Entering 2024, some things have not changed for asset managers. As was the case a year ago the industry faces an uncertain economic climate, with much debate about whether a recession will come, the cost of geopolitical instability, and for how long interest rates will remain elevated.
In parallel, continuing what has become a familiar theme, fee compression and wavering investor confidence are pressing hard on business performance. One global survey of senior investment management executives found 41% expect revenue to fall in 2024 against 38% who anticipate growth.
The questions that arise from these challenges are equally familiar. Asset managers and servicers must change to remain competitive but how? How fast should they move to transform their business models and in what direction? Should the focus be primarily on cost reduction or revenue growth, or dare we say both? How can the pressing needs of the next quarter, or the quarter after that, be balanced against the investment requirements over the coming years?
That brings us to what is different from a year ago: the prevailing attitude towards the question of technological change. For some time the stance on themes such as generative AI, distributed ledger technology and tokenised funds has been largely conceptual – proof of concepts. Now the urgency of change is focusing minds on the means to achieve it. Increasingly, experimentation is turning to action and debate is hardening into decision – more akin to focus on pilots rather than proof of concepts.
Developments in the regulatory sphere are symptomatic of an industry focused not just on ‘if’ but ‘how’. A can-do attitude is starting to take hold, evidenced by the way regulators are beginning to collaborate across borders on innovation: bodies from the UK, Japan and Switzerland have now all joined forces with the Monetary Authority of Singapore in its Project Guardian scheme working with industry partners to explore use cases of tokenisation and digital assets. That was followed by the publication in November of a framework for tokenised funds in the UK, supported by the FCA.
As long-term challenges persist, therefore, attention is turning to how innovation can help to thread the needle of achieving growth without increasing costs. We expect 2024 to be the year when the industry capitalises and builds upon this momentum, benefiting firms with clear and focused innovation strategies, and most importantly an outcomes orientated approach as opposed to an action orientated one.
From concept to reality
Every asset manager recognises that technology is becoming more important to the success of their business model, with a significant role to play in driving much-needed cost savings as well as opening up commercial opportunities.
The priorities may vary for each firm, with some more focused on product innovation while others work on platform integration. But the necessity is common: to find ways in which technology can help deliver against business needs in a measurable way.
The progress of the last year suggests that much of this attention is converging on one area: the development of ultra-efficient digital investment vehicles that will provide choice for the customer while delivering efficiencies for the provider. As the regulatory path to tokenisation clears, asset managers are responding: in our recent survey, over a third said they are already implementing a tokenisation project, including 38% in APAC and 45% in North America. Tokenised funds are fast moving from concept to reality, and the coming year will make clear which asset managers are ready to seize the moment.
For asset managers, deciding how to approach this changing environment is only the beginning. In 2024 every firm will also be confronted by additional choices. Do they build their own solutions and teams in house or outsource? Do they persist with legacy technology that gets the job done more quickly today, or make the sometimes difficult transition to a new stack that has much more scope and opportunity? Or do they find a balance, and strangle legacy technology, insulating it with a host of wrap around services, such as API’s, and enhance the client experience this way? What investments must they press ahead with, even when cost savings are a priority? What does the Return on Investment (RoI) need to look like to get the required approvals and management board support?
The challenge for firms is to be ‘tactegic’: strategic in thought and tactical in delivery. In 2024 it won’t be enough to say that you are hiring people to drive an innovation project or explore the implementation of a new technology. That work will also have to show outcomes and deliver incremental benefits – to build confidence that investments made today are on track to deliver returns tomorrow. In the current environment, everyone from board members to clients only cares about one thing: the outcome.
Reasons to be cheerful
As they look inwards towards a combination of efficiencies and new growth opportunities, asset managers must work in an uncertain macroeconomic climate. In 2023 investors have mostly favoured safety: UK investors parked more cash in money market funds in the first eleven months of last year than in the previous eight years combined. Commensurately, equity funds saw six straight months of net outflows and ESG funds seven.
At the same time, pockets of growth are clear. Globally, ETFs saw assets under management increase by 18.7% in 2023, allowing the sector to top its all-time high from 2021. Often associated with passive funds, the ETF model is increasingly shifting into the actively managed space: in the US, launches of active ETFs outnumbered index funds last year by three to one, and in Europe such funds saw more than three times the inflows in the first nine months of 2023 than the equivalent period a year before.
The industry continues to find ways to grow, and is approaching 2024 in what might be best described as a state of cautious optimism. With inflation cooling, the possibility of rate cuts is enticing for markets, while the considerable volume of assets sitting in cash represents dry powder ready to be deployed.
However markets turn in 2024, asset managers know they must get ready for a future in which their clients will increasingly demand seamless service, extensive choice and intelligent personalisation. The decisions made now about how and where to invest in technology will continue to be felt for years to come. As use cases become established, the regulatory environment crystallises and competitors make progress, the coming year will be a time for bold choices and clear priorities. As we mark the centenary of the mutual fund, the need for the industry to focus on the future, and for individual firms to define their place in it, is more pressing than ever.