European fund managers could realize 15 billion euros ($ 17.8 billion) in additional profits by capitalizing on their economies of scale and better cost control according to McKinsey & Company.
The consulting firm said in a report, European asset management after an unprecedented year, that the region’s long side has not been able to harness the operating leverage once considered a core feature of the business, even though the results have weathered the dislocation and volatility caused quite well. by the Covid-19 pandemic.
“Looking into these numbers, however, the absolute cost pool increased 4.2% for 2020,” the report says. “This highlights how much the profitability of the industry depends on rising markets.”
One recommendation for asset managers to reclaim the inherent operating leverage is to focus on environmental, social and governance strategies.
Europe has far more funds considered ‘sustainable’ than any other region and asset managers need to show leadership in guiding Europe towards an even greener path and improved sustainability.
McKinsey said, “Asset managers should establish a leadership position by supporting initiatives put in place by governments and the many NGOs and industry groups focused on climate change to achieve net zero carbon goals. They should also direct capital flows in the most productive and sustainable directions. “
The advisory firm continued that well-defined ESG strategies should be incorporated into every phase of the investment process, including prioritizing the investments to be made and adhering to the principles of the ESG mission.
To assume this responsibility, asset managers will need to change their internal structures by strengthening diversity and inclusion in their leadership ranks, emphasizing the ‘social’ of ESG policy and calling for fairness. in terms of work and occupational health and safety. .
Accept technological breakthroughs
The shift to remote working in response to COVID-19 is a harbinger of technological change over the next decade, according to McKinsey.
“The way forward for asset managers should include a transformation towards organizations that constantly adapt and learn,” the report said.
Asset managers must be fully committed to improving efficiency by using advanced analytics and artificial intelligence at scale across their organizations; radically improve the customer experience in the retail and institutional sectors; launch digital businesses; and the creation of new digital capabilities for investment themes and new asset classes.
“As capital markets companies, fund administrators and custodians deploy distributed ledger technologies, it could become the leading front-to-back messaging technology in asset management within ten years.” McKinsey added. “Additionally, asset tokenization enables digital commerce and helps ‘liquidate’ traditionally illiquid assets such as art or real estate, opening up investments in those assets to a much larger group of clients.”
Accenture also said in a study, The future of asset management, that the buy side must use automation, artificial intelligence and analytics for product development, alpha generation and to deliver customer experience to create differentiation by 2025.
The consulting firm said in May that almost all respondents, 95%, believe that the technology, data and digital capabilities of an asset manager will be differentiators by 2025. Respondents said the technology internal was the most important factor for the success of the asset manager in 2025, even more than ESG products, advice and equity funds.
However, the survey found that many asset managers are still in their infancy with many emerging technologies, including AI. Accenture said: “Our survey found that 72% of asset managers don’t see themselves as top companies when assessing their digital maturity.
As a result, fund managers made fintech acquisitions. The report cited Invesco’s acquisition of JemStep (now Intelliflo), one of the first automated online financial services investment platforms, and Schwab Buying Motif, which uses data science to deliver personalized investments and supports supports direct indexing.
The industry’s investment capabilities will primarily focus on data and advanced technologies. Accenture found that mature companies that industrialized and developed AI throughout the investment process were citing up to 300 basis points of alpha collectively.
“Analytics and AI applications will become as widespread, smart and user-friendly as spreadsheets and research software,” the report adds. “AI adoption will increase in capital markets with respect to more qualitative investment decision making.”
For example, in stocks, companies can use AI to anticipate stock performance ahead of quarterly reports or earnings announcements, which can generate 10 to 50 basis points of alpha.
Almost all, 92% of investment managers believe that alternative data improves due diligence on public and private investments and 40% intend to increase their processing of new forms of data to generate insights. Accenture gave the example of a company using alternative data to analyze job vacancies, as well as employment and unemployment data, to create their own data sets on company performance.
The majority, 79% of asset managers expect the growth of the “vocation / investment economy” as many consumers want at least part of their portfolio to be invested in companies that promote ESG objectives.
Asset managers should therefore introduce sustainability practices into their data strategy to ensure that consistent standards are applied to both non-financial and financial investment decisions.
“The market for ESG data will grow, bringing a wide range of complexity and granularity issues that companies must adapt to,” said Accenture. “A robust data governance model will also be needed, a model built on a solid IT and data base to enable scalability. “
Mutual funds currently have three times the assets of ETFs, but Accenture said they were starting to lose ground against emerging products such as collective investment trusts, active ETFs and direct indexing. Three-quarters, 76%, of asset managers believe direct indexing will become a more popular investment strategy over the next five years.
In addition, there is a large movement in the capital markets towards the tokenization of traditional securities and cash, so that almost all, 79%, of asset managers are exploring crypto-based and decentralized financial products.
“The implications of tokenization for the asset management community center on moving from non-payment clearing to expedited settlement which could include integrated cash settlement,” said Accenture. “Being a ‘fast follower’ is probably not a winning strategy. Businesses will have to step into the ring and take action.