Survey Finds Asset Managers Optimistic, But Change is Coming

Asset managers project future organic growth despite a host of challenges facing the industry, according to a Northern Trust industry study of 150 asset managers, conducted in partnership with Coalition Greenwich. The bank says the list of challenges is “extensive”, ranging from regulation, through rising interest rates and increased competition, to market volatility.

The survey finds that 84% of managers expect to grow, while 22% plan to implement changes to their operating models to achieve efficiency and cost savings. The white paper from the survey, however, finds a gap between the strategic priorities of asset managers and their appetite for structural changes that could prepare firms to meet the scale of future challenges.

In terms of assets under management, 27% of managers expect significant growth (over 10%), driven largely by Europe and North American firms, while 57% expect a slight rise (under 10%) and 14% expect AUM to remain flat. Notably, Asian asset managers were slightly more downbeat, with 33% of respondents from that region expecting flat AUM.

Performance remains the top internal challenge, with 59% of the 150 managers that took part citing this as their number one concern, while 50% cited talent management. Rising costs (44%), data management (35%), outdated technology (31%) and scalability (20%) were the other top concerns.

Away from firms’ internal challenges, the survey finds that market volatility is deemed the top industry challenge cited by 57% of respondents, while regulatory change hit 51% of radars. Shifts in client demands (34%), more frequent Black Swan events (33%), a prolonged bear market (26%), and competition from other long-only managers (19%) were also cited. Perhaps in line with the fears of a prolonged bear market, 10% of respondents cited competition from hedge funds and private equity as an industry challenges, the same percentage also saw a challenge in the cycle of market dynamics, namely the rotation from growth to value.

Managers plan to deploy new technology and implement more cost-effective operational approaches, which can be difficult to do in a contracting market

The top four priorities for managers in the next three years were new products or investment strategies, cited by 52% of respondents; followed by cutting costs and increasing efficiency (43%); improved sales and distribution (37%) and increase market share in current products (37%). New technology is at the heart of cost saving drives, with 63% citing this as their key tool in achieving greater efficiency. Interestingly, while 14% were looking at staff reductions, a further 14% saw the avenue being juniorisation – as has been seen in banking circles in recent years.

“Asset managers continue to face considerable adversity, and we commissioned this study to understand how the asset management industry is evolving,” says Grant Johnsey, head of client solutions, capital markets, Americas at Northern Trust. “Active, long-only strategies remain an important component in our clients’ investment mix. Information from this research can help guide our continued development of outsourced trading, investment operations outsourcing, foreign exchange and other solutions integrating the whole office to support the business environment of tomorrow for asset managers.”

Gerard Walsh, global head of capital markets client solutions, at the bank, adds, “Addressing the internal challenges facing managers will require skill and a diverse mix of capabilities to continue on their growth course. Managers plan to deploy new technology and implement more cost-effective operational approaches, which can be difficult to do in a contracting market. In the next phase of the cycle, it seems likely that firms will seek more ways to develop orchestrated ecosystems that support their alpha generation activity. We believe firms that assess their entire value chain of activities will benefit from recent evolution of traditional outsourcing models into new areas. This will help them deliver their strategic growth priorities.”

The key recommendation of the white paper is that asset managers take a holistic view of efficiency that includes outsourcing some or all processes and more deeply integrating the front, middle and back office of the investment organisation.

“While there are many unknowns in the current environment, one item asset managers control is their operating model,” says Stephen Bruel, senior analyst at Coalition Greenwich market structure & technology, and author of the report. “Rethinking and rebuilding with flexibility, growth and cost in mind can help bridge the gap between where firms currently stand and where they need to be.”