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Fine-Tuned Efficiency Drives Performance in an Orchestrated Ecosystem
In a challenging environment, investment managers should focus on efficiency to enhance performance.
and Ryan Burns, Head of Global Fund Services Americas
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.
Global Head of Capital Markets Client Solutions
Head of Global Fund Services Americas
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