Asset managers and owners alike have been grappling with managing costs and improving efficiencies through new technologies and, particularly in the case of Asian investors, outsourcing, according to a Northern Trust report.
According to the survey of 300 global asset management firms, 50% said that creating greater efficiency is a priority for operations over the next two years, and 47% said controlling costs would be a focus.
To achieve these priorities, 59% of these global investors plan to leverage new technology, 52% hope to refine and implement their target operating model, and 37% plan to outsource.
Asian investors, however, have expressed more interest in outsourcing than before, said Caroline Higgins, Northern Trust’s head of Hong Kong, Macau and Taiwan.
“Asia has lagged in outsourcing; they have had a very high reliance on very loyal, dedicated people versus technology. And I think this has shifted everywhere in the world, but also in Asia – away from the people and a focus on operational resiliency, target operating models, and the use of technology like data analytics,” she said.
She added that as investors around the world face common challenges such as a low-interest environment, and volatile markets, there tends to be more overlap in priorities across geographies.
“They have more commonality now about what they've got to focus on… They're not just focused now on returns and putting all their eggs in one basket. It's really around managing expenses, particularly fixed cost expenses, and being more open to sourcing multiple vendors, like a best-of-breed approach, or giving clients options or optionality,” she said.
While institutional investors in the past used to work closely with consultants, they now increasingly seek service providers directly, she observed.
“I think they're probably braver; they're probably more experienced now… Two years ago, they probably would have had those conversations directly with a consultant and sought their views, whereas now they're going more to the market.”
The investors’ focus on improving efficiencies was in part driven by the Covid-19 pandemic. Operational resiliency was obviously a concern in the past two years, but as the world moved on to a post-Covid environment, companies have faced fresh challenges such as employee retention.
In addition, a third of respondents felt that there is no longer a direct correlation between the size of assets under management and increased margins, putting greater pressure on firms’ bottom line.
Higgins said in the report that institutional investors have gravitated to cryptocurrencies, private equity and other niche strategies in search for revenue growth.
“Asset managers, particularly the hedge funds have been, the most active in crypto, digital assets, and private assets. And, generally, I think one of the challenges is that these are less regulated assets,” she told AsianInvestor. “For many of the asset owner investors, their investment mandates exclude these types of investments. And I think they also require very high level of specialisation that may not exist in all organisations.”
However, as regulations evolve, she believes these asset classes will become more mainstream as alternatives have. “If you look back 5, 10 years ago, people would say they wouldn't invest in alternatives, and now it's pretty mainstream. And we see allocations of 10 to 15%, as becoming more standard for the institutional space.”
The report also found that investors were looking at new technologies particularly in areas such as alternatives, emerging assets and environment, social and governance (ESG) investing.
“For example, advanced analytics can be used to streamline ESG data, allowing managers to quickly interpret a non-standardised and often confusing world. Data science can help identify where managers are succeeding, and where they are falling short,” the report wrote.
ESG data analytics has been in demand, especially so in Hong Kong and Singapore, where asset owners have been using third-party asset managers to achieve their ESG investment objectives, Higgins said.
But if you're investing in a unit trust, that can create quite a lot of challenges, because the client themselves really needs to look through the underlying investment, to make sure that they're meeting their objective, not just that the fund label that states that its ESG compliant,” she explained