How three asset managers operate in a complex world

SimCorp’s 2017 North American User Summit (NAUS) offered a high-profile keynote on the topic “Operating in a Complex World”, among more featuring leading representatives from AXA Investment Managers, Fannie Mae, and Norges Bank Investment Management (NBIM). This article sums up some of the main takeaways from the panel discussion and highlights key challenges and strategic priorities as seen from the eyes of three of the world’s largest asset managers.

With missions ranging from a commitment to provide Americans affordable mortgage financing to helping safeguard the wealth for the next generation of Norwegians, the panelists all agreed that a key strategic priority was to manage their assets as cost-efficiently as possible while spurring growth and reducing risk.

However, they also agreed that this is gradually becoming more challenging in a complex world of:

• increasing amounts of data and regulations
• growing reporting and transparency demands
• increasing technological complexity, e.g. blockchain, AI, and robotics
• continuous emergence of new instruments

The people perspective

In addition to tackling the challenges of a complex world from an operational perspective, the panel also stressed the importance of the people perspective. You need to find out how you bring your employees along with you on this demanding journey. All this complexity means new roles for an organization’s employees, who must take on new tasks. Someone who once was an information gatherer and reconciler now has to do analysis and problem solving. How do you change peoples’ skills sets to match this? And just as importantly, how do you find and retain talent? The panel agreed that global companies must always be looking for talent who can perform these transforming roles. Furthermore, it is important to develop a global culture and achieve a sense of consistency across offices and borders to ensure that all are aligned.

The need to consolidate to tackle increasing regulations

Moving back to the complexity drivers listed above, Joseph Pinto, Global COO, AXA Investment Managers, stressed that a main concern for AXA is regulation. For instance, a new product launched from one country takes localization before you can sell it across other countries due to multiple jurisdictions being involved. “The regulatory complexity means that while, on the one hand, we want to be a global player and leverage economies of scale, on the other hand, we need to establish local operations that can accommodate the local flavors required by the regulators and the local clients. This challenges how much we can simplify our systems and how lean we can be,” Joseph explained. AXA has a total annual cost of around EUR/USD 750 million and, every year, the firm invests a recurring EUR 30 million in IT, mainly to support the core of its business, the portfolio managers, investing about half of the budget to improve their tools. Second priority is the CRM tool used by the sales people and third priority is regulatory projects. “Constantly changing compliance requirements were the main reason for us to initiate a project to simplify our infrastructure,” Joseph explained. “If we have too many systems, we need to upgrade every single one, when there is a new regulation. Hence the need to simplify and why we embarked on the project to implement a new operating platform a couple of years ago, enabling us to move from 120 front office applications to one core system, and a few satellite systems for alternatives,” Joseph Pinto added.

Taking control of operational costs through consolidation and automation

When commenting on Norges Bank Investment Management (NBIM)’s multi-year strategy to consolidate systems to take control of data quality and operating costs, Kjell Nordgard, Global Head of Systems & Data, explained how this strategy has helped make processes lean and automated at NBIM. “Today, it is all about information management, which means that it is crucial that you control at least your own information, in other words your inventory, to understand exactly how your portfolios are composed and how you are positioned in the market,” Kjell said. He went on to explain how this is about using technology to get an even better understanding of your own business. To be able to do so, NBIM realized that it had to insource some of the services that had previously been outsourced. At the same time, there was no option to increase staff. Those conditions made consolidation and automation the two answers that went hand in hand at NBIM. “For us it was important that we could build a platform where we could change and grow the fund without proportionally increasing the cost, a proposition we found impossible to achieve with our then current use of service providers, as they tend to charge you based on AUM and transaction volume,” Kjell explained.

The data management challenge

NBIM sees technology as playing a crucial role in the future when it comes to mastering information management on solid analytical platforms and wants to be able to reap the benefits of controlling and understanding not only their own data but also the exploding amount of external information available. “In 2020, it is said that there will be 40 zettabytes or 40 trillion gigabytes of digital data – or what is estimated to be 57 times the amount of all the grains of sand on all the beaches on earth,” Kjell Nordgard pointed out.

Chryssa Halley, SVP & Controller, Fannie Mae, agreed to the challenge of exploiting having huge amounts of data. Fannie Mae has USD 3 trillion in mortgage assets on its books and now it is all about how to harness the data included. “The task is to figure out what tools we can apply to get to the data and manage it. Next is to decide what analytics we want to provide. We need to figure out what we want to know and what our customers want to know,” Chryssa explained. In accounting, it is no longer only about closing the books, it is about achieving and providing insights in real-time analytics and dashboards to the rest of the organization and its stakeholders. Data is critical and it is the race for space – those who can harness all that data and make it available in the right format will be the winners. “Data management is a big priority for Fannie Mae, just as it is a high priority to be able to offer new products quickly and cost-efficiently. A consolidated platform will enable us to be nimbler and to adapt more quickly to new demands, so changing our operating platform with this in mind has been a key priority,” Chryssa Halley stressed.

Acknowledging that changing your operating platform is not something that happens overnight, Chryssa Halley added that when they had looked at the target operating model at Fannie Mae, they realized that it would take looking at it in smaller pieces to then later be able to go live in one big bang with all of the projects. “You cannot approach a big platform change in one go, it is simply too complex. You need to split it up into smaller projects and think each of these through,” Chryssa Halley stressed.

The operating model and the journey towards consolidation

Joining the discussion about changing your operating model, Joseph Pinto explained that AXA started their journey 12 years ago, with the pressure on fees being one of the biggest drivers then, as it is today. “What we can do to remain profitable is to make our operating model more simple and our processes leaner,” he agreed with the other panelists and then elaborated on AXA’s journey towards a simpler operating model. “Twelve years ago, we had outsourced our middle office activities to one global provider. At the same time, through acquisitions, team lift-outs, and internal developments, we started creating more and more investment expertise platforms. Ten years later, or two years ago, we ended up having around 120 different systems – a complete nightmare for our risk managers whenever we wanted to consolidate positions.” It also meant that AXA was not a true global player from an operating model standpoint. “As we could not achieve the follow-the-sun type of portfolio management we wanted with our patchwork of systems, we switched to one single system to achieve a true global operating model. You are not a true global player until you have only one operating model across all your markets, achieving all the synergies and economies of scale. Operating in 28 countries, that is the journey we are now in the middle of,” Joseph Pinto elaborated.

All agreed that moving to a new operating platform is a journey. Kjell Nordgard stressed that: “Having established a global operating model does not mean that you are done – the keyword to success is continuous improvement. You need to tune the machinery to increase your STP rates and to work with your service providers to get them to create efficient standard processes. You also need to make your own add-ons to the system to compensate for the gaps that are still in the market, for instance in matching for certain instruments.”

When AXA started to think about consolidation in 2013, they pictured a complete redesign of the IT architecture, Joseph Pinto explained. The management board and the CEO were two big drivers. They saw the complexity of AXA’s systems as a roadblock to becoming a true global player. Another big driver was the risk of failing regulatory compliance due to the difficulties in getting a strong consolidated view of their positions. “Overall, there was a strong push for a core system and a limited number of satellite systems,” Joseph elaborated.

Moving from outsourcing to insourcing and simplification

At NBIM, consolidation meant a journey away from outsourcing and running multiple systems. “We saw that we had ended up outsourcing what we came to realize was in fact our core business. You cannot fully understand what is going on and make improvements with such a setup. For instance, taking our trade processing in-house, while increasing automation, meant that, today, ten people at NBIM are doing what our service providers had 40 people undertake,” Kjell Nordgard explained. However, it all started with a front office decision to take on multi-asset investment strategies, which led to the building a new data foundation. The new foundation did not only solve data issue but also a lot of other issues the company had had with its service providers.

Joseph Pinto from AXA supported the argument that what you outsource depends on what your core business is, by explaining how outsourcing the firm’s middle office 12 years ago, while focusing on their core business, had been a great strategic move in becoming a global player faster. “For us, it has made us more competitive as we have been able to focus on our core business and develop more sophisticated products compared to what we would have achieved if we had not done so,” he said.

Vendor relationships and a look to the future

Commenting on whether to outsource to multiple service providers or putting all your eggs in one basket and moving towards system consolidation, Kjell Nordgard, NBIM, put another question: “How do you want to bring your eggs to market? Do you want to carry all your eggs in one basket or do you want to juggle a lot of baskets with a few eggs in each? Which is most risky?” Giving NBIM’s answer to this, he explained that: “We find that with consolidation, we also get more flexibility if we want to change something in our operating model setup in the future. If we were to ask someone to take charge of a part of our operating model, we would not have to explain something that would include a lot of disparate parts and systems. Also, operating with multiple vendors, no chain is stronger than its weakest link. When we enter a partnership with a vendor, we do that in a very conscious way to ensure that our strategies are aligned.”

Chryssa Halley agreed: “At Fannie May, we are aiming to have fewer partners and we are very careful about the ones we select. We go deep into the relationship to ensure that our partners are able to scale and that they will also be around in the future.”

A discussion of the impact of new technologies like blockchain and robotics on the operating model ended the panel discussion. All four asset managers agreed that these will have a fundamental impact but also that no one can yet say exactly how. They are all doing projects which to various degrees involve these technologies and actively engage with peers to exchange experiences.