Skip to content

Subscribe to Asset Servicing & Fintech Insights

Discover more information in our monthly publication, the AXIS newsletter, including industry trends, product innovation, Fintech and more from our team of experts.

    Fine-Tuned Efficiency Drives Performance in an Orchestrated Ecosystem

    In a challenging environment, investment managers should focus on efficiency to enhance performance.

    Recent asset manager industry surveys by Coalition Greenwich and Northern Trust, and by BCG and PwC1 all point to the same conclusions regarding the health of the global investment management industry. The decade of ‘easy money fuelled growth’ is over and the next 5-10 years may look very different – operational efficiency may become the key to driving investment performance.

    The core findings revolved around profitability. “Over the past few years, asset managers costs have outgrown revenues by about 2% … in a supportive market, this dynamic has been tolerable … times have clearly changed2”. BCG estimates that asset managers will need to address their revenue and costs in equal measure. “Asset managers need to change … those that (do) stand to emerge strong and resilient for years to come.”

    Furthermore, almost two-thirds of respondents to the Coalition Greenwich survey listed portfolio performance as their number one internal challenge with nearly half stating that cutting costs and increasing efficiency is a top strategic priority in the next three years.

    Investment managers are in business for a relatively simple reason – to manage the assets of their underlying investors in such a way that they generate an investment return for them and be paid a fee for doing so. Therefore, it makes sense for managers to focus everything they do on those two things.

    A viable analogy exists in the world of high-performance sport. Consider Formula 1 motor racing and in America’s Cup class yacht racing, where the singular focus and the difference between winning and being an also-ran is an ecosystem built into the car or the yacht that delivers high speed and reliability – the equivalents of investment performance – at the exclusion of all other things.

    The best performing teams tune their operations to the point where only equipment that tangibly adds value to the pursuit of first place is on the vehicle. There is no spare nut, no bolt, no rope, no line, no sail, no anything that gets in the way of the pursuit of excellence. Clear focus on simplicity and efficiency are the key enablers.

    That begs the question – how can investment managers adopt the same high-performance mentality and deliver the same level of excellence?

    We believe it starts with a simple hypothesis – investment managers should focus their finite resources on functions and activities that add tangible value to the pursuit of investment performance and work with trusted partners to deliver everything else. In other words, don’t put unnecessary nuts, bolts or sails on the boat.

    We’ve seen this work well when the lifecycle of an investment decision is analysed and separated at the point of order origination. The optimal structure would line up investment manager resources to work only on everything ‘upstream’ of the transmittal of an order to the market, and all the functions and activities downstream of that decision to execute are rented on a variable cost basis from service providers.

    The reason this makes sense for many managers now and into the future is that fully comprehensive solutions at every point in the lifecycle of an investment decision, from decision support and analysis to operational support, reporting and transparency to investors, are available from outsourced solutions providers. The benefits seem obvious. A laser-like focus on ‘our own business’ could improve investment returns and operational efficiency. Solutions providers can bring global scale, reach and resources to the table. As an example, managers will be well-positioned to permanently change the shape of their tech stack and may be able to arrest the ever-increasing cost of embedded data and technology solutions by relying on outsourcing. Indeed, simplifying the tech stack and therefore lowering the costs of being in business makes good commercial sense for many managers.

    Investment managers can enjoy the benefits of sensible time-and-resource saving propositions at every step of the value chain, from front through middle to back office. Starting with a review of how trading is delivered may help deliver returns on change projects more quickly. Carrying that approach through the rest of the value chain and plugging into live solutions from global-scale providers can enable managers to develop more flexible, adaptable models to service their own clients.

    In the front office, order execution and foreign exchange solutions are readily available to managers. Similarly, investment operations, portfolio servicing (performance measurement, attribution, risk, and regulatory reporting), fund servicing and data management can be delivered on a modular basis into the middle office. Finally, the back office can be supported too. Trustee and depositary service, custody, fund administration and transfer agency solutions are all tried, tested and ready to support managers.

    Investment managers are natural problem solvers. It’s part of their DNA. Given the challenges highlighted in the recent surveys, those skills can be applied to the key questions – does this function or activity add to our ability to drive an investment return and earn a fee? Is it more cost-effective to do it ourselves? If the answer to those is anything other than a positive ‘yes’, managers should work out how to rent the outcome they seek from solutions providers.

    In short, be like the world’s fastest drivers and sailors. Take steps to orchestrate your whole ecosystem around the highest possible performance outcome. If your aim is to deliver excellence, tune the vehicle to its optimal shape and configuration and deliver everything else from the pit lane or the support boats.

     


    1 Asset and wealth management revolution 2023: The new context (pwc.com)
    2 Boston Consulting Group, Global Asset Management 2023 Report: The Tide Has Turned

    Gerard Walsh Portrait

    Gerard Walsh

    Global Head Client Solutions, Banking & Markets
    Ryan Burns portrait

    Ryan Burns

    Head of Global Fund Services Americas

     


    © 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients (or equivalent) only and is not intended for retail clients and should not be relied upon by any other persons. This information is provided for informational purposes only and does not constitute marketing material. The contents of this communication should not be construed as a recommendation, solicitation or offer to buy, sell or procure any securities or related financial products or to enter into an investment, service or product agreement in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. This communication does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it. Moreover, it neither constitutes an offer to enter into an investment, service or product agreement with the recipient of this document nor the invitation to respond to it by making an offer to enter into an investment, service or product agreement. For Asia-Pacific markets, this communication is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret), address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.