As someone who has worked in the global investment industry for more than 40 years, I have had a front-row seat to every major transformation from the early 1980s onward.
Yet even with over four decades of experience, I have rarely seen so many disruptive trends reshape the industry all at once.
If we had to summarize the current, ongoing transformations in a brief list, we might call them “the five D’s”: digitization, diversification, democratization, derisking, and decarbonization.
They are all connected, which has further accelerated the pace of change.
Digitization
The digital transformation has helped investors analyze enormous volumes of data in shorter periods of time, and thereby make faster, better-informed decisions.
Most notably, investment solutions powered by artificial intelligence have unlocked new insights about performance drivers across asset classes.
Global spending on the digital transformation grew from $1.9 trillion in 2022 to an estimated $2.5 trillion in 2024, and it is projected to reach nearly $4 trillion in 2027, fueled heavily by AI investments, according to International Data Corporation.
The AI revolution is really a data revolution, because high-quality AI outputs depend on high-quality data inputs.
To put it another way, the rise of advanced data and models has made the AI revolution possible.
Diversification
It has also helped investors differentiate and diversify their portfolios with alternative assets, including private-market assets.
Bain & Co. has calculated that private assets under management globally could increase from $25 trillion in 2022 to $60 trillion or more by 2032.
Private credit, in particular, has emerged as an increasingly popular asset class, with alternative providers of capital dramatically expanding their loan operations.
For perspective, the global private-credit market grew roughly tenfold between 2009 and 2023, and the total addressable market in the U.S. alone could exceed $30 trillion, according to McKinsey & Co.
Democratization
One key factor behind the growth of private assets has been the democratization of alternative investing.
Historically, private assets have been relatively opaque, which has made it difficult for investors to gauge their true value.
As the market has become more transparent, it has also become more accessible, and thus more democratic.
The same is true of wealth management: Greater transparency and accessibility have democratized an industry that previously served a much narrower segment of the population.
Derisking
Not surprisingly, amid a flurry of new challenges and opportunities, derisking has taken on a far broader meaning than it once had.
Today, risk management encompasses not only traditional financial risks, but also a wide range of geopolitical, regulatory, sustainability, and other risks impacting investments.
As my colleagues shared at our 2024 MSCI Analytics Summit, the risk team at a typical investment firm has evolved “from simply producing reports and analyses to becoming a value-added business partner who collaborates with the front office to enhance decision-making and portfolio resilience.
For huge numbers of investors around the world, derisking now extends to the financial impacts of climate change.
Decarbonization
While decarbonization has proceeded at different speeds in different regions, the common theme is that investors want to adapt their portfolios to address the physical risks of rising global temperatures and the transition risks of moving to a lower-carbon economy.
Despite the headwinds created by Russia’s war in Ukraine and the recent inflation surge, total climate-related investments worldwide grew from $674 billion in 2018 to more than $1.5 trillion in 2023, according to the Climate Policy Initiative.
In fact, a survey conducted by the MSCI Sustainability Institute and Stanford University found that more than three-quarters of institutional investors already consider climate or carbon emissions in their investment decisions.
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These trends are all being driven by the twin revolutions in data and technology. The proliferation of advanced and customized datasets has enabled deeper, more granular risk assessments in highly specific areas.
Meanwhile, AI-driven models and integrated platforms have made it much easier for investors to translate raw data into actionable intelligence.
Nobody knows how much the data and technology revolutions will accelerate or reconfigure the other transformations in the years ahead. But there is no question that the five D’s are remaking the face of investing across the globe.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
