The asset management industry is undergoing major changes
A major European fund administration player, Societe Generale Securities Services (SGSS) is sensitive to the promotion and development of the asset management sector.
What the market has to say?
A major European fund administration player, Societe Generale Securities Services (SGSS) is sensitive to the promotion and development of the asset management sector. Within this context, SGSS has undertaken a strategic consultation1 amongst some one hundred Senior Executives from eight European countries in order to understand the extent of the ongoing changes and enable its current and prospective clients to appreciate the challenges they will face. The Bank also wanted to provide them with an opportunity to present their strategy for adapting to change and making the most of opportunities.
Four themes were addressed with the people surveyed: the global environment, clients and strategies, operational strategies and new technologies. The sample comprised traditional asset managers (65% of those surveyed), alternative asset managers (18%) and asset holders (17%).
The buy-side industry is facing changes that will substantially impact its business model over the coming years. According to respondents, adapting to regulatory requirements, low interest rates and pressure on commissions are the largest factors.
The regulatory aspect is considered to be the most difficult aspect to grasp for 82% of respondents, notably because of the resulting costs. Asset managers are the most concerned, in particular the smallest players who are finding it increasingly hard to follow the pace imposed by the regulator. MiFID 2 and PRIIPs2 are the most mentioned regulations, by 63% and 40% of respondents respectively.
Low interest rates are causing a lack of visibility and difficulties in terms of profitability, according to 85% of respondents. Indeed it is the number one problem for asset holders. A third of Private Equity and Real Estate (PERE) managers are worried about the considerable volume of liquidities invested as a result of low interest rates, and some fear a possible bubble.
Pressure on commissions was raised by 35% of those surveyed. For example, the impact of competition on commissions was mentioned by more than half of the asset managers questioned. We’re talking here about competition on passive investment, but also discounts on commissions granted by the biggest market players in order to increase their market share and pressure on commissions by institutional investors. As a result, some players have opted for a results-based commission structure.
Another interesting point worth bringing up: BREXIT does not appear to be a concern for the majority of respondents. The largest players are already putting the necessary adjustments in place, but everyone, whatever their size, agrees that BREXIT is an opportunity. Alternative fund managers expect London to continue to be the place to meet investors for LBO and market capitalisations. They also anticipate an increase in flows towards the European mainland that will lead to increased competition on targeted asset prices.
Strategy and clients
Aware of the challenges mentioned above, asset managers are reassessing their sales strategies. The main avenues being looked into are: diversification and cooperation strategies, retail distribution, client knowledge and Environment, Social and corporate Governance (ESG) aspects.
37% of asset managers mentioned retail distribution. Note that, as well as those who already have retail clients amongst their clientele, 19% of those surveyed – all of them major asset managers – are considering launching a retail strategy using digital tools and artificial intelligence. 36% of small and mid-size asset managers are looking at geographical expansion projects.
To support their distribution strategy, cooperation is advocated by 41% of asset managers – cooperation essentially with distributors (52% of them), 19% with other asset managers from a distribution perspective, whilst 14% do not wish to collaborate for fear of losing clients.
Moreover, client knowledge was highlighted by 25% of respondents. Information on clients is a demand from major asset managers (marketing and finance teams) and French asset managers (the current French ‘Contractual Settlement Date’ model does not favour transparency).
Obviously the diversification of investments appears to be essential for many institutions in order to maintain good performances whilst cutting risk. 42% feel that this is a response to weak returns. It is widespread, notably within PERE, seeking non-performing loans (30% of alternative asset managers surveyed) or new sectors such as art, wood, fashion, etc. (in similar proportions).
Asset holders and asset managers are taking two directions:
- Exchange-Traded Funds (ETF) and passive strategies;
- alternative assets with non-liquid loans and PERE.
ESG criteria are not considered to be a diversification in themselves, although they were nevertheless mentioned by almost half of all those questioned. A third said they are already very engaged, whilst the rest are beginning to take it onboard, sometimes through opportunism. This does not alter the fact that all of them deem ESG strategies to be an in-depth trend and feel they will have to incorporate them in their policy, especially at PERE player level.
Lastly, the market appears to be inexorably moving towards increased player consolidation, according to 42% of respondents. 36% of them are even considering a ‘soft’ consolidation in the shape of a partnership with one of their peers.
Operational strategies have to take into account regulatory requirements, new client needs and cost pressure. The latter is the one that is weighing on people’s minds the most. Mentioned by 30% of respondents, digital tools are the main lever for cutting costs whilst enhancing quality and flexibility.
64% of those surveyed said they have an outsourcing strategy. This orientation is extensively supported by small asset managers and PERE managers (more than 70% of the latter). The services considered for outsourcing are Middle Office services (15% of respondents), reporting services (9%) and all non-essential services (also 9%). Furthermore, 22% of respondents prefer to choose insourcing, but indicate they could change their opinion in the coming years.
Moreover, 28% want to reduce the number of service providers to a bare minimum. For asset holders, this also means reducing the number of asset managers. They displayed a clear intention to industrialise all of their relations with the help of platforms that can consolidate markets and the various asset classes. On the other hand, PERE managers emphasised the importance of local experts rather than global players.
New and digital technologies are issues that are considered to be a top priority for 84% of those surveyed. Big data, robo-advisors, blockchain, process automation and artificial intelligence are game-changers but, paradoxically, few respondents have launched initiatives in this respect to date.
Only 9% of them have a clear roadmap, 43% have adopted a wait-and-see stance and 48% have already begun initiatives such as robot-advisors or RPA (Robotic Process Automation: 32%). Note that blockchain is perceived to be a fashionable expression, with the vast majority of those surveyed as yet having no visibility on this emerging model.
Asset managers are turning to their usual providers to launch their digital projects. This is the case for two thirds of respondents. Only large asset management companies are looking to establish partnerships with fintechs (29% of them) that may take the form of a stake in incubators or direct investments in solutions.
In conclusion, three major ideas have emerged from this survey, which aimed to identify the main trends that will shape the asset management landscape by 2025.
Large asset managers are highly diversified, showing a passive and multi-sector approach to investment. They also have the ability to cut their commissions in order to win mandates. Conversely, small management firms are in a favourable position because they can make the most of their unique propositions. Players in-between these two categories are the most exposed to upcoming challenges, as they are unable to offer a unique proposition and cannot afford to reduce their commissions either.
However, size is not the only decisive criterion. The ability to make the most of new technologies and promote highly-qualified experts are key factors for success, or distinguishing for the implementation of a unique value proposition.
All of the respondents emphasised the absolute necessity of better knowing their clients. Supported by digital tools, using client databases will help identify or even predict client behaviour.
It is therefore clear that no player currently has a solution that would guarantee their development within this highly-competitive and continually-changing commercial context.
This survey shows that it is together that we will find the keys to the future.
1 The detailed survey will be available on the SGSS stand (stand 18) at the ALFI Global Distribution conference on 25 and 26 September, and will be uploaded to www.securities-services.societegenerale.com/en/insights sometime in October
2 MiFID II: Markets in Financial Instruments Directive; PRIIPs: Packaged Retail Investment and Insurance Products
Article published on the AGEFI.lu, September 2018 (Translated from french)