If there is one market that has continued to withstand disruption, it is Asian asset management. Growing at 9% per annum for the last decade, it is the world’s fastest growing asset management market. Much of this growth comes from the domestic shift in investor risk appetite, from low-yielding fixed income, to more rewarding global, multi-asset class strategies. Having grown rapidly across the Western Hemisphere, these strategies are now taking over Asia by storm, overtaking traditional equity and fixed income assets. In 2017 alone, 70% of Asian institutional mandates were for multi-asset and alternatives investments and this trend continues.
But while Asian buyside firms have enjoyed steady growth in profit margins, cost margins have also risen, with absolute cost pools rising by 13% in 2017. Compared to that of North America (24.9 bps) and Western Europe (21.6 bps), Asian asset management incur the highest operating costs at 29.3 bps. Currently, these costs have been absorbed by high revenue margins, but as the market establishes and as revenue margins plateau, firms will no longer be able to justify high operating costs and inefficient operations, or the damaging impact to profitability.
As Asian institutional investors pour into new sources of alpha, including alternative investments, an alarming truth is coming to light. While multi-asset investment strategies may have soared in recent decades, much of the operations of many Asian buyside firms are simply unable to handle the increasing scale and demand in this new landscape. Compromising legacy architectures, outdated point solutions and complex outsourced models now stand in the way, posing a threat to the success of global multi-asset investing. Much of this can be addressed by a simplified system landscape and consolidating all asset classes onto one platform, with real-time data for decision-making. With the right integrated infrastructure, firms will reap the long-term benefits of this changing tide.
Curing the buyside headache
The changing investment landscape is further compounded by the sheer volume of data that buyside firms now need to handle, including the nuances of data for alternatives such as real estate and private debt. This presents serious problems for a firm’s agility, impacting the launch of new investment products ahead of the competition, to accessing new asset classes to meet client demand, or empowering the front office with the real-time data for optimal investment decisions.
Assessing the optimal target operating model
One approach to tackling the current challenge, is to operate an insourced “golden master” or single source of data, an operating model adopted by many asset managers and pension funds globally. Using an investment system that has an integrated Investment Book of Record at its core since inception provides these firms with the highest degree of integration and automation for their workflows. The operational benefits address much of the current challenge, including increased control and cost efficiency, while also reducing operational risk. While in changing market conditions, insourced operating models enable quicker responses to market movements. The front office can capitalize on new investment and trading strategies swiftly, without unforeseen costs and additional manpower.
With the recent spell of vendor acquisitions, you’d be forgiven for thinking that the integration achieved in a single system can also be achieved by an outsourcer or vendor acquiring and combining systems. There is, however, a big difference between a single system covering the full gamut of front-to-back operations, and one that comprises multiple systems, to cover a front-to-back scope. Signing up to the latter, may take away some of the initial burden, but in the long term, it won’t fully overcome the complexity and costs that will eventually outweigh returns, or increase opportunities for alpha.
Scale & Agility
Adopting a core, multi-asset system provides the most efficient foundation for scalable operations. For one, a 24/7 follow the sun model enables firms with integrated operations across the world to have the same set of data from the start of business. This eliminates arduous manual reconciliation in those crucial opening hours, or worse, using stale data, endangering a firm’s exposure.
Secondly, with multi-asset class coverage, in a unified platform, operations teams can be relieved from lengthy procurement processes for niche solutions. This means firms can operate nimbly and significantly reduce the time to market, for new products. If we turn to outsourcing, much of the buy side’s frustrations focus on the lengthy responses to new functionality and service requests. With many outsourcers reining in costs, anything deviating from a standardized solution is either put in a long queue or considered too customized to fulfil. And for those outsourcers battling with complex legacy architecture, it is often down to a sheer technological inability to fulfil client requests. The impact on the investment manager, is a potential loss of alpha, through either missed opportunities or being late to market.
Real time, real decisions
The availability of accurate, real-time cash and positions data provides the front office with optimized investment decision-making and enhances risk management. Often it is the lack of available data, buried deep in siloed systems, that results in firms having trouble calculating their firm-wide exposure during market events. In a recent SimCorp commissioned surveys, accurately measuring firm-wide limits and counterparty exposures continues to be a theme with both North American and European firms. Overhauling legacy systems and automation were considered the top strategic priorities for these firms. From our discussions in Asia, the same challenge exists.
Automation that cuts costs and drives alpha
To harness true automation, buyside firms need an architecture that delivers near-live data, in an integrated system accessible across the business. This is particularly significant for alternative investments. As illiquid investment instruments continue to gather pace, many buyside managers face the challenge of achieving the same level of automation, as with equities. This makes them a costly but necessary investment strategy, given the investor demand. When run together with traditional asset classes in one automated, integrated system, firms can achieve higher straight through processing (STP) and eliminate data errors. When combined with advanced analytics functionality, improved risk management and access to more granular data, it becomes a powerful tool.
Interestingly, a consolidated operating model has as much impact on a firm’s future, as it does on its present. This includes the ability to embrace emerging technologies and access innovation in the global fintech community cloud applications. By addressing data management, rather than outsourcing it, for example, in the front office, firms can capitalize on their intellectual property through APIs for investment decision-making. Then there are emerging technologies such as machine learning, which can potentially pre-empt errors such as settlement-breaks in the post trade space.
Accomplishing an Agile Future
In 2019, as Asian institutional investment continues to mature into a new global paradigm, the operational transparency, once perceived to be a luxury, will become a necessity. Many asset managers and pension funds are already realizing the urgency in accessing timely data, and the need for a centralized front-to-back approach. The challenge lies in breaking from the pattern of system patches, add-on solutions and a reliance on outsourcing to simplify operations. Ultimately, this will translate to a reduced cost/income ratio and deliver innovation that is vital in the search for a competitive edge.
Oliver Johnson is managing director of SimCorp Asia