, and examines the likelihood that they’ll persist. These forces are widely covered by the media, and are known to all investors—even though they may not realize it explicitly. Kahn examines each of these trends (see below) and presents a list of his own research sources for those interested in doing further reading.

1. Active to Passive

   Active to passive indexing and the retail acceptance of ETFs are now mainstream and well documented.

2. Increased Competition

   Successful active management is becoming more difficult, so increased competition is considerably subtler. The ability to exploit market inefficiencies is further limited by the rapid dissemination of academic research and new regulations around the simultaneous release of material non-public information.

3. Changing Market Environments

   Kahn discusses the impacts, both positive and negative, of indexing and high-frequency trading on trade size.

4. Big Data

   Big data is potentially the most fascinating new area of development—“an explosion in data availability so vast that access is no longer sufficient. The edge now lies in identifying which data are useful and in analyzing and effectively processing them.” This trend, perhaps more than any other, will transform the way portfolios are managed and the investment solutions available to the public. To capitalize, investment firms will need to hire people with the requisite skills in statistics, data, and mathematics.

5. Smart Beta

   Smart beta isn’t new, but it has gone mainstream due to recent product innovation in the factor ETF space. What its impact ultimately will be is still unknown, as professionals are still learning to use these portfolio-building tools. It’s likely, however, that greater understanding of these vehicles will put further pressure on active fees as investors learn to distinguish alpha from beta and expect more from their active managers.

6. Investing Beyond Returns

   Kahn touches on the development of ESG investing goals, which reach beyond managing risk and return. The evolution of this field has accelerated lately with the big data explosion, adding rigour to measurement and product development in this field.

7. Fee Compression

Kahn examines the facts and causes of investment management cost reduction over the last decade.

He concludes the chapter by showing how the seven trends are interconnected, and extrapolates what he expects for the future.

I highly recommend you read Kahn’s book, so I won’t spoil the ending. I will say, however, that he summarizes in the final chapter, “The Future of Investment Management,” what he expects will happen next and the current and likely product response from our industry. For anyone looking for insight and opportunity into the field of investing, this research illuminates—both in leading the profession and in benefiting society—our mission in action.