The Future of Asset Management

Reliance on data and analytics was identified as the top trend in asset management over the next 3‑5 years by both asset managers and asset owners. They feel the pressure to seize opportunities being created by big data and the technology that can be used to analyze it, including cloud computing, artificial intelligence (AI) and machine learning (ML).

For some, this focus on data may involve internal changes, while others seek outside support. Integrating data sources and improving transparency was cited by asset managers as a top priority over the next 24 months. But increased complexity of both data and its application are challenges. When asked what hindered their ability to extract meaningful insights from their data, there was little consensus. Instead, it appears a range of barriers exist.

New technologies – from machine learning to blockchain – may help, and were identified as another top trend in the survey. Greater and more expansive use of tech‑related tools was high on the list of spending and development priorities for both asset managers and owners. Greater emphasis on digital tools was also linked to areas respondents are considering for outsourcing opportunities.

Finding in‑house solutions is not off the table, though respondent groups differed in their approaches. Asset managers are looking to hire more specialist staff and increase spending on digital plans. Alternatively, asset owners are exploring partnerships – from cocreating new products to increasing reliance on their existing financial service providers.

Both groups are eyeing advancements in artificial intelligence as a potential solution for a variety of needs. For example, when asked what capability or technology they plan to develop over the next three years, 45% of respondents said AI and predictive analytics (20% and 25%, respectively). In fact, 67% of asset managers surveyed said they were already using ML/AI to drive change in their business.

At the same time, these trends pose a disruptive threat to asset managers wedded to older operating models as scalable and robust solutions are expensive, complex, require new technology and demand cultural change to implement.

Adapting the Front Office with Data Management, AI and Integration

For the front office, asset managers are looking to harness technology across the gamut of functions: including the full suite of analytics to portfolio management teams, providing insights around performance and risk attribution, deepening research and analyzing trends.

Most asset manager and asset owner respondents intend to employ AI and predictive analytics over the next three years, in addition to technologies such as cloud computing that can support the increased computing power necessary for adequate data storage and processing.

The main challenge with the application of advanced analytics, however, is an ability to integrate data from an increasingly rich set of sources in a way that will adapt to the front office.

In which parts of your organization are you looking to expand the deployment of data analytics and insights and digital capabilities/technologies?

Percentage of asset managers and asset owners planning to further develop capabilities in AI (56%), predictive analytics (51%) and cloud computing (41%) over the next three years.

How do you anticipate your priorities shifting over the next 1‑2 years?

Asset managers and asset owners recognize they cannot continue making incremental improvements confined to silos in their organizations. The volume, velocity and complexity of harnessing data is difficult to manage at scale, from the delivery of actionable insights to ensuring data flows cleanly and seamlessly through the back, middle and front office. Accordingly, 37% of asset managers identified integration of data sources and increasing visibility end‑to‑end as a top three priority over the next 1‑2 years.

A more holistic approach to analyzing, using and integrating data with new technology that spans the entire business is necessary and many firms are turning to service providers for full support. Similar proportions of respondents have plans to outsource or explore the outsourcing of data management infrastructure (26%) and data operations and/or analytics (29%). However, more than half of respondents (53%) already outsource both functions to some extent.

Implementation and Integration Challenges for Scalable Technology

The barriers facing asset managers and owners as they work to effectively manage their data are vast.

• Some 80% of asset owners agreed their biggest barrier to effective data management was the ability to obtain real‑time, high‑quality data that is reliable, complete and fresh.
• Alternatively, there was little consensus in asset manager responses. Though 37% of managers said integrating data sources and increasing visibility would likely be a top three priority over the next few years. When asked to single out their top priority, data ranked first – alongside introducing operating model changes. Overall, the challenges in data management appear to be scattered across the range of options, from technology limitations to incorporation of external data.

Similarly, managers do not face a single barrier in extracting meaningful insights from data. Perhaps the most uniform culprit was thought to be data complexity with 24% of those surveyed choosing it as the top barrier, closely followed by 23% selecting the inability to capture certain types of data or the lack of proper analytical tools.

The growing number of data sources and wider range of data types under analysis can complicate the generation of meaningful insights. Both asset managers and asset owners cite the complexity of data and the difficulties of working with unstructured data as major obstacles.

Companies based in North America seem the most interested in data management. When asked about strategic imperatives, 20% of North American respondents said creating a data management and governance model to support growth. This compares to 10% of those based in the EMEA regions and 0% of Asia Pacific survey participants.

Yet all three regions placed providing a better client experience and more transparency to stakeholders as a top three consideration over the coming year. Here, 40% of respondents in Asia Pacific placed a higher importance on transparency versus 32% in North America and 31% in EMEA.

Some 24% of asset owners believe that a data management platform would help them consistently extract insights from data, rather than merely manage it. A platform is one model for data management, but any solution requires digital and operational changes that present several challenges. Beyond the financial cost, these include integration difficulties with existing and legacy systems, where “half‑lives” are getting shorter as the pace of innovation accelerates:

In addition to integration difficulties with legacy IT systems and technology, firms need the right people to pursue their digital ambitions: 53% of asset managers and 28% of asset owners view recruiting or retaining skilled and specialist staff as a top priority for accelerating digital transformation.

Key disruptors: startups and fintechs

An overwhelming majority of both asset managers and asset owners (95%) ranked startups or fintechs as one of the top three disruptors in the sector.

To keep pace with these innovative solutions, service providers have concluded “if you can’t beat them, join them” – leading to the formation of alliances with fintechs or the onboarding of their solutions in‑house.

This approach is not reserved for service providers – 39% of asset managers reported plans to pursue third‑party partnership(s) with a fintech to accelerate digital innovation, with 22% planning to acquire a fintech to achieve the same goal. Alternatively, 61% of asset owners’ primary strategy for accelerating digital innovation is to cocreate new products or services with clients.

Growing interest in broadening use of ETF structures, alternatives and values‑based investing are just some of the identifiable shifts affecting players across the asset management industry. But product design is just one area of change. For many, tackling the twin influence of technological innovation and client demand is leading to greater outsourcing opportunities.

Values‑Aligned Investing Momentum Accelerating

Survey results highlight the continued focus on values‑aligned investing and ESG. Over 55% of respondents ranked full integration of ESG criteria as one of the top 3 trends in the asset management industry over the next 3‑5 years. When asked about expectations regarding their organizations’ offerings over the next 1‑2 years, the highest proportion of respondents (87%) anticipated increasing ESG strategies in general.

The strong interest in sustainability extends beyond ESG. Green bonds – debt securities used to finance sustainable and environmental projects – are also rising in popularity. Over 60% of asset owners expect to increase their allocations in the next 1‑2 years, while another 28% think allocations will be unchanged. For managers, 52% expect to see growth in green bonds, although 46% believe interest may have plateaued and will stay the same.

Balancing Customization Against Standardization

Nearly 90% of respondents have existing exposure to “customized client products,” such as direct indexing, and almost half of respondents plan to increase their exposure to the customized category in the next 1‑2 years. Nuances in data, reporting, regulatory and regional requirements are all factors that could contribute to the preference of a customized solution over a commingled fund.

Active management maintains its strong presence; the majority of managers expect allocations to active strategies – equities and bonds – will be unchanged over the next 24 months. Actively managed strategies may in fact see renewed interest. So, while asset owners are still turning to ETFs for index strategies, managers are increasingly offering active ETF strategies. In fact, almost half of the managers surveyed expect to see an uptick in mutual fund conversions to ETF structures.

Underscoring this smart beta/active ETF disconnect is the juxtaposition of asset managers, keen to launch products, and asset owners almost evenly split between adding and subtracting exposures. Over the next 12‑24 months, 44% of asset managers expect to increase offerings of active or smart beta ETFs; 47% expect no change. However, while only 34% of owners are looking to add more to active ETFs (37% plan to lessen exposure), passive remains more popular with 60% forecasting increased allocations to this area. This compares to just 19% of asset managers who think their passive ETF activity will increase over the next few years.

Liquid and Illiquid Alternatives Growth Story Continues

Asset managers and owners also differed in their views on alternatives. While asset managers appear more optimistic with rising interest in real estate, private credit and hedge funds, asset owners lean more towards infrastructure. More than double the asset owner respondents (68%) expect to increase infrastructure allocation versus those from asset managers (33%). Alternatively, while 42% of managers expect offerings in private credit to grow over the next two years, only 26% of owners are as sanguine.

The two groups do seem to agree on the likely increase in activity around private equity with 74% of managers and 62% of owners surveyed expecting growth in this area.

Nearly All In‑house Functions are Being Considered for Outsourcing

Respondents indicated that even core alpha generating investment functions are on the table. Some 60% or more of asset managers and owners continue to keep portfolio management and asset allocation in‑house with no plans to outsource – but notable minorities of 25% and 30%, respectively, plan to either explore outsourcing or expand outsourcing in these areas. Among the groups, asset managers are more likely to outsource in these areas than asset owners.

A larger proportion of asset managers and asset owners view other front‑ and middle‑office functions as the next frontier for outsourcing, often to tap into data and technology‑driven services to inform decision making and mitigate risk. Outsourcing some of the activities directly contributing to investment alpha generation potentially enables managers to concentrate even more resources on delivering client and stakeholder value and identifying additional outsourcing opportunities throughout the back, middle and front offices.

Front‑Office Outsourcing Opportunities

Research was identified as the most outsourced front‑office activity – some 80% of asset managers and 41% of asset owners may embark on or expand research outsourcing. Only 9% of all respondents do not plan to outsource research activities.

Forty‑five percent of asset owners already outsource trade execution of which 12% may expand it further, while 33% of both asset managers and asset owners who execute trades in‑house are contemplating outsourcing.

To sharpen their competitive edge, asset managers are demanding solutions that aggregate data from in‑house sources, third parties and their service providers for more actionable insights and valuable intelligence. More than 90% of asset managers have plans to begin outsourcing or increase their outsourcing of data‑related activities.

Forty‑five percent of respondents plan to streamline with a few best‑of‑suite vendors and providers to accelerate digital innovation. An additional 40% plan to increase their reliance on core financial service providers to achieve the same goal.

Middle‑Office Outsourcing Opportunities

The proportion of respondents open to outsourcing of the middle office varies by function, but the overall trend is toward more outsourcing in this area.

While the majority currently execute performance attribution and risk reporting in‑house and have no plans to outsource it, one‑third of respondents (32% and 35%, respectively) are either exploring or expanding outsourcing in these areas. Some 43% also currently execute investment reporting in‑house but are planning to explore outsourcing. Currently, regulatory reporting is evenly split between in‑house and outsourcing, but the majority of those performing this function in‑house could consider outsourcing.

Back‑Office Outsourcing Opportunities

The majority (76%) of respondents have already outsourced back‑office services such as fund administration and fund accounting, to some extent, though some 46% may expand outsourcing further – and 16% who have in‑house back offices are considering outsourcing them.

Asset Owners Want to Retain Management of Data

Yet asset owners show some resistance to outsourcing data operations and related data management infrastructure. Only 29% currently outsource their data operations and/or analytics functions or intend to expand them. Whereas 73% of asset managers are outsourcing these functions, and just over half intend to expand outsourcing arrangements.

While sizeable minorities of both asset managers (25%) and asset owners (33%) are exploring outsourcing their still‑largely in‑house data operations, a large subset of asset owners (38%) report they have no intention of outsourcing these functions, a claim made by only 3% of asset managers in this survey.

The same divergence between asset managers and asset owners can be observed in how these organizations approach their data management infrastructure. Almost two‑thirds of asset managers (63%) currently outsource this element of their operations, versus 42% of asset owners who do so. Moreover, almost as many asset owners (34%) emphasize the importance of keeping their data management infrastructure strictly in‑house and have no plans to outsource/explore outsourcing this part of their business.

Outsourcing in the Context of Operating Model Evolution Priorities

Outsourcing is one aspect of operating model evolution. While asset managers see opportunities for evolving operating models throughout or across the business, the highest proportion (39%) expect the front office to be in the vanguard of change.

Conversely, 48% of asset owners are still concentrating on the back office (versus 29% of asset managers), highlighting their focus on leanness and optimization of operational efficiency as they look to reduce costs. However, a significant share of asset owners (34%) expects the front office to drive the greatest change in their end‑to‑end investment life cycle over the next few years, further underscoring the growing awareness of game‑changing services, such as data analytics and AI.

How Outsourcing Dovetails with other Operating Model Priorities

Almost half of asset managers and 40% of asset owners say assessing the need for additional outsourcing to support their operating model will be one of their top three priorities over the next 1‑2 years, behind achieving scalability and resilience and accelerating existing technology programs. Of course, these three aims can be interrelated and complementary. Some respondents have explicitly linked outsourcing to technology upgrades. And outsourcing is being used to address a need for more specialized talent required for digital transformation.

Balancing and Optimizing Outsourcing Objectives

There’s no question the rapid pace of technology development is a major catalyst for outsourcing. The high value asset managers place on data and analytics – and the recognition that functions can be efficiently and effectively outsourced to service providers – must also be balanced between risk management and their objective for outsourcing: achieving scale in a cost‑efficient manner.

Outsourcing can also lead to consolidating vendor relationships. Nearly half of asset managers and 43% of asset owners view streamlining operations with a few best‑of‑suite vendors and providers as the most effective strategy for driving digital innovation and operational transformation.