Never let a good crisis go to waste, they say. Asset managers appear to have taken that mantra to heart.
Over the course of a few short months, as the Covid crisis unfolded, the financial industry as a whole underwent rapid change. Nowhere is that change more evident, or more fundamental, than in the asset management industry. It has touched front and back offices alike and even impacted the product mix as investor behaviour and attitudes shifted.
In September 2019 we published a paper assessing what the industry would look like in 2030. It is tempting to say the industry moved more in three months – essentially the second quarter of 2020 – than it was slated to do over three years.
Fast forward with digitalisation
Asset managers are starting to change the way they work. They have hit the ‘fast forward’ button on digitalisation and the pace of process automation is already going up. At Calastone, we are particularly well placed to testify to the last of those three shifts.
Homeworking is the most obvious change. As firms moved into lockdown, behaviours changed – with a move from physical to digital connectivity. For sales teams that meant virtual roadshows and client meetings over Zoom. For the back office it underlined the importance of robust operating systems built around automated processes and flexible connectivity. Counterparties still wedded to faxes found themselves dragged rapidly into the digital age.
Now homeworking is no longer seen as a temporary measure. Several firms, most notably Schroders, have told their staff they will not be required to return to the office full-time. Changes in behaviour that were forced on firms in the early days of homeworking have been refined. Many are now seen as positive, with firms building on the experience of recent months rather than reverting to old ways. M&G has reported that attendance at its virtual conferences and seminars has been strong, ‘with many clients saying they prefer this type of engagement.’
The same firm recently reported it had accelerated the adoption of digital practices in the first half of 2020. It is not alone. Many asset managers realise that digitalisation and automation are the logical consequence of remote working if you are to get staff, counterparties and clients interacting efficiently. At Calastone, we have seen an uptick in client requests for automation. Travel and office outfitting budgets are out. Investment in technology is in.
Broad-based investment programmes
The new investment will be broad, ranging from cloud-based productivity aids and the adoption of collaborative and messaging apps, to thoroughgoing automation of fund processing. We are seeing a new appetite for data collection and a new awareness for what data-driven intelligence can bring – from a better understanding of the client to a differentiation of service levels.
On the one hand this investment is driving new efficiencies. On the other it creates the opportunity to deliver a more streamlined, automated investment service and improve the customer experience as ever more business moves online.
Outside of asset management, we have already seen the emergence of API-enabled Open Banking and ‘Banking as a Service’. This level of change is likely to now happen much faster across the rest of the financial services industry.
What AI can deliver
For many in the industry, the next logical step is to make full use of what artificial intelligence (AI) and machine learning have to offer. Some firms are already exploring this area. Blackrock, for instance, has a business called AI Labs that is reportedly working on projects ranging from the analysis of alternative data sets for investment managers to the creation of a next-generation stock lending platform.
The wild market swings earlier this year may have prompted more asset managers to look anew at AI as an investment tool. For quant-based managers in particular the market anomalies thrown up tested the boundaries of traditional risk management models based on historical data. AI could help generate early warning signals and algorithms capable of responding to sudden shifts in market conditions.
AI also has the potential to cut costs in both client engagement and operations. Natural language processing and increasingly sophisticated chatbots can eat into the costs of investor reporting and servicing.
Enthusiasm for ESG is here to stay
The industry has had to take one further factor into account in the first half of 2020: a marked surge in inflows to ethical/ESG funds. During the market turmoil of the first quarter, record amounts found their way into ESG funds, according to Morningstar.
Our UK-focused Fund Flow Index illustrates how dramatic this buying activity was. In January alone, we recorded £395m of inflows to UK-domiciled ESG funds – almost as much new money as 2015, 2016 and 2017 combined. Even in March, which saw unprecedented outflows from funds as market sentiment crashed, ESG saw only a tiny outflow. The inflows resumed the following month.
ESG inflows have been steadily increasing since late 2017, but the explosion of interest in the first half of 2020 is indicative of a sharp reorientation on the part of private investors. It doubtless helps that these funds have been outperforming the broader market since the pandemic crisis hit, especially at a time where people have become more risk averse. ESG funds tend to be global in their nature, where growth stocks make up a larger share of holdings, and when combined with the funds industry’s marketing push, inflows are driven up further.
ESG funds may still be a niche category, making up just 3% of the total market, but that category is one no asset manager can now afford to ignore.
Technology key to staying in the game
The industry has a lot on its plate. Recent events have underlined the importance of technology investment, both at the front end and the back, if firms are to adjust to the ‘new normal’ world where digital access, digital support and process automation are now essential elements of staying in the game.
The evidence suggests that industry has not only recognised this but is pushing on to the next level where AI and machine learning promise a new level of empowerment. And it is happening with extraordinary speed.