LONDON – As the asset management industry experiences significant change, companies are turning to technology to reinvent and differentiate themselves, creating a $3.4 billion industry by 2012, says a new report by Datamonitor.
Technological developments within the evolving asset management industry, says the drive to offer superior performance is changing risk procedures in both the front and middle office. Outsourcing fund marketing functions is growing in popularity for asset management firms to maintain efficiency whilst online issuance is developing as an effective distribution channel, although several models exist. The report expects global asset management spend on front office technology to top $3.4 billion by 2012.
The fortunes of asset management firms over the last few years can only be described as being mixed , says Amit Shah, Financial Services Technology Analyst with Datamonitor and the report?s author. The downturn in financial markets in the early 2000s and the resulting outflow of global assets under management (AuM) caused the industry to suddenly shift from a high-growth to a low-growth environment forcing asset managers to become more mature in the management of their business in a very short space of time. In a changing market, asset managers are looking to make effective strategic investments in technology to assist them to enhance their product offerings.
The drive to offer superior performance is changing risk procedures in both the front and middle office
The asset management industry globally continues to exhibit significant reform and shows no immediate signs of slowing. Regulatory bodies still proceed to examine existing compliance measures in a bid to further provide security and transparency for investors. In addition, the relationship between investment firms and third party distributors is under constant scrutiny. This is all occurring as new investment products are being demanded to provide superior returns. Asset management firms are finding themselves delicately balanced between expanding their product set and performance statistics to boost revenues and maintaining operational efficiency at a time of downward pressure on existing margins.
According to Shah, the evolution of the asset management industry is causing firms to direct their trading strategies to a point on the investment spectrum where risk and reward can be effectively balanced based on investor demand. Firms will differ in their quest to find opportunities to add value through execution. This will determine their preference towards either passive or active alpha* strategies
The most successful players in the market will be firms that choose to alter their regime to focus on satisfying client needs through utilizing advanced technological solutions that integrate real-time performance and risk information into the investment decision making process. These market leaders will use alpha opportunities and combine these strategies with customized client-based solutions based on return objectives, risk and time horizons.
Emerging markets provide another route to profitability
The trend to exploit overseas markets has become clearly evident. China, Korea and India have begun to attract significant amounts of exposure. This is occurring at a time when governments in that region are putting a high amount of focus on encouraging savers to become investors, thereby transforming the huge saving rates in existence into capital to fuel Asian capital markets. Similarly, in the Middle East tremendous amounts of money have stayed within the country following 9/11, prompting demand for asset management services.
China is one of the leading lights and the country s economy continues to grow strongly, prompting some speculators to predict an inevitable slowdown. However, asset managers for the time being continue to enter the market, providing investment products and advice to the middle class pre-retirement. RBS has used its partnership with the Bank of China to target the nation s wealthy elite through joint credit card schemes and wealth management services in alliance with Coutts. Similarly, the large number of middle class wealth owners in India has precipitated strong investment inflows into the region. These two are key markets that make up the BRIC (Brazil, Russia, India, China) economies, the next big emerging markets.
Datamonitor expects these regions to continue attracting considerable investment from overseas. Foreign firms will hope to offer sophisticated and advanced operational and risk management techniques in order for these markets to function efficiently. At the same time, local governments will need to work closely with asset managers to achieve structural balance in the economy.
Any financial markets organization in this space looking to take advantage of this opportunity will need to take a step-phased approach. This involves firstly establishing access to a neighboring economy as a springboard, then establishing relationships and entering into joint ventures before targeting a full service locally. For asset managers, the joint venture step with retail banks is especially important as it opens up access to an established customer base and thus distribution channels are already formulated. In addition, foreign firms can benefit from local expertise in terms of market conditions and regulations.
Shah concludes:
Asset managers are looking to make effective strategic investments in technology to assist them to enhance their product offerings. In a bid to gain superior returns, the traditional asset management sector is gradually converging with the previously distinct hedge fund area. Product development has now reached such a point that traditional firms are pursuing alternate strategies previously employed by hedge funds. As this trend continues, risk management capabilities in the front office will be high on the agenda for IT spend. In addition, to combat low margins, operational efficiency will also rise in importance as more firms pay increasing attention to the decision on how best to structure themselves outside the front office.
a>>
