The year 2018 witnessed several industries adjust to the ‘new normal’, where unpredictability was rife, particularly for the asset management industry across the region. The three underlying themes that become predominantly prominent are technology, efficiency and doing the right thing.
Outsourcing shifts to the front
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 readymade tools and external resources. This will have critical implications for portfolio managers who will have to become fluent in this world.
It is early days, but some GCC asset managers are moving to algorithmic trading which requires advanced analytics, and a few pioneers are exploring artificial intelligence or machine learning to identify investment opportunities.
Active management becomes active ownership
As volatility reasserts itself and the 10 per cent annualised 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 equitylike” investing approach will help differentiate those managers who can credibly frame their value proposition in this way. GCC private asset managers are still focused on shorter time horizon. SWF on the other hand are increasingly being active investors using their scale and clout and taking an ownership mindset.
Asset managers 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Outdated core asset management technology architectures make even simple upgrades unnecessarily difficult, costly and unrewarding.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 asset managers 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 asset management builds in 2019. As leading GCC asset managers reach critical scale they indeed look at new greenfield IT solutions to leapfrog, especially for those who have not yet invested in expensive legacy systems.
The opportunity is clearest for SWFs who have assets spanning all continents, asset classes and management style.
Moving forward by moving back: Monetising 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 per cent by applying smart data analytics in distribution. But that is 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 organisation.
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.
For asset managers, it is mostly centred around account/client/sales management where leading players are developing real time dashboards and client analytics. For SWF the opportunity is to better steer through advanced analytics what can be very complex portfolios.
Democratisation of the separate account threatens traditional mutual founds
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 customisation, tax/ESG overlays and minimising the liquidity drag inherent to fund structures.
Tech-enabled SMAs will make these benefits increasingly available to the for doing so. This is a huge theme but especially for SWF and national holding companies where they also have a national agenda and a public image goal.
Building business resiliency: Growing importance of cybersecurity and nonfinancial 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 prioritise 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 cybersecurity 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. Cyber is key in the GCC where there have been multiple high-profile attacks in recent years and SWFs especially invest to ensure the confidentiality of their most sensitive information and deal making is protected. This is a big focus area.
The valuation gap
With the recent significant drop in market capitalisation 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.