Change is accelerating
This year’s research highlights a striking uptick in the level and intensity of change across the asset owner spectrum. 82% of asset owners claim to be making changes to their investment operations in 2023, double the level that we saw in 2022.
How many asset owners are driving transformation in their investment operations?
(% of respondents with change projects ongoing, per year)
Redesigning the operating model
Why are asset owners driving transformation in 2023?
(Core drivers, % of respondent for each)
Underlying this significant increase in project activity is a consistent theme of “operating model redesign” (which is the cost driver of 43% of projects in 2023, ahead of operational efficiency at 40%).
Rather than focusing on specific pressures (such as costs, risk or regulatory requirements), asset owners across the world are looking to drive fundamental change in their operating models – in order to enable greater efficiencies and maximise their agility (in light of market changes).
Driven by the factors and thresholds that we set out below, there appears to be a generational shift going on through the asset owner operating model today – as investment operations leaders begin to apply the same long-term mindset that they have historically had for investments, to their operating models and infrastructures.
...across the enterprise
This desire for fundamental change across investment operations is evident in the nature and focus of our project work in 2023.
42% of asset owner respondents plan to make changes across their enterprise functions – in preference to driving tactical changes in individual functions across the trade cycle.
In terms of specific functions, 35% of respondents see data management as being central to their change ambition in 2023 and 25% see the management of asset allocations being of critical importance.
Regardless of AUM or profile, we clearly have a robust whole-of-fund view, driven by a scalable data infrastructure, within our sights.
Where is change happening?
Asset Allocation
Asset owners are now devoting as much time to changing their asset allocation processes as they are to incorporating environment, social, governance (ESG) oversight into their daily investment management and monitoring. Approximately 57% of asset owners are working on each area – as the stand out project priorities for 2023.
IBOR
48% of respondents said they are working on adopting new IBOR (investment book of record) solutions – with interest more than doubling year-on-year (from 21% in 2022). With momentum strongest amongst asset owners with US$6 to US$20 billion in assets under management, willingness to invest in core infrastructure and derive a holistic overview of their positions and exposures appears to be a core stepping stone to the robust, enterprise-wide view described above.
Cash management
38% of asset owners are also enhancing their cash management and forecasting capabilities. Rising interest rates across major markets means that the case for investing in sophisticated and more precise cash management technologies is increasingly compelling. Against a historical backdrop of long and unremunerated cash balances, many asset owners are now seeing the value in deploying their cash with the same sophistication as their securities investments.
Reconciliations
Outside of the limelight, investments into improved reconciliations have almost doubled in the last year, with 33% of asset owners focused on this area today. Anecdotally this appears to be driven less by operational efficiency considerations as by an existential need to replace fast-disappearing back office staff. As the impact of the ‘Great Resignation’ continues to be strongly felt in low-complexity, high-volume functions, asset owners are quickly turning to technologies such as artificial intelligence (AI) in order to remain resilient and future proof.
Shareholder governance
At the end of the trade-cycle, 19% of asset owners are strengthening their shareholder governance practices (e.g. proxy voting, class actions etc.) in the face of growing regulatory and end-investor pressures to improve their stewardship practices. EU regulation – principally the Shareholder Rights Directive II (SRD II) – already requires there be clear communication channels between issuers and end investors and heightened transparency around shareholder identification. And with growing pressures driving growing voting volumes across all profiles of asset owners, yesterday’s manual or outsourced processes are in urgent need of revision.
What are the top areas where asset owners are and aren't running projects?
(% of respondents running projects in each activity, per year)
What changes are we running?
Whilst there is no single technology that is proving itself universally from front to back, asset owners are clearly focused on three core solutions in their efforts to drive transformation: the creation of data lakes (a priority for 26% of firms); spreadsheet replacement (a priority for 21%) and outsourcing (also a priority for 21%).
Data lakes drive resilience
With asset owners seeking to embed investments into private assets (for example) into their investment management processes at the same time as increasing their ESG monitoring, data lakes are becoming an indispensable enabler of continued resilience. How else can highly data-intensive activities such as performance attribution or compliance monitoring be adequately supported – despite the numerous changes to underlying data models and portfolios?
Data lakes are also quickly becoming a core first step in firms’ legacy technology transition plans. Only having separated processing from data flows can firms begin to unpick their complex system architectures – and hence reduce their exposure to outdated and sub-standard platforms.
Spreadsheet replacement is enabling a whole of fund view
If 55% of firms have been using spreadsheets for their asset allocation view so far, there is good news from 35% of firms who see the removal of these spreadsheets as a core priority in 2023.
Across asset allocation, portfolio construction, dealing and IBOR, over one third of firms are looking to replace ‘spreadsheets as a platform’ with robust and scalable systems at their heart of their investment operations.
Outsourcing for scale – not just in the back office
Whilst asset owners have historically relied heavily on outsourced partners (usually custodians) for scale in settlements, asset servicing and valuations, it appears that their willingness to outsource is shifting into the dealing room – with 80% of firms looking at outsourcing trade management in 2023.
Similarly, the management of collateral (still highly manual and error-prone) is an outsourcing target for 40% of asset owners – as they seek to drive scalability across their target operating models.
Benchmark your plans
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Are you looking to drive transformation across your investment operations?
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