Opportunities for Optimism?

Asset managers are on the threshold of a new era. As assets under management continue to rise, State Street’s research finds the industry’s leading players jostling to catch the next wave of growth

Our global survey of 400 asset managers shows that leading players in the industry are finding new ways
to create value for their clients.¹ They are revamping their investment strategies, upgrading their capabilities, and hunting for acquisitions that could extend their expertise or reach.

Optimism must be tempered by an awareness of new risks. Costs are under scrutiny. Clients want “more bang for their buck.” Competition is also intensifying — not just from traditional rivals but from tech-savvy challengers. Indeed, a comparison with our 2014 study shows some significant shifts in asset managers’ perceptions of risk and opportunity.

The most enterprising asset managers are responding by “bringing more to the table” in their client relationships. Delivering greater value to customers doesn’t just mean achieving consistently high returns. It means forging closer partnerships with investors based on a transparent dialogue around risk and performance. It will also require asset managers to develop the capabilities to customize their investment solutions around their clients’ long-term needs.²

New Sources of Value, New Forces for Change

Asset managers are playing for high stakes. A rising market creates opportunities on multiple fronts — for those that are agile enough to seize them. Over four-fifths of asset managers (88 percent) in our survey see opportunity for profitable growth in the next 12 months.

Asset managers are racing to develop new offerings to meet changing client demands. Over three-quarters of asset managers (78 percent) say that a greater proportion of client assets will move to bespoke solutions over the next five years. They are also improving their distribution networks and operational capabilities to support these new areas of growth.

At the same time, the industry faces new competitive pressures. Almost four out of five executives (79 percent) in our survey say they will face direct competition from non-traditional market entrants. Technology players like Google, Apple and Alibaba Group could mount a serious challenge. Asset managers also find themselves competing with their clients’ own investment talent, as large investors bring more asset management in-house. 

This new competitive landscape requires asset managers to invest in new talent and capabilities. As one sign of the momentous changes underway, 46 percent of companies in our survey are evaluating targets for acquisition today. Looking at our Opportunity Index (see right), the perceived potential for acquisition activity has increased significantly over the past 12 months. Leading players will move fast to plug any capability gaps while increasing their penetration of the fastest-growing customer segments.

Our research identifies four emerging “value drivers” that may shape success in the future industry landscape:

VALUE DRIVER #1 Asset managers reshape the product mix around new client needs

Asset managers are adapting their capabilities to meet investors’ growing demands for multi-asset, outcome- oriented solutions. This is a major test of their capabilities. Instead of selling by product line, solution providers need to consult, design and market investment strategies around investors’ long-term objectives.

There is more than one way to create value for clients, and low-cost passive strategies are part of the growth story for many asset managers. The industry is also investing heavily in hybrid products that combine some of the strengths of active and passive management.

Large numbers of asset managers in the survey are expanding their presence in smart beta mutual funds. They are also positioning themselves to capture growing demand for liquid alternatives.
Asset managers are rethinking their product mix to address their clients’ changing requirements. Indeed, product innovation, rather than new markets, is increasingly viewed as the primary route to growth.

• 42 percent of asset managers in our survey are preparing to enter a new product category for the first time
• Almost a fifth (19percent) will launch a product in the multi- asset solutions space for the first time over the next three years
• More than one in five (22percent) will launch a liquid alternative product for the first time
• Smart beta mutual funds and smart beta exchange-traded funds (ETFs) are other areas that asset managers are considering for product launches
• 52 percent of respondents plan to expand their existing distribution network, while only 35 percent are preparing to enter new markets

VALUE DRIVER #2 Client services become more personalized and transparent

Clients are being more hands-on with their portfolios. They want more information and insight from their asset managers to help them manage their money. Leading asset managers are ready to be more transparent about all aspects of investment performance and risk. They are learning to work in close partnerships with their institutional clients.

• 79 percent of asset managers say client demands for increased transparency on how their money is managed are having a moderate to significant impact on their business strategy
• 77 percent now offer their clients more transparency on sources of risk and return
• 74 percent say their clients’ growing need for customized solutions and services is shaking up their business models
• Only 36 percent are highly confident in their ability to use advanced analytics to segment clients according to their characteristics and needs
• Only 10 percent rate their process for gathering client feedback on how they are delivering against expectations at more than 8 out of 10

Despite a willingness to work more closely with their clients, few asset managers in our survey are gaining the customer insight
required to drive strategic decision-making around investor needs.

Asset managers will need customer analytics tools that can segment clients according to their characteristics and needs. The desire to build long-term partnerships with their customers will also require asset managers to develop better feedback mechanisms to understand how they are delivering against client expectations.

VALUE DRIVER #3 New ideas around risk will shape the dialogue with investors

Risk issues are at the heart of the conversation between asset managers and their clients. Asset managers with the analytics tools to support new levels of risk insight may gain a competitive edge.

While our survey respondents report that their concerns around regulatory risk have subsided to some extent over the last 12 months, this is partly because the industry continues to make substantial investments in compliance.

• 72 percent of asset managers say their conversations with clients have evolved to focus more heavily on risk
• 61 percent say clients are demanding a more personalized approach to help them understand their risks
• 64 percent say that heightened risk and compliance demands threaten to divert resources from critical business areas

Leading asset managers will need more robust methods to understand risks across complex multi-asset portfolios. This entails being able to integrate their risk analytics across multiple asset classes. The leaders are also designing more advanced risk models that can be customized to their clients’ needs.

VALUE DRIVER #4 Advanced operations can deliver value at scale

Despite the positive outlook, asset managers see no relief from the pressure to bring down costs. Investors are willing to reward managers that can deliver discernible value, yet as competition increases there is no room for complacency.

Asset managers must support demand for outcome-oriented solutions at the same time as improving cost efficiency. Leading players are pursuing the operational efficiencies that will enable them to provide personalized service and better investment insights at a competitive price point.

Advanced technology will underpin the new offerings, providing investment managers with a much richer and more complete view of risk and performance across their client portfolios. Another recent State Street survey showed that 81 percent of asset managers have increased their investment in technology by more than 5 percent over the past three years.4 Managers may also need to find more cost-effective ways to keep pace with technology innovation — for example by outsourcing or by partnering with fintech start-ups.

• Only 4 percent of asset managers in our survey feel no pressure to reduce costs
• Only 36 percent are highly confident they have the analytical tools to segment their clients according to their characteristics and needs
• Only 33 percent are highly confident that their current operating infrastructure will support their future distribution strategy

Moving Up the Value Chain

Asset managers see opportunities ahead. But they will need to demonstrate where and how they create enduring value for their clients to achieve long-term success.

Our research sheds light on several important questions as asset managers adapt to the new landscape:

• How should asset managers improve their client proposition and competitive positioning, based on their specific capabilities?
• How can asset managers forge closer partnerships with investors, and develop the skills needed to thrive in the new environment?
• What steps can asset managers take to provide clients with the integrated yet highly granular view of portfolio risk they need?
• How can asset managers develop innovation models that will fend off the threat from new market entrants?
• Where should asset managers prioritize their infrastructure investment to be more transparent, insightful and cost efficient for their investors?

¹ State Street 2015 Asset Manager Survey conducted by FT Remark in April and May 2015. Unless otherwise noted, all data in this summary originates from this survey. See back cover for full methodology.

² See The Folklore of Finance: How Beliefs and Behaviors Sabotage Success in the Investment Management Industry, Center for Applied Research, 2015. This report explores some of the steps that the industry can take to improve long-term outcomes for investors.