Across the world, persistent low interest rates and a flattening yield curve are among common challenges faced by asset managers, banks and asset owners. They are also contending with trends that are reshaping the competitive landscape and outlook of the investment industry as a whole.
Speaking at a recent BNY Mellon event in Tokyo, Emily Portney, Global Head of Client Coverage for Asset Servicing at BNY Mellon, highlighted three trends affecting the global asset servicing sector: consolidation, outsourcing and investment strategy “barbelling”.
Consolidation can be seen through merger and acquisition (M&A) activities, particularly in the asset manager segment, which she said often leads to a consolidation or integration of service providers. But even without M&As, there is also a real desire from clients to consolidate service providers for efficiency and pricing power.
“Many clients are looking to, perhaps, go from 10 custodians down to five, or they are looking to take their fund administration, transfer agency and custody services and bundle them with one service provider to gain efficiency,” Portney said.
Outsourcing has long been present, but the trend points to it encompassing a broader range of capabilities. “Even some of the larger players who are performing fund accounting or transfer agency in-house are starting to feel the pressure and are looking to outsource,” she said, adding that it includes middle office activities, such as trade support, loan administration, derivative support and collateral management. “That is certainly the next frontier.”
Yoshio Okubo, Chairman of the International Advisory Committee at the Japan Securities Dealers Association, reinforced this point, noting that asset management goes beyond purely investing. “Asset Management consists of custodian services, legal and accounting services, tax, distribution and administration for clients,” he said. Scope for consolidation and outsourcing is clear. “We need to look at each individual component to integrate the business and offer a total solution.”
“Barbelling” of investment strategies is where institutional investors allocate at both ends of the risk spectrum—concentrating assets in passive investments, as well as higher margin alternative products, such as private equity, private credit and real estate – for better, more cost-efficient returns over the long run.
Portney noted that to help clients respond to these global trends, BNY Mellon Asset Servicing developed a business strategy built on three key pillars.
The first pillar focuses on enhancing the platform and core business services that clients rely on—that is, the traditional capabilities, like custody and fund accounting, upon which markets and stakeholders depend—to drive greater resiliency and operational efficiency. It is also about determining whether or not to expand into new markets, develop new capabilities or add to a product range: for example, workflow tools, NAV contingency, IBOR solutions and tokenization.
The second pillar is creating new digital experiences, essentially deploying faster, better technologies, including artificial intelligence and machine learning, to simplify processes, increase automation and get the job done more efficiently and with less risk.
The third pillar is deepening data management services to help clients aggregate, sanitize and manage the immense volume of data that firms generate internally and receive from third party sources, which can then be fed back to clients. There is demand for insights and analytics on, for example, upcoming settlement activity and cash flow that can really help clients make more informed business decisions and manage liquidity easier and more efficiently, said Portney.
“Digital and data are no longer something that you aspire to, they are critical to business management,” said Rohan Singh, Head of Asia Pacific for BNY Mellon’s Asset Servicing. He added that an open architecture platform for service providers can be effective because it prioritizes functionality and performance over competition with other providers. Building connectors with underlying data to provide greater efficiency and a better experience through a one-stop shop works well, he said.
Change may be the only constant, but the pace of change only gets faster. Looking forward, buy-side leaders must be ready to deal with the challenges that accompany change. At BNY Mellon, having a clear strategy that stays agile and supports innovation in technology and process to serve client needs runs central to embracing change and navigating the rapidly evolving market.