Competitive market pressures are stronger than ever, and volatility is back with a bang, putting the onus on smaller and emerging asset managers to find new ways to adapt. As firms reassess operating models with urgency and look to differentiate their service against a backdrop of sustained pressure on fees and shifting investor product demand, what are the top 10 trends shaping the asset management industry in 2022?
1. Inflation comes knocking
Opinions differ on how long inflation is here to stay for, but as it continues to rise, asset managers need to find new ways to protect against the worst of it. Previously out of favour strategies, asset classes and geographies have already started to make a resurgence.
With inflation widely expected to increase further before the end of the year, many investors have indicated they expect to reduce exposure to traditional fixed income assets. But investors aren’t completely put off by fixed income, as structured credit becomes a more attractive proposition, despite challenges around liquidity and valuation.
2. Standardising ESG reporting and disclosures
Interest in ESG funds has increased exponentially in recent years and there has been no sign of that slowing down in 2022. But it is not just inflows that have been increasing. As policymakers turn their attention to ESG concerns, there has been increased pressure for asset managers to provide more data and consistent reporting around ESG investments. Alongside the ongoing rollout of SFDR regulation, EU taxonomy and MiFID II sustainability preferences have also been added to the growing stack of ESG regulations asset managers must adapt to.
3. The regulatory onslaught
Regulatory reporting burdens continue to mount in 2022. As UCITS funds prepare for the transition to PRIIPS KIDs for retail investors beginning in 2023, and the rollout of ESG regulation continues, it all follows hotly on the heels of European Securities and Markets Authority guidelines on liquidity stress testing, introduced in September 2020. Under the guidelines, fund managers must stress test the assets and liabilities of their funds, including stressing potential redemption requests to combat liquidity risk. These obligations are on top of existing extensive reporting requirements for UCITS, AIFMD, MiFID, DTCC reconciliation under EMIR, Solvency II, ANNEX IV, OPERA et al., meaning asset managers are being forced to spend more time on regulatory compliance than ever before.
4. Rethinking Data Strategies
As firms look to find operational efficiencies, asset managers are reflecting on their data strategies in order to break down internal data silos and improve the quality of data that is used for portfolio analysis, client and regulatory reporting.
Asset managers’ ability to comply with their regulatory reporting obligations is increasingly tied to their ability to consolidate and aggregate data across multiple systems. Many are finding that with the burden of integrating new ESG metrics into portfolio analysis and reporting, legacy systems are struggling with the volumes of data required.
Data is also the fuel behind comprehensive performance and risk reporting, and with the underperformance some managers face in current market conditions, providing it accurately and quickly is more important than ever. Being able to consolidate and aggregate data rapidly across systems can help managers identify the performance drivers and detractors within a portfolio, along with gaining a full understanding of exposures and risk.
5. Providing a digital reporting experience
As competition for capital continues to rise, an exceptional reporting experience can go a long way to creating loyal clients and attracting new mandates. Investors increasingly favour managers that can provide a digital reporting experience where they get a near real-time view of top-level performance and risk metrics, but also the ability to look granularly at the individual security level. For asset managers looking to differentiate their service offering, providing only static, periodic reports is simply no longer enough.
6. A heightened focus on risk
In volatile markets, investor demands when it comes to risk management become deep and broad. Robust processes and high-quality risk reporting are paramount. As is the ability to deliver a wide range of analytics, including portfolio sensitivities, scenarios, stress testing, risk contributions and liquidity, alongside performance contribution and attribution analysis. Strong risk governance frameworks providing daily automated monitoring of regulatory and fund risk profile limits, with alerts to notify managers of any breaches, are essential for maintaining fund integrity.
7. The importance of transparent reporting
Transparent reporting is a vital contributor to investor retention, especially when performance has been struggling. Alongside their investment teams, allocators have non-investment teams who value high-quality client service and will have a significant say in deciding whether to redeem from a manager. Investors will need reassurance that any underperformance is temporary, especially with strategies that are prone to volatility and require a full cycle to deliver. Feeling confident they are not being misled or that anything is being hidden is crucial. Transparent and easy to understand reporting go a long way to providing that confidence.
8. The squeeze on fees continues
As investors continue to show partiality to lower-cost passive investment funds, the pressure on fees continues for active managers. Even amid improved returns in recent years, the industry continues to drop its fees and see investors pressing for even more concessions. It has put the pressure on asset managers to protect their margins by finding operational efficiencies with technological platforms and differentiating their service with outstanding reporting.
9. Cybersecurity concerns
Data security concerns were once of the main objections for asset managers moving to cloud-based software. But as the risk of a cyber-attack remains more prominent than ever, asset managers’ data is far safer in the cloud than on an in-house server.
Cloud-based solutions employ security measures beyond the affordability of most growing asset managers, where resources are often in short supply. Sophisticated detection systems, and strong authentication and encryption techniques to protect user data are standard. The level of investment and specialist expertise vendors can devote to monitoring the infrastructure and addressing new threats as they emerge ensure ongoing security, while fail-safe business continuity protocols maximise system uptime.
10. The move to cloud solutions
In a period of volatile markets and intense competition asset managers need to be nimble. Cloud-based investment management software gives smaller and emerging asset managers the ability to automate burdensome data management and reporting workflows, whilst also providing a radically improved reporting experience for clients.
Automation also frees employees from low value, laborious tasks such as manual data aggregation and reporting, allowing them to focus on higher value portfolio management and business development initiatives.
Data and digital transformation have never been more important for asset managers. Not just to control overheads and find efficiencies, but to drive growth and attract new capital too.
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