Rebooting the global asset management industry

Rebooting the global asset management industry 39 Alongside this trend, many active managers are seeking to improve their alpha generation credentials to counter the existential challenges from the prolonged rise of passive investing. Thus, they have been focusing on three areas they regard as central to having a strong widely admired brand: investment returns, client service, and the alignment of interests (see Insights). In the investment area, they are seeking to enhance capabilities to profit on two fronts: first, top-down investing that is essential to take advantage of rising geopolitical risks in real time; and second, bottom-up stock picking that is essential for harvesting time premia and risk premia in the medium term. In the client service area, they are aiming to improve proximity via greater engagement to ensure that clients share their investment beliefs and time horizons, get products they need rather than the ones managers have, and offer timely feedback that can be a powerful external tool for internal change. In the alignment area, they are seeking greater mutuality of interest via meritocratic fees, proactive investment ideas and co-investing that ensures that managers have skin in the game. Against this background, the majority of our respondents continue to regard principal front office and middle office activities as core and central to their brand development. They need constant enhancing: after all today’s alpha could easily be tomorrow’s beta. Besides, only a few service providers reportedly have the expertise and critical mass of assets to build a long enough track record – so far. That said, in the emerging ecosystem, some of them have already established a toehold across the value chain. Outsourcing is a fact of life and more of it is just a matter of time. If core competency is the key imperative for asset managers, then innovation is the magic bullet. In the raging bull market of 2009-21, product push was the main thrust of innovation. However, as the asset management industry’s investor base shifts towards digitally savvy self-directed wealthy clients, product pull is expected to predominate. Under it, product success will rest mainly on knowing client needs and the quality of skills and processes aimed at meeting them. If the historic wealth transfer is to boost organic growth, asset managers expect their service providers to continue their advance into the investment value chain via product widening and product deepening. Widening by developing state-of the-art capabilities in the front and middle office functions that are currently performed in house. And product deepening via innovations that improve the cost-effectiveness of functions that are already outsourced. Key among them are: fund structuring in different jurisdictions, as asset managers continue to expand their global footprints; state-of-the-art data warehouses that give real time information on trades; risk analytics that inform key decisions; simulation models that stress test new products; and above all, innovation hubs that integrate front, middle and back office activities. Outsourcing is a fact of life and more of it is just a matter of time. Insights There is a fine line between core and non-core activities in front andmiddle offices As a pure-play active manager, we have responded to the rise in passive investing by upping our game. As a partnership, we are not under shareholder pressure to grow our AuM year-on-year via a culture of product push. Our core belief is that investing is a long-term game for harvesting time premia and risk premia. So, we only target clients who share this belief in value investing. To cement a long-term relationship with them, we have made step improvements in three areas – all of which have elevated most middle and front office activities as core to our brand as an alpha shop. The first is beefing up our investment expertise. Our portfolio managers have developed deeper insights into the complex interaction between geopolitics and market dynamics, and trained intuition about key return drivers during volatility phases. The second area is improving our proximity to clients by knowing their dreams and nightmares, eliciting regular client feedback and acting on it, and avoiding unrealistic claims about returns. The third area is promoting a better alignment of interests via meritocratic incentives, products that are fit for purpose, and proactive investment ideas. Accordingly, our outsourcing has been confined to back office activities. By putting clients at the heart of our business, we had to strike a delicate balance between core and non-core activities. An Australian asset manager “With the rise of AI and GenAI, front and middle office activities will be the next frontier of outsourcing.” “Supply chains in asset management are becoming more sophisticated, like in traditional modern manufacturing.” Interview Quotes