Opportunities for Optimism? A New Vision for Value in Asset Management

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1 Opportunities for Optimism? A New Vision for Value in Asset Management Featuring the findings of the 2015 State Street Asset Manager Survey

2 Opportunities for Optimism? A New Vision for Value in Asset Management State Street research shows that asset managers are positive about growth opportunities. 1 As AUMs continue to rise, opportunities are arising on many fronts, but they will be realized only through creating new kinds of value for clients. Asset managers are revamping their investment strategies, upgrading their capabilities, targeting new markets and hunting for acquisitions that could extend their capabilities or reach to compete in a fast-changing industry. Optimism must be tempered by an awareness of new risks. Our research reveals that costs are under scrutiny and investors want more bang for their buck they are seeking value beyond beating traditional performance benchmarks. Competition is intensifying including from tech-savvy challengers and the trend toward greater insourcing by asset owners. The most enterprising asset managers are bringing more value to the table. They re focusing on delivering more specific investment outcomes for clients. Many are forging closer partnerships with investors based on a transparent dialogue on risk and performance. A new industry landscape is emerging, according to our research. Opportunities are there for the taking. But asset managers will need to demonstrate where and how they create enduring value for their customers if they are to translate today s optimism into long-term success. 1. State Street 2015 Asset Manager Survey conducted by FT Remark. All data and opinions in this presentation originate from this survey unless otherwise noted. Conducted in April and May 2015, this survey canvassed the opinions of 400 senior executives in the asset management industry. Respondents from 23 countries participated, with the majority from Australia, Canada, China, Germany, Japan, Switzerland, the UK and US. 2

3 New Sources of Value, New Forces for Change A rising market creates opportunities on multiple fronts. Asset managers are racing to develop new offerings and invest in new capabilities to meet changing client demands. Opportunity 88 percent of asset managers predict a positive outlook for profitable growth 78 percent see growing demand for bespoke investment solutions built around their clients requirements 95 percent see positive scope for acquisitions, with 46 percent evaluating acquisition targets today Threat 96 percent say they are under pressure to reduce costs 79 percent believe it is likely they will face direct competition from a non-traditional entrant to the asset management industry 81 percent of pension funds say they plan to increase the proportion of their portfolio that is managed in house 2, causing asset managers to seek new ways to create value for these clients Leading players will move fast to plug any capability gaps through acquisition and investment while increasing their penetration of the fastest-growing customer segments. 2. State Street 2014 Asset Owner Survey conducted by the Economist Intelligence Unit. Pension fund respondents only. The survey was conducted in August Respondents from 15 countries participated, with the majority coming from the US, UK, Australia and Canada. 3

4 Opportunity Knocks At Home and Overseas Acquisitions Are on the Horizon as Asset Managers Target New Markets and Growth Around New Product Lines What actions is your firm taking as a result of the opportunities you are seeing in the market? Evaluating targets for acquisition 46% 45% 48% Accessing new distribution channels 42% 52% 48% Preparing to enter new markets 28% 33% 42% Preparing to enter a new product category for the first time 36% 45% 44% EMEA NA APAC 43% of asset managers evaluating targets for acquisition are preparing to enter new markets, compared to just 27% of others, highlighting a tendency toward strategic M&A that will extend the firm s reach Those asset managers serving institutional investors are more likely than those serving retail investors to be targeting acquisitions 58% vs 38% Far more asset managers serving the active end of the market (59%) are evaluating targets for acquisition than the managers on the passive side (36%) 4

5 Opportunity Makers: Four Drivers of Value 5

6 VALUE DRIVER 1 Reshaping the Product Mix Around New Client Needs Asset Managers Are Adapting Their Capabilities to Meet Investors Growing Demand for Multi-asset, Outcome-oriented Solutions 42 percent of asset managers are preparing to enter a new product category for the first time GLOBAL INSIGHT For each of the following product types, please indicate your firm s expected strategy over the next three years Asset Managers Planning to Launch Product for the First Time Liquid Alternative Strategies 22% Multi-asset Solutions 19% Other ETFs 9% Smart / Strategic Beta ETFs Offshore-domiciled Funds 7% 7% Smart / Strategic Beta Mutual Funds 5% Product innovation, rather than new markets, is increasingly viewed as the primary route to growth 6 Limited Access

7 VALUE DRIVER 1 How to Compete as a Solutions Maker GLOBAL INSIGHT Articulate and communicate a clearly defined and focused proposition, from serving a specific market niche to active management capability. Focus on the client objectives, rather than delivering relative performance through generic, manufactured investment products. Plug gaps in capabilities, both in terms of product and the wider service proposition, using acquisitions, partnerships or outsourcing to augment your platform. Master the multi-asset challenge by building the systems and talent pool required to manage risk and performance across today s complex portfolios. Prepare to innovate as clients get more demanding and new entrants intensify competition, fostering the entrepreneurial culture required for growth. 7

8 VALUE DRIVER 2 Client Services Become More Personalized and Transparent Leading asset managers are ready to be more transparent about all aspects of investment performance and risk. They are learning to work in closer partnerships with their institutional clients 79 percent of asset managers say client demands for increased transparency on how their money is managed are impacting business strategy 77 percent now offer their clients more transparency on risk and return Only 36 percent are highly confident in their ability to use advanced analytics to segment clients according to their characteristics and needs For each of the following investor trends, please indicate the extent to which it is impacting your firm s business strategy, in terms of shaping your products and how you deliver them Percent Indicating Significant Impact GLOBAL INSIGHT Investor demand for more transparency into the investment process Investor demand for multi-asset, outcome-oriented investment strategies Investor adoption of factor-based allocation models Investor demand for impact investing strategies Investor demand for liability-driven investing strategies Investor demand for increased customization 36% 34% 32% 31% 31% 44% Investor demand for passive investment strategies 24% 8

9 VALUE DRIVER 2 How to Get Closer to Your Clients GLOBAL INSIGHT Provide investors with more granular detail about the performance and risk profile of their holdings. Meet the need for a variety of different formats and respond to bespoke requests. Recognize that transparency is a two-way street. Develop new channels for investor feedback and use analytics to better understand clients needs. Develop approaches to the increasing demand for information from regulators and investors. Prioritize specialist data units. Invest in the consultative skills and intellectual capital that will enable you to deliver uniquely valuable insights to your clients. Deliver personalization at scale. Build strategic asset allocation models that can be adjusted to accommodate client-specific overlays. 9

10 VALUE DRIVER 3 New Ideas Around Risk Will Shape the Dialogue With Investors GLOBAL INSIGHT Risk issues are at the heart of the conversation between asset managers and their clients, according to our research. Asset managers with the analytics tools to support new levels of risk insight may gain a competitive edge 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 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 75 percent say they are spending more time and resources on educating the boards of their institutional clients on risk issues 10

11 VALUE DRIVER 3 How to Compete in the Risk Arena GLOBAL INSIGHT Recognize that investors are placing as much emphasis on risk management as they are on high performance. Allocate the right level of resources to meet this need. Be prepared to educate investors on risk, developing more effective methods of communicating risk exposures to clients. Ensure your data infrastructure supports the need for improved risk analysis across multi-asset portfolios. Make it an important competitive weapon in winning new clients. Invest in new risk tools and more sophisticated risk models that give clients a more granular understanding of their exposures, both individually and consolidated across their portfolios. Recognize that investors now consider a greater range of risks including the operational risks that their asset managers may be exposed to. 11 Limited Access

12 VALUE DRIVER 4 Advanced Operations Will Deliver Value at Scale GLOBAL INSIGHT Our research shows that investors are willing to reward managers that can deliver discernible value, yet as competition increases there is no room for complacency on cost 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 Thinking about the cost pressures facing your business today, how would you describe the environment? 4% 15% High pressure to reduce costs 33% Moderate pressure to reduce costs Slight pressure to reduce costs 48% No pressure to reduce costs 12

13 How to Deliver More Client Value Through Smarter Operations GLOBAL INSIGHT Recognize investors growing concerns about fee levels. Be ready to demonstrate your added value. Develop new fee structures that match the shifting focus from relative performance to a more outcome-focused approach. Investigate whether new partnerships can help deliver more value to clients at lower cost. Build links with areas such as the fintech sector. Automate manual processes to free up resources for more added-value tasks, ensuring operational efficiency helps protect margins in a climate of flat or falling fees. Invest in the in-house technology infrastructure required to deliver value at scale and transform cost efficiency. Utilize alternative approaches such as outsourcing. 13 Limited Access

14 Moving Up the Value Chain Our Research Sheds Light on Several Important Considerations for Asset Managers as They Adapt to the New Landscape What is your unique value proposition today? How can you raise the bar in client interactions? How will you meet demand for more outcome-based solutions? How will you service new requirements on risk management and transparency of risk reporting? How will you respond to the threat of digital disruption? What is the most effective way to reach new investors? Asset managers will need a more focused proposition about the value they can deliver to investors, whether it s providing the full spectrum of solutions, or carving out a particular specialism. This may mean scaling up, or deepening niche expertise. Investors are demanding more effective, detailed communication about complex areas of performance and risk. Servicing this need will mean devoting greater resource to investor engagement and strengthening advisory capabilities. To meet more specific investor needs on risk management and longer-term income requirements, asset managers must support multi-asset strategies, and use clients desired outcomes as a starting point for building their solutions. With the popularity of multi-asset solutions, asset managers need to deliver granular risk analysis customized to individual investor demands. Those who can devise smarter risk models and apply sophisticated analytics tools will be highly sought after. Investors want easy access to their investments with the ability to manage their portfolios at the click of a button. Technology firms are a threat, but established asset managers can use data and analytics to find their own competitive edge, or look at partnering with start-ups, such as in the fintech sector, to innovate in this area. Central to asset managers growth ambitions is the ability to reach new investors and achieve more direct interaction with the end clients. Expanding the distribution network and taking ownership of distribution platforms will be important. 14

15 Appendix: Regional Insights 15

16 North America 16

17 Regional: North America VALUE DRIVER 1 Reshaping the Product Mix Around New Client Needs Asset Managers are Adapting Their Capabilities to Meet Investors Growing Demand for Factor-Based Allocation and Custom-Tailored Solutions For each of the following investor trends, please indicate the extent to which it is impacting your firm s overall business strategy, in terms of shaping your products and how you deliver them? (North America respondents) Investor adoption of factor-based allocation models 41% 31% Investor demand for increased customization 42% 29% Investor demand for impact investing strategies Investor demand for multi-asset outcome-oriented investment strategies solutions Investor demand for liability driven investing strategies 39% 37% 34% 29% 31% 27% Investor demand for passive investment strategies 41% 21% Moderate impact Significant impact More than a third (35 percent) of US-based asset managers say that demand for outcome-oriented solutions is significantly impacting business strategy, while 44 percent of Canadian asset managers think investor adoption of factor-based allocation models will have a similar level of impact 17

18 VALUE DRIVER 2 Client Services Become More Transparent, More Personal Leading asset managers are ready to be more transparent about all aspects of investment performance and risk. But North American managers may need to get better at managing service levels against their clients expectations. 71 percent of asset managers in North America say client demands for increased transparency on how their money is managed are impacting business strategy 77 percent now offer their clients more transparency on risk and return Only 33 percent score themselves 8 or more out of 10 for their ability to gather feedback from their clients on how they deliver against expectations On a scale of 0-10, how would you rate your firm s process for gathering feedback from your clients on how you are delivering against their expectations? (North America respondents) Regional: North America 9% 33% Weak (Score 0 to 4) Mediocre (Score 5 to 7) Strong (Score 8 to 10 59% 32 percent of US-based managers are highly confident in their ability to segment clients using advanced analytics, compared with 40 percent in Canada 18

19 VALUE DRIVER 3 Risk Goes to the Heart of the Conversation Regional: North America Risk issues are at the heart of the conversation between asset managers and their clients, according to our research. Asset managers with the analytics tools to support new levels of risk insight may gain a competitive edge over their rivals North America s 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 72 percent of asset managers in North America say their conversations with clients have evolved to focus more heavily on risk 75 percent of them are spending more time and resources on educating the boards of their institutional clients on risk issues 66 percent say that heightened risk and compliance demands threaten to divert resources from critical business areas 19

20 VALUE DRIVER 4 Advanced Operations Can Deliver Value at Scale Our research shows that investors are willing to reward managers that can deliver discernible value, yet as competition increases there is no room for complacency on cost. Regional: North America Leading players are pursuing the operational efficiencies that will enable them to deliver a more 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. Thinking about the cost pressures facing your business today, how would you describe the environment? (All North America respondents) 42% 6% 11% 40% High pressure to reduce costs Moderate pressure to reduce costs Slight pressure to reduce costs No pressure to reduce costs 47 percent of asset managers based in the US say they face moderate to significant pressure to reduce costs Only 35 percent of North America-based managers are highly confident their current operating infrastructure can accommodate future distribution strategy 20

21 EMEA 21

22 Regional: EMEA VALUE DRIVER 1 Reshaping the Product Mix Around New Client Needs Asset Managers are Adapting Their Capabilities to Meet Investors Growing Demand for Customized and Outcome-Oriented Solutions For each of the following investor trends, please indicate the extent to which it is impacting your firm s overall business strategy, in terms of shaping your products and how you deliver them? (EMEA respondents) Investor demand for increased customization 50% 30% Investor demand for impact investing strategies Investor adoption of factor-based allocation models Investor demand for liability driven investing strategies Investor demand for multi-asset outcomeoriented investment strategies solutions Investor demand for passive investment strategies 37% 36% 42% 30% 44% 33% 32% 27% 39% 16% Moderate impact Significant impact 53 percent of Switzerland-based asset managers say that multi-asset strategies will significantly impact business strategy, while 1 in 2 German managers say that investor demand for more transparency into the investment process is having a similar level of impact on their strategy 22

23 VALUE DRIVER 2 Client Services Become More Transparent, More Personal Leading asset managers are ready to be more transparent about all aspects of investment performance and risk. But EMEA managers may need to get better at managing service levels against their clients expectations. 83 percent of asset managers in EMEA say client demands for increased transparency on how their money is managed are impacting business strategy 78 percent now offer their clients more transparency on risk and return Only 23 percent score themselves 8 or more out of 10 for their ability to gather feedback from their clients on how they deliver against expectations On a scale of 0-10, how would you rate your firm s process for gathering feedback from your clients on how you are delivering against their expectations? (EMEA respondents) Regional: EMEA 23% 14% Weak (Score 0 to 4) Mediocre (Score 5 to 7) Strong (Score 8 to 10 62% Half of German-based managers are highly confident in their ability to segment clients using advanced analytics, compared with 37 percent in Switzerland and 36 percent in the UK 23

24 VALUE DRIVER 3 Risk Goes to the Heart of the Conversation Regional: EMEA Risk issues are at the heart of the conversation between asset managers and their clients, according to our research. Asset managers with the analytics tools to support new levels of risk insight may gain a competitive edge EMEA s 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 72 percent of asset managers in EMEA say their conversations with clients have evolved to focus more heavily on risk 82 percent of them are spending more time and resources on educating the boards of their institutional clients on risk issues 60 percent say that heightened risk and compliance demands threaten to divert resources from critical business areas 24

25 VALUE DRIVER 4 Advanced Operations Can Deliver Value at Scale Regional: EMEA Our research shows that investors are willing to reward managers that can deliver discernible value, yet as competition increases there is no room for complacency on cost. Leading players are pursuing the operational efficiencies that will enable them to deliver a more 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. Thinking about the cost pressures facing your business today, how would you describe the environment? (All EMEA respondents) 30% 4% 12% 54% High pressure to reduce costs Moderate pressure to reduce costs Slight pressure to reduce costs No pressure to reduce costs 64 percent of asset managers based in the UK say they face moderate to significant pressure to reduce costs, compared with 66 percent in Germany and 70 percent in Switzerland Only 34 percent of EMEA-based managers are highly confident their current operating infrastructure can accommodate future distribution strategy 25

26 Asia-Pacific 26

27 Regional: Asia-Pacific VALUE DRIVER 1 Reshaping the Product Mix Around New Client Needs Asset Managers are Adapting Their Capabilities to Meet Investors Growing Demand for Passive and Liability-Driven Solutions For each of the following investor trends, please indicate the extent to which it is impacting your firm s overall business strategy, in terms of shaping your products and how you deliver them? (APAC respondents) Investor demand for liability driven investing strategies 42% 36% Investor demand for passive investment strategies 42% 34% Investor adoption of factor-based allocation models 37% 38% Investor demand for impact investing strategies 37% 38% Investor demand for multi-asset outcome-oriented investment strategies solutions 36% 39% Investor demand for increased customization 38% 34% Moderate impact Significant impact 50 percent of asset managers based in Japan see investor demand for increased customization as having a significant impact on their business strategy 27

28 VALUE DRIVER 2 Client Services Become More Transparent, More Personal Leading asset managers are ready to be more transparent about all aspects of investment performance and risk. But APAC managers may need to get better at managing service levels against their clients expectations. 84 percent of asset managers in APAC say client demands for increased transparency on how their money is managed are impacting business strategy 78 percent now offer their clients more transparency on risk and return Only 16 percent score themselves 8 or more out of 10 for their ability to gather feedback from their clients on how they deliver against expectations On a scale of 0-10, how would you rate your firm s process for gathering feedback from your clients on how you are delivering against their expectations? (APAC respondents) Regional: Asia-Pacific 16% 66% 18% Weak (Score 0 to 4) Mediocre (Score 5 to 7) Strong (Score 8 to percent of China/HK-based managers are highly confident in their ability to segment clients using advanced analytics, compared with 33 percent in Australia, 30 percent in Japan and 25 percent in SE Asia 28

29 VALUE DRIVER 3 Risk Goes to the Heart of the Conversation Regional: Asia-Pacific Risk issues are at the heart of the conversation between asset managers and their clients, according to our research. Asset managers with the analytics tools to support new levels of risk insight may gain a competitive edge APAC s 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 72 percent of asset managers in APAC say their conversations with clients have evolved to focus more heavily on risk 67 percent of them are spending more time and resources on educating the boards of their institutional clients on risk issues 63 percent say that heightened risk and compliance demands threaten to divert resources from critical business areas 29

30 VALUE DRIVER 4 Advanced Operations Can Deliver Value at Scale Our research shows that investors are willing to reward managers that can deliver discernible value, yet as competition increases there is no room for complacency on cost. Leading players are pursuing the operational efficiencies that will enable them to deliver a more 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. Thinking about the cost pressures facing your business today, how would you describe the environment? (All APAC respondents) Regional: Asia-Pacific 25% 2% 23% High pressure to reduce costs Moderate pressure to reduce costs Slight pressure to reduce costs No pressure to reduce costs 50% 83 percent of asset managers based in Japan say they face moderate to significant pressure to reduce costs, compared with 69 percent in Australia Only 28 percent of APAC-based managers are highly confident their current operating infrastructure can accommodate future distribution strategy 30

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