While most asset managers are accustomed to adjusting their strategies to meet market and societal changes, the last two years have sent even the most seasoned veterans into uncharted territory. Many were just starting their careers the last time the US saw rampant inflation and surging interest rates, and while the crisis of 2008 was seismic, it didn’t fundamentally change the day-to-day working lives of millions of people. But our present moment is delivering all three factors – and many more – as a once-in-a-century pandemic combines with other remarkable global issues and continues to create a rare breed of uncertainty and volatility, amid confusing and sometimes contradictory signals.
Some realities are clear, however. Asset managers can no longer depend on improving margins by increasing assets. Finding and retaining talent is more difficult. And it’s becoming financially unviable for even the largest firms to continually improve their internal analytical capabilities to keep pace with rapidly advancing technologies in data science.
To learn how asset managers are responding to these challenges and others, Northern Trust commissioned a survey of 300 CEO’s, CIO’s, directors of operations and similar leaders at global asset managers in the second quarter of 2022. One key revelation is that asset managers are increasingly interested in outsourcing functions across their entire office, to cut expenses, focus more on their unique core competencies, and create alpha. We sat down with three market experts from Northern Trust to discuss these evolving factors: Clive Bellows, Head of Global Fund Services (GFS) for Europe, Middle East, and Africa (EMEA), Ryan Burns, Head of Global Fund Services (GFS) for North America, and Caroline Higgins, Head of Hong Kong, Macau, and Taiwan.
What findings from the 2022 survey of asset managers do you find most significant or remarkable?
Ryan Burns: The major finding is that 50% of managers say their key priority over the next two years is creating greater efficiency, and 60% of them note that the pandemic experience has increased their likelihood of outsourcing. I think those are linked. This leads to exciting opportunities to expand through leveraging new technologies and outsourcing solutions with a partner like Northern Trust.
Caroline Higgins: Interestingly, on these issues, we’re seeing similar percentages from managers in Asia to those from Europe and the US. In a similar survey we conducted two years ago, the drive towards outsourcing remained low in Asia. But now those managers are becoming more aligned with the European and US mindset.
Clive Bellows: I saw the findings as an evolution from the last survey that we did in 2020, rather than any radical new directions. Being more efficient means managing costs better, so rather than focusing mostly on cost reduction, as the previous survey showed, today’s managers are seeking greater efficiency. And outsourcing plays an important role in that strategy.
Please say more about how strategies to drive growth have shifted.
Burns: In our current survey, the focus on operational efficiency was followed by cost, quality, accuracy, resiliency, and new asset classes. That’s a shift. In a prior survey from 2020, the focus was on increasing distribution, closely followed by regulation. Regulation remains a high priority, but the focus on data quality, creating operational efficiency and managing the expense side of the ledger came through loud and clear. We’ve gone from a pure revenue, distribution, and growth focus just a couple of years ago to focusing on the expense side, and ensuring that the firm has the right people, technology, and products to serve their investors.
Higgins: There’s a global shift in clients being more open to moving from internal fixed costs to more of a pay-as-you-go concept. They’re giving over some control to partners in areas like trade execution that they’ve historically kept in-house.
Also, the trend towards finding alternative asset types continues to gain momentum. Particularly in segments like hedge funds, we’re seeing expansion of investment options to include those in the digital space, such as cryptocurrency. Alternatives continue to constitute large parts of portfolios not just for our asset manager clients, but also our asset owner clients. And particularly in Asia, they’re gaining access to alternatives by using third party investment managers.
Clive Bellows: Even since we’ve finalized the survey, the economic environment has further forced investment managers to gain efficiencies and try to maintain their margins against a backdrop of falling asset values. And it isn’t just from markets, but also outflows from funds. So, they’re being pressured from a fee perspective on two fronts. That focus on expense management means that managers who, historically, were protective about doing certain things themselves are now opening their options to outsourcing these functions.
Let’s take a deeper look at outsourcing. How will asset managers use outsourced services differently in the new economic landscape?
Higgins: Historically, clients would come to us with a problem and ask for a specific solution. They’re now asking for discussions around holistic end-to-end models. More clients are asking, “What does the target operating model look like?”. That’s a shift in the discussions we’re having with clients.
While time to market has always been critical, the current volatility and liquidity challenges mean the timing to get returns is much shorter now. Finding optionality, and bringing solutions together in a very quick, agile form is vital to clients now. And they’re much more open to doing this in short spurts of delivery, as well.
Burns: Two years ago, more managers viewed mergers and acquisitions as the likely way to achieve scale and speed to market. Today, more view technology partnering and outsourcing as viable solutions to achieve these objectives. Asset managers today are taking a hard look across their whole office, front-to-back, and deciding what makes them unique in terms of providing value to clients – and they are open to outsourcing everything else.
That includes functions that, in the past, might have been a bit more sacred in terms of the actual operating model, such as trading. Today, a partner like Northern Trust can support outsourced trading through our Integrated Trading Solutions product set. We can also provide advanced data analytics to enhance these functions, given our relationships with firms like Equity Data Science, or EDS, and Essentia Analytics.
Bellows: I agree, we see asset managers sticking to their core competencies and then engaging outsourced providers such as Northern Trust to do the things that help them stay focused on those core areas. And that theme seems to have accelerated over the last year.
It’s important to remember that another main benefit in outsourcing non-core activities is future cost avoidance. Consider the money you’re not only going to save today, but in two- or three-years’ time. Because our industry is going to continue to evolve, and there’ll be new regulatory requirements and client requirements. Once you’ve delegated those functions to a partner like Northern Trust, you’re getting rid of that future cost exposure. So outsourcing is a future hedge, not just an immediate one.
How does data management figure in the strategic direction for asset managers?
Burns: The survey showed that data management held the most potential for outsourcing for managers. More than half said they would leverage tech innovations such as machine learning, artificial intelligence, and cloud technology to meet data management challenges. But there’s not one single answer for every client. For some, it may be partnering and outsourcing with a provider like Northern Trust. For others, it may be bringing new technology in-house. Either way, the survey shows it is paramount and front-of-mind for asset managers.
Higgins: Clients have data in many formats from many sources, held in many different applications. While all clients want the golden source, not all require the same solutions, as Ryan said. So how do you create effective data management solutions and optionality? This is where Northern Trust can work with clients in determining their needs and matching up the different options.
Data challenges are especially thorny when it comes to ESG…
Bellows: ESG presents a huge data challenge, as the playing field and regulatory environment is not yet fully formed or consistent across every jurisdiction. Of course, data is critical to evidence that you’re applying a consistent ESG approach, and the survey showed that managers would increase their ESG offerings.
Higgins: We talk a lot about that high-quality, look-through data on the ESG front. Outside of Europe, the US is just catching up and Asia is a little on the back foot in this space. We’re seeing a lot of push now from end clients, like pension funds and other institutional investors that must show they’re meeting ESG obligations. We see this as an opportunity to bring solutions to the table for these clients.
How can Northern Trust help asset managers and other institutional investors overcome these challenges and seize opportunities in ways that other firms can’t?
Higgins: One of our differences is that our approach is not about selling a solution. It’s a collaborative conversation about creating holistic, end-to-end solutions. This allows our clients to be clear about their strategy and their way forward and gives us the ability to work with them to determine the best result.
Bellows: Many smaller firms, who only do private equity for example, may be wholly technology driven. But the fintechs can only provide part of the solution for institutional clients. Asset managers still need traditional banking services and access to credit. And in Europe, they’ll need a depository.
Unfortunately, it’s easy for clients to get seduced by technology. But when you scratch beneath the surface, can the tech-driven firm provide everything that your fund will require? Does it have a proven long-term track record of delivery, both in terms of constant innovation and delivery of new products? Asset managers need to ask those questions before partnering with a firm.
Northern Trust brings all those capabilities as well as advanced technology solutions, with the pedigree of asset servicing. This can be vital to provide the necessary assurance to regulators that you are safe in terms of operational resiliency – and it’ clear that regulators will continue to pay more attention to not just how firms invest their money, but also the infrastructure that supports those investments.
Burns: The challenges we’ve discussed present real opportunities for asset management firms across a variety of fronts. It’s an opportunity to learn about new technology that can improve your operating model. And it’s an opportunity to go after different types of talent and advance your goals around diversity, equity and inclusion in terms of the types of backgrounds, thoughts and experiences that talent can bring into your firm. When managers look to explore solutions around new technology or outsourcing, we’re in a position to help, not driven by “meet us where we are,” but rather, “we will meet you where you are,” and be a trusted partner to help them best serve the needs of their staff and investors.
Learn more about new strategies to drive growth.
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