As we head into 2022, managers will be kept busy by a variety of issues, not just macro tailwinds that will start to reverse as Central Banks buy less debt and stimulus is withdrawn, creating a Adjustment in the accounts of the managers so dependent on the market beta that it has boosted flows despite a mediocre alpha. Also due to the challenges driven by a compelling need for greater efficiencies, diversification, regulatory demands and scalability.
A few days ago we analyzed advances in technology, more focused on robotics in the manufacturing industry, but the asset management industry needs to be much more active in this digitization and modernization process. The business environment is so competitive, with new players that are much more digitized than the traditional ones and in which concepts such as Big Data or Artificial Intelligence are helping to automate processes and channel disintermediation.
Digitization affects the industry across the board, and what defines cruising speed has been a context of low rates and margin compression, where scale is more relevant than before, and where the use of technology must be applied not only in the front but in the back, looking for operational efficiencies.
“And all this translates into investment in technological infrastructures to transform into entities with digitally integrated, transparent, secure and cognitive environments and from the perspective of the client, the new digital generations motivate changes in the expectations of omnichannel, flexibility, ease of operation, personalization …”, Javier Muñoz Neira, partner in charge of the Asset Management sector at KPMG, pointed out.
In the offer of the entities, the creation of new participants in the industry is observed, which are digital natives and do not have to go through a process of digital transformation, such as neobanks or robo-advisors, which grow a lot both in terms of assets and number of clients, with products and services with a time to market much higher than that of more consolidated entities and with more competitive costs, which have an impact on margins, forcing entities to face important technological investments not only in the front but also in the back that lead to operational efficiencies.
During the pandemic it was clearly seen that entities that do not have a sufficiently developed digital omnichannel strategy have suffered a lot. Many digital solutions are emerging to meet regulatory requirements, a value offer that increasingly demands the use of a large number of data that generate better results.
The increasing allocation to private and alternative markets increasingly challenge operating models of fund managers. As we have witnessed at the recent Asset Allocation Summit of Investment Strategies, strong activity is to be expected in 2022 in terms of allocation and participation in private markets, making it necessary to evolve appropriately in the operating models of managers to efficiently support said growth, as well as the hiring of specialized resources.
As pointed out Paul LaCoursiere, Global Head of ESG Investing at Janus Henderson, ESG investing it continued to accelerate in 2021 and we have started to see the reputational consequences for industry participants who get it wrong, knowing that there has been a notable lack of debate. Looking ahead to 2022, “ESG evidence will be a major focus and it will be critical to see increased debate that guarantees that the industry realizes its potential and avoids unwanted consequences”, the expert points out.
The ESG investing requires a large volume and complexity of requirements, with data that is growing exponentially, as is the Sustainable Finance Disclosure Regulation (SFDR). Regulators are increasingly holding agents to account in many areas, but notably it will be more around the greenwashing. It is to be expected that the market will undergo a bifurcation, “market players with rigorous and integrated processes will begin to differentiate themselves from those that have been able to exist behind the window to date,” adds LaCoursiere. Proper data management, in addition to having the necessary equipment, will cause more and more managers to withdraw or be excluded for not being able to corroborate their commitments.
Another factor to take into account and Moody’s highlights is cyber security. The rapid movement of technology, increased during the pandemic and the “home office” has increased the security risk for asset managers. The rise in ransomware attacks means they must work hard to put systems in place to help defend against this threat.
The fusions and acquisitions will continue in both active and passive managers. The last case was the purchase of Lyxor by Amundi, with the intention of gain scale and therefore be able to compete in channels and products. The pandemic also showed how those large and well-diversified managers with scale in all business segments were more resistant to market shocks than the smaller ones. Attractive cost savings and cash flow improvements via M&A will be powerful for some managers to combat structural pressures such as falling fees, growing demand for passive products and clients’ desire to do more with fewer providers. and multi-active solutions. It is easy to predict that the big insurers will make a move in order to increase their own competitive advantage.