The asset management industry has undergone fundamental change in recent years amid increased regulations, geopolitical uncertainty and market volatility, to list just a few of the challenges faced. This article
outlines some of the themes likely to drive behavior among
asset managers during the remainder of 2016 and beyond.
The global financial crisis triggered significant change in how business is conducted throughout the investment management value chain. Time and resources were diverted away from core investment activities towards business risk management, cost reduction,
client demand, reporting and related matters. Now, eight years on, while these things are still on the agenda, we hear in daily interactions with our current and prospective clients, a more positive theme - that they are increasingly focused on core investment
activities and looking to grow their businesses. The challenge is: how?
As the primary consumers of investment data, the front office must manage, analyse and act upon data from a broad range of sources to make informed investment decisions. In an environment where latency leads to lost opportunity, it will become more
and more important for the front office to have position and transaction lifecycle information available, accurate to the second, across all asset classes and markets. Why? Because the competition either has this capability already or is working towards it.
Additionally, it will be increasingly difficult for the front office to work in isolation. Firms that can immediately gauge the risk ramifications, performance implications and P&L impacts of their investment strategies will have an advantage over those who
cannot integrate external metrics into front office activities in a timely manner.
As asset owners look beyond the mainstream, so alternative investments will continue to take up a larger proportion of assets under management (AuM). Consequently, portfolio management capabilities needed to manage them will become more sophisticated.
Some will look to new markets, while others may choose to invest in instruments with potential to offer better risk-adjusted return than traditional securities, such as commodities or insurance-linked products. But while new may equal opportunity, it may
also mean lack of experience, structure, and system support.
Diversity of assets being managed means diversity of data sources, which will ensure that
data management remains front of mind. Availability of accurate, consistent and timely data of all kinds – transactional, reference, market – is obviously essential for operational efficiency, management oversight, client support and, not least, regulatory
reporting. However, every additional data source or store increases the complexity of the information landscape and so makes such availability harder to achieve.
And heightened market volatility, which most market participants agree is likely to remain with us for some time thanks to ongoing geopolitical uncertainty, will only exacerbate the data management challenge as stakeholders require more information
more quickly. In rapidly changing markets it is important that investment management firms can easily understand the impact on their exposures, as clients will request immediate updates on their holdings and senior management need to assess business risk.
Meanwhile, personnel in operations or portfolio management need to be able to absolutely trust their data to avoid expensive mistakes.
On the subject of data, this year we also expect to see more concrete application of
big data in investment management. The use of sophisticated data analysis tools on large data sets, looking for patterns in data to provide new insight, offers tantlising opportunities for differentiation and improved alpha. Some quant-driven hedge funds
took the lead on this before the term “big data” was coined – with sustained high returns using sophisticated in-house built tools. Some of the emerging big data solutions of interest to asset managers in particular are in behavioral finance and the use of
social media as complementary risk factors.
It shouldn’t be a surprise in light of all the above, and in light of events such as the near Grexit, Chinese markets meltdown and upcoming Brexit vote, that good
risk management practices will stay at the top of the buy-side’s to-do list. Regulators are increasingly asking for full transparency of data and models used in risk and regulatory reporting calculations by financial institutions. Investment managers
need to know the details of their risk measures so it is essential that models and processes are well documented and validated. They will also need to demonstrate and document why individual instrument types were covered in each model.
Much of the above would be naturally thought of in a traditional office context. However,
mobility is another trend that has been evident for some time, albeit that it perhaps has still to really take off for the complex and highly regulated workflows in the investment management industry. Most investment management professionals today access
their systems from just one location, their desk, and have to rely on offline reports and management information when away from their desks. The proliferation of smartphones and tablets with limited but effective user interfaces is raising expectations. We
believe that this year interest in true mobility will start to grow substantially.
The lack of mobility of core systems impacts investment managers in several ways. Consider how many times you check your smartphone or tablet over the course of a day. Now imagine if you could do the same for core business processes and data. Today you
probably frequently go into meetings armed with printouts, PDFs or spreadsheets with exported data, all of which is offline.
Of course it’s not just asset managers who expect to be increasingly mobile – it’s everyone, and that includes asset owners. We also expect
digitalisation to become increasingly the norm throughout 2016 and beyond. Asset managers must deliver a very different digital experience if they are to remain relevant in the future. The trend towards investor empowerment is fueled by two factors:
first, investors expect to be provided with the right data whenever and wherever they want it; second, digital is rapidly becoming the de facto form for everyday communication and transactions. The availability of easy-to-use, dynamic, online mobile tools
will become commonplace. There is also a growing trend for institutions to adopt these digital tools internally, empowering client services teams to be more productive and cost-efficient when creating presentations, client meeting packs, pitchbooks, and other
And finally, yes, it hasn’t gone away… new regulation. A plethora of regulations are set to affect asset managers over the rest of 2016 and beyond, leading them to make operational changes to their front and back office processes. These include the
central clearing requirements of EMIR and Dodd Frank, with increased margin requirements for non-cleared derivatives. These are going to affect firms’ collateral management processes with a trend towards tighter integration between the front office and a firm’s
collateral management and administration system.
Beginning 2018, under MiFIR, buy-side firms will be required to trade liquid assets on electronic venues, demonstratring increased transparency of costs and commissions associated with their clients’ transactions. Under this regulation, firms will have to
report all of their trades to an Approved Reporting Mechanism (ARM). Similiarly to EMIR, buy-side firms can outsource this reporting to their broker but they will need to provide them with many more data points than those required under EMIR. For this reason,
and to avoid any reporting errors, many firms may choose to connect directly to an ARM.