Volatility to Value in the Investment Industry

In a series of live webinars hosted by the Financial Times in partnership with State Street, this virtual event gathered investment leaders to discuss the operational impact of the pandemic to date, and the lessons learned to weather the storm and plan for the move from volatility to value.

The business of investing has been hit hard by COVID-19. Not only has the pandemic severely rocked markets, prompting a potential recession, it has also presented asset owners and asset managers with unprecedented challenges in managing risk, liquidity and operational resiliency.  Against this background, and facing into an equally uncertain outlook, how are institutional investors reacting and what should be their next steps to ensure they are prepared for the road ahead?  

LESSONS FROM THE CRISIS: Managing risk and building resilience in investment operations

• The crisis has been an unprecedented stress test for business continuity. Relationships with suppliers and partners in investment operations are now under more scrutiny than ever as institutions ask if, like Goldilocks, they have too many, too few or just enough partners for the new way of working.

• Cyber security is now a huge concern as more and more systems and processes move to remote sites and to the cloud. Phishing attempts have become more sophisticated and investment institutions are doubling down on their efforts to manage the risks of having hundreds and possibly thousands of satellite and home offices.

• 90% of an organisation’s assets are its employees, and work life has changed beyond all recognition.  To ensure creativity is maintained and to be a better place to work, asset managers and asset owners will have to decentralise their decision making, empower their workforce and build more flexibility into their way of working.

• Environmental, social and governance factors have shot up the agenda since the crisis began.  Responsible investing is fast moving from an idea to a belief, and as it becomes normalised it will likely define the winners and losers of tomorrow.

INSOURCING VS. OUTSOURCING: Finding the optimal model for investment operations

• The pandemic has affected how investment organisations think about outsourcing vs insourcing, and hybrid models.  Its sudden arrival had an immediate effect on businesses, testing their systems, processes and competencies, and the strength of their relationships with external partners and suppliers.

• Communication with outsourced suppliers has become critical in recent months. Providers have become more aware of and involved in client operations and are looking to be the ‘secret sauce’ for customer success.  Clients are performing much more due diligence on what they need from service providers.

• Outsourcing is about much more than cost savings.  In the current environment outsourcing of business processes and analytics can result in efficiencies in scale and as a way of exposing staff to new skills and tools.  It can also free up employees to work on core business functions.

• Services requiring knowledge and the ‘human factor’ are seen as core to the investment business and are, to a large extent, being retained in-house.  The client experience for investment institutions remains critically important, especially amid the current uncertainty.

SCALING-UP: Identifying new growth paths for institutional investors   

• Environmental, governance, and social factors look set to redefine the path to growth for investment institutions in the years to come.

• Data is now viewed as a major corporate asset by both asset owners and asset managers. How it is gathered, measured, protected, and leveraged will play a key role in future growth. Lack of data should never be an excuse for poor performance.

• The outlook on outsourcing is shifting as organisations seek out partners who can bring experience and expertise, enhance competitive advantage, and work hand-in-hand with investors as they seek scale and growth.

• Growth plans are being revised and refocused by the new working from home dynamic.  Investment organisations are now considering different models and work practices, and seeking out greater racial, gender and geographical diversity amongst the workforce.

• Artificial intelligence and machine learning look set to dramatically change the business of investment into the future, providing huge opportunities for scale and diversification.

CONSOLIDATION IN ASSET MANAGEMENT: Are we at a tipping point? 

• M&A in asset management is expected to grow in 2021 and beyond.  Though valuations are difficult in the current market, recent surveys suggest that around 50% of asset managers expect greater consolidation across the industry in the next 10 years.  The question remains as to whether firms need to be bigger to effectively compete, and how boutique organisations will fit into the evolving landscape.

• The key drivers influencing consolidation in the industry include increasing regulation, pricing and fee pressures, and product targeting. Profitability is also a major factor as margins look set to fall, despite a widespread increase in assets under management.

• More subtle drivers include the need for asset managers to adapt their operating model to reflect the changing demands of the business, particularly in terms of digitisation, disruption and distribution.

• The targets for M&A are likely to adapt to the market environment. While in the past the focus has been on acquiring capabilities in passive asset management, it is likely that future consolidation, particularly after the experience of the pandemic, will seek to capitalise on the opportunity to differentiate perhaps by moving into private and or retail markets, and/or to expand distribution networks.

• Value creation, incorporating financial and operational synergies, client retention, capability building and technological and cultural integration, is one of the most important measures of success for a merger or acquisition. Missing in the current environment is the face to face interaction traditionally key to executing a successful deal.

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