As one of Ireland’s largest global custodians and asset servicers, Northern Trust works with investment managers around the world daily, helping administer their investments, supporting their operations and assisting in bringing funds to market. Through these activities we see at first hand the opportunities and challenges they and the industry face.
Perhaps more obviously today than ever before, asset managers who have built technology into their operating models are able to maximise efficiency and keep operations flowing smoothly even in times of crisis.
While we have yet to fully realise the impact the COVID-19 pandemic will have, readers of Finance Dublin will know that market conditions experienced in the first six months of the year magnified what had already been a difficult environment of escalating costs and fee pressures. At the same time, investment firms continue to face complex regulatory and compliance challenges, and growing technology demands.
Against this backdrop, we commissioned research surveying 300 heads of investment operations from asset management firms across Asia-Pacific, North America, Europe, the Middle East and Africa. The survey, Driving Growth in Asset Management, was conducted for Northern Trust by WBR Insights in the first quarter of 2020. Through the survey, we aimed to understand more closely how asset managers are seeking to drive growth, to inform our thinking as we continue to support their requirements.
Where are managers’ core areas of focus? When asked what their strategic priorities were for the next two years, controlling costs was named as being among them by 87% of respondents. This was closely followed by focusing on risk and compliance (86%) and supporting expansion into new markets (85%). Our survey results also demonstrate that 64% of respondents will look to achieve their strategic priorities by leveraging new technology, with 55% stating a change in the direction of product strategy as being among their overall strategic priorities and 41% citing mergers and acquisitions activity.
Driving growth in asset management requires more than finding new streams of revenue or reducing costs, and this is reflected in our survey responses. Noticeably, we see that many asset firms recognise the role technology plays in enhancing their operational efficiency. Perhaps more obviously today than ever before, asset managers who have built technology into their operating models are able to maximise efficiency and keep operations flowing smoothly even in times of crisis.
However, investing in next generation technology such as artificial intelligence, machine learning and cloud-based data management solutions comes at high cost. Firms should be mindful about how this investment will be balanced against the increasing pressures on their fee revenues.
Fund distribution and entering new markets
When asked if their firm was considering or planning to increase distribution, and if so how they planned it achieve it, 49% intend to do so by entering new markets. Continental Europe was seen as the area with the greatest opportunities for distribution growth at 31%, closely followed by the U.S. at 29% and the UK at 20%. When asked what products their investors sought, the majority of respondents said their investors preferred a regulated funds structure and domicile.
In order to maintain competitiveness, many asset managers look to increase their distribution by investing in new asset classes. When asked specifically about distribution strategy 46% of our survey respondents plan to launch new products in order to meet their distribution goals. As firms do this however, they may face the challenge that their investment management platforms are built with a single asset class solution in mind or they lack the servicing capability and expertise needed to support new types of security.
In such situations, outsourcing to a service provider that can offer support across the entire range of asset classes can enable firms to speed up their time to market for launching new products. In addition to fund servicing expertise, such providers can also provide the technological and systems capabilities needed to support new products.
When asked what products their investors sought, the majority of respondents said their investors preferred a regulated funds structure and domicile.
Raising assets is the lifeblood of asset management, and it is unsurprising that fund managers are focused on broadening their distribution, including looking to new asset types and markets for asset growth. Discovering new investors in previously untapped regions and adjusting their portfolios to meet these investors’ requirements has enabled many firms to increase their returns.
However, expansion must be carefully planned and well-executed or it can prove more expensive than originally planned and a drain on resources. Firms must carefully consider the cost/benefit calculations of market entry and develop a strategy to reduce the risks of rapidly escalating costs.
Managing regulatory requirements
The number and scope of securities regulations across the U.S., Europe and Asia continue to evolve and asset managers looking to increase distribution may struggle to keep up. When asked about their biggest challenges when launching new products, 50% of our respondents cited the regulatory environment. And when asked how their investment of time and money on regulation would develop in the next two years, 45% of respondents – the largest proportion – said it would increase.
One way that asset management firms may better prepare for complex regulatory requirements is to build a regulatory-ready operating model with processes designed to manage and quickly adapt to changes in the compliance environment. This can help reduce their risk, especially when designing, building and launching new products.
Regulatory changes can also be a key driving factor in whether asset management firms overhaul their legacy architecture to invest in next generation technology. This may mean working with providers of regulatory technology (‘regtech’) to automate tasks such as ‘horizon-scanning’ for changing regulations and the potential solutions that are available to support compliance with them.
When asked about their biggest challenges when launching new products, 50% of our respondents cited the regulatory environment. And when asked how their investment of time and money on regulation would develop in the next two years, 45% of respondents – the largest proportion – said it would increase.
Maximising efficiency through outsourcing
When asked about their plans to outsource business functions, 45% of respondents considered data management the function most likely to be outsourced. This was closely followed by back office operations (40%) and middle office/investment book of record (38%). When asked about outsourcing their trading function, 85% cited that they either already outsource this capability or were interested or planning to do so in the next two years.
Many asset management firms are increasingly realising the benefits that can be gained by partnering with external providers to outsource business processes. Outsourcing remains a key way through which small to mid-size managers can achieve operational scale and gain access to capabilities usually only available to the largest players – aiding efforts to maximise efficiency, realise cost savings and improve margins.
Our experience is also that by identifying functions that are ‘non-core’ (i.e. not of intrinsic value to their businesses) and outsourcing these to a third-party provider, managers often gain greater focus on the areas where they can add real value. In this way, outsourcing can aid managers’ focus on activities such as portfolio management and client service, and avoid being distracted by activities at which others may be more expert, such as trading.
In addition, while many firms have outsourced their back and middle office functions for many years, recently many have turned to the front office as a candidate for outsourcing. Outsourced trading has moved from being viewed solely as a defensive, cost-cutting measure, to a more proactive one aimed at improving margins, streamlining and future-proofing operations, while enhancing governance and control processes.
Capitalising on technology and data management
Today there is no shortage of data available to investment managers, and the task of managing changes to existing data sources or providers was ranked as the biggest challenge for asset managers when evaluating their data management. Consolidating data from multiple disparate internal and external sources was ranked second.
When asked how they would address data challenges in 2020, half of respondents plan to leverage new technologies such as AI and machine learning. 57% of respondents cited ensuring reconciliation activities are consistently completed to support the start of the trading day as their top challenge in supporting their front offices. 44% plan to improve decision support and analytics to address their challenges, while 43% plan to employ a component outsourcing strategy that leverages multiple providers to support post-trade processing.
Our experience is also that by identifying functions that are ‘non-core’ (i.e. not of intrinsic value to their businesses) and outsourcing these to a third-party provider, managers often gain greater focus on the areas where they can add real value.
Firms that fail to focus on incorporating data management into their operating models are at risk of falling behind their competitors. Implementing next-generation technology internally is an effective way to build on a pre-existing data strategy and IT infrastructure. However, before firms go down this road, their decision-makers should have a clear understanding of how this investment will impact their current technology commitments and operating model and how it can specifically help them to achieve their business goals.
Adapting for a successful start to the 2020s
2020 is a pivotal year for asset management firms and the impacts of the COVID-19 pandemic mean asset managers will face further challenges to those envisaged at the start of the year. From our survey we see that investment managers are most concerned about controlling costs in volatile markets, followed closely by risk and compliance issues and support for expansion into markets beyond their home country.
From our perspective as an asset servicer to global investment funds, we see how forward-thinking asset management firms are meeting these challenges by looking beyond outdated ways of working in silos across their front, middle and back offices to improve processes. Rather, they are considering their ‘whole office’ as an ecosystem that works together to deliver scale, efficiency, and flexibility across the investment lifecycle.
In uncertain times, those who adapt first are often those who succeed. While there are significant challenges ahead, we expect the asset management firms that view their operating models holistically will be the ones that succeed. As ever, agility and flexibility will remain crucial for success.