1. Outsourcing shifts to the front office
The outsourcing conversation has tended to focus on cost reduction in the middle and back office processes. No more—it’s coming to the front as well. Open source analytical and code libraries are proliferating, and access to the massive amounts of data created by the online world is increasingly open.
This entails a declining dependence on armies of in-house coders and data scientists, and a greater use of ready-made tools and external resources. This will have critical implications for portfolio managers who will have to become fluent in this world.
2. Active management becomes active ownership
As volatility reasserts itself and 10%+ annualized equity returns become a distant memory, managers will define themselves not just by what they invest in but by how they invest in it.
Managers looking to make a compelling case for how they can outperform in difficult markets will begin to shift from an active management to an active ownership mindset, where the typical holding period is more like eight-to-ten years rather than the traditional one-to-three. This longer-term, “private equity-like” investing approach will help differentiate those managers who can credibly frame their value proposition in this way.
3. AMs look to “greenfield” to tackle the technology drag
Outdated core asset management technology architectures make even simple upgrades unnecessarily difficult, costly and unrewarding. Asset managers are reaching a crunch point. Fed up with the traditional incremental approach, some will heed lessons from the banking sector where greenfield tech builds are now well-established, not only with newcomers but, increasingly, with incumbent players.
At the heart of a greenfield approach is the data integration layer which allows AMs to plug into a wide range of third-party services and applications, which makes the time and costs of building and operating only a fraction of maintaining the legacy system. We expect the combination of continued top line and cost pressures to lead to a few initial greenfield AM builds in 2019.
4. Moving forward by moving back: monetizing data analytics
Hundreds of millions of dollars have been invested in building data science teams and advanced analytical capabilities. There have been successes. For example, some firms have improved the conversion of sales leads by 20-30% by applying smart data analytics in distribution. But that’s the exception.
For most, the ROI of these investments has been limited. Many firms have yet to figure out how to translate these capabilities into improved decision-making across the organization. Instead of pushing the boundaries of analytical sophistication, firms will take more of a “back to basics” approach, re-focusing their efforts on detailing clear uses, getting better business engagement, updating core workflows and data models, and designing solutions for front line users, not for data engineers.
5. Democratization of the separate account threatens traditional mutual funds
Advances in technology are making it possible to offer separately managed accounts (SMAs) cost-effectively at much lower AuM levels. The benefits of SMAs include customization, tax/ESG overlays and minimizing the liquidity drag inherent to fund structures. Tech-enabled SMAs will make these benefits increasingly available to the mass market and, eventually, to DC plans via customized Target Date Funds, threatening those that are overly reliant on traditional fund structures.
6. Asset managers: Late again to regulatory reform
Many asset managers underestimate the impact of the LIBOR transition. They will be affected by changes not only to the instruments in their portfolios, but also to their benchmarks, performance targets and valuation models.
The challenge is exacerbated by global divergence in timelines and the type of LIBOR replacements being proposed. Regulatory pressure on banks and insurers is already high, and we expect the AM industry to come under growing scrutiny. We expect asset managers who have not already done so to scramble to get transition project teams up and running.
7. Diversity moves up a gear
The argument for diversity in asset management is no longer about proving the business case but rather that “it’s the right thing to do”. Asset managers need to lead by example if they want to promote change in their investee companies. There is engagement and energy on the ground and, crucially, support at the top, and that feels like progress. But the numbers do not show much improvement.
To turn the dial, leading diversity players are explicitly stepping up their company’s and individuals’ goals. We have seen some holding managers adjust pay, while other firms are setting targets for under-represented groups. We expect more asset managers to do the same, with the aim of making the industry and the investees more diverse, inclusive and attractive places to work.
8. Stewardship – whose responsibility is it?
ESG awareness is rising. But there are still large unanswered questions for the asset management community. What exactly is stewardship and what form should take? What role should passive capital play in providing stewardship, and who is going to pay for it?
And how can stewardship responsibilities be extended to both short-term and long-term providers of capital? We are at an inflection point where some asset managers are going to step up significantly and show leadership in answering these questions. Society will increasingly recognize and reward them for doing so.
9. Building business resiliency: Growing importance of cyber security and non-financial risk management
Cyber, technology and data privacy risks are increasingly important for asset managers by virtue of increasing regulatory pressure and asset owner expectations. Yet, most asset managers struggle to identify and prioritize their most important non-financial risks; erect suitable controls against infrastructure disruptions, compromised systems, and misuse of sensitive client data; and deliver reporting that enables effective business decision-making.
In 2019, we expect cyber security and enterprise risk management will be key priorities for asset managers, as they seek to improve their capabilities to identify, protect, detect and respond and recover from key risk events.
10. Bridging the valuation gap
With the recent significant drop in market capitalization for stand-alone asset managers, potential sellers of in-house asset managers may be inclined to reduce their price expectations. This effect may be greatest for small players without distribution scale or product breadth, making them much cheaper and potentially more relevant targets.
Many banks and insurers see their captive asset management unit as a potential token for monetization in case of a crisis. As the value of this token is declining, potential sellers may be more inclined close a deal, leading to increased consolidation.
For more information or advice about any of the trends in asset management outlined above, contact a member of our dedicated team.