In the first of two articles, I outline some of the themes likely to drive behavior among asset managers during the remainder of 2016 and beyond.
The global financial crisis triggered significant change in how business is conducted throughout the investment management value chain. Time and resources were diverted away from core investment activities towards business risk management, cost reduction, client demand, reporting and related matters. Now, eight years on, while these things are still on the agenda, we hear in daily interactions with our current and prospective clients, a more positive theme - that they are increasingly focused on core investment activities and looking to grow their businesses. The challenge is, how?
As the primary consumers of investment data, the front office must manage, analyze and act upon data from a broad range of sources to make informed investment decisions. In an environment where latency leads to lost opportunity, it will become more and more important for the front office to have position and transaction lifecycle information available, accurate to the second, across all asset classes and markets. Why? Because the competition either has this capability already or is working towards it. Additionally, it will be increasingly difficult for the front office to work in isolation. Firms that can immediately gauge the risk ramifications, performance implications and P&L impacts of their investment strategies will have an advantage over those who cannot integrate external metrics into front office activities in a timely manner.
As asset owners look beyond the mainstream, so alternative investments will continue to take up a larger proportion of assets under management (AuM). Consequently, portfolio management capabilities needed to manage them will become more sophisticated. Some will look to new markets, while others may choose to invest in instruments with potential to offer better risk-adjusted return than traditional securities, such as commodities or insurance-linked products. But while new may equal opportunity, it may also mean lack of experience, structure, and system support.
Diversity of assets being managed means diversity of data sources, which will ensure that data management remains front of mind. Availability of accurate, consistent and timely data of all kinds – transactional, reference, market – is obviously essential for operational efficiency, management oversight, client support and, not least, regulatory reporting. However, every additional data source or store increases the complexity of the information landscape and so makes such availability harder to achieve.
And heightened market volatility, which most market participants agree is likely to remain with us for some time thanks to ongoing geopolitical uncertainty, will only exacerbate the data management challenge as stakeholders require more information more quickly. In rapidly changing markets it is important that investment management firms can easily understand the impact on their exposures, as clients will request immediate updates on their holdings and senior management need to assess business risk. Meanwhile, personnel in operations or portfolio management need to be able to absolutely trust their data to avoid expensive mistakes.
Stay tuned for the next installment of this article, where I will focus on big data, risk management, mobility, digitalization and new regulation.