Rebooting the global asset management industry

38 Rebooting the global asset management industry Middle and Front Office Outsourcing May Be Slower Since Covid-19, capital markets have been buffeted by geopolitical game changers like monetary tightening by key central banks, the worsening conflicts in the Middle East and Ukraine; and the US–China trade rivalry fragmenting the intricate web of supply chains after 40 years of the globalization of trade and finance. End-investors have been drawn into dynamic investing that marks regular departures from their strategic benchmarks. This shift requires a deep talent pool and a solid performance record from asset managers. Hence, push–pull synergy, where the push by asset managers to reduce costs and the pull by service providers to build the scale that led to the widespread externalization of back office activities, has been less evident in the front office (Figure 3.4, upper panel). At least 72% of survey respondents currently do their four key front office activities in-house. A maximum of 20% of respondents have now outsourced trading and 12% have outsourced research and analysis. Both of these areas expect a modest increase over the next three years but not the two core areas of portfolio management and client relations. However, the incidence of current outsourcing in the middle office is a bit higher (Figure 3.4, bottom panel). Three functional areas are leading the charge: IT infrastructure (35%), trade support (33%) and performance analysis (14%). Each of them expect an increase over the next three years; but not the two core activities: risk management and regulatory compliance. Indeed, in the fast-growing area of private markets, critical value adding activities such as loan origination, corporate takeovers, fund design and divestments upon fund maturity do not readily lend themselves to outsourcing. But that does not apply anymore to high-volume, high-touch tasks across areas such as treasury, trade lifecycle management, reconciliations and FX. Their outsourcing can now allowmanagers to scale their business volumes and eliminate hefty fixed costs. Thus far, outsourcing of front and middle offices activities mainly covers sub advisory mandates, where the asset managers in question need to fill gaps in their product line-ups in response to changing client needs. The rise of multi-asset platforms has enabled managers to source product needs from the best-of-breed third- party asset managers with strong capabilities and a good performance track record. In future, multi-asset funds will be packaged and customized at the point of sale. Thus far, outsourcing of the front and middle office activities mainly covers sub advisory mandates. Figure 3.4 What is the current state of play with regard to outsourcing front and middle office non-core activities in your organization? Source: Citi/CREATE-Research Survey 2025 % of respondents Remain in-house Will be outsourced Has been outsourced Front office Middle office Trading Research and analysis Portfolio management Client relations Information technology infrastructure Trade support Performance analysis & reporting Risk management Regulatory compliance 76 86 90 51 53 66 80 83 72 12 6 7 14 14 20 8 5 8 12 8 3 35 33 14 12 12 20 “Our clients want to be assured that our operating models are robust, efficient and have clear lines of accountability.” “Asset managers can only focus on their business by retaining their core capabilities.” Interview Quotes