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Perspectives

2019 Investment Management Outlook: Mid-year review

QuickLook

Last November, the Deloitte Center for Financial Services published a 2019 investment management outlook. We focused on how firms are picking the right growth options, creating operational efficiencies, and delivering the next level of customer experience. In each of these areas, we noted market trends and made a few predictions. Let’s see how some of these trends and predictions are actually playing out in 2019.

August 29, 2019

A blog post by Doug Dannemiller, Investment Management research leader at the Deloitte Center for Financial Services, Deloitte Services LP

Last November, the Deloitte Center for Financial Services published a 2019 investment management outlook. We focused on how firms are picking the right growth options, creating operational efficiencies, and delivering the next level of customer experience. In each of these areas, we noted market trends and made a few predictions. Let’s see how some of these trends and predictions are actually playing out in 2019.

Trends

First let’s explore the trends we identified that have continued to play out as expected: mergers and acquisitions, development of alternative data capabilities, and the accelerating use of artificial intelligence across the organization.

Mergers & acquisitions (M&A)

Many investment management firms have used M&A as a tool for growth, capability enhancement, and cost optimization through scale. The levels of M&A have been consistently high throughout the first half of 20191. Global regulatory requirements and competitive pressures are expected to continue to drive higher than average M&A activity in investment management.

Alternative data processing

Many firms are developing alternative data processing capabilities to improve alpha generation. The marketplace of alternative data providers is growing on a daily basis, with more than 400 firms selling alternative data as of July 2019. Also in the news are notable long-only managers, such as Canada Pension Plan Investment Board (CPPIB), that are developing these capabilities to augment their investment processes3. Alternative data inclusion in the investment decision process is becoming a mainstream capability.

Artificial intelligence (AI)

Artificial intelligence takes many forms, and in investment management firms AI traction is accelerating in back-, middle-, and front-office processes. Where AI is being implemented varies dramatically, with more quant and tech-savvy hedge funds implementing AI to enhance trading capabilities, while more brand-name traditional firms are using AI to gain efficiencies in the back and middle office. Evidence indicates firms are using AI in conjunction with, rather than as, a replacement for personnel. It is an efficiency or effectiveness play, not a replacement play4.

Predictions

Our two growth predictions for 2019 were “to be determined” at best and “not likely to pan out” at worst. The first prediction was that we would see success among investment managers targeting China that have an operating model focused on distribution agility, local partnerships, and product transparency. It is too early to tell if that is the case.

The second prediction was that fulcrum fees would emerge as a growing trend in 2019, which appears to have plainly missed the mark. Key distributors of investment products are slow to embrace variable fees. Perhaps they doubt that an investment firm should be paid more for doing what is expected of them in the first place.

In our “bottom line on growth” we recommended that firms consider investment in data storage and analytics and be aggressive when acquiring new capabilities. Both of these recommendations stood the test of time through the first half of 2019. For example, in their largest deal since the financial crisis, Morgan Stanley recently acquired the SaaS equity administration provider Solium Capital at a 43 percent premium in order to enhance their wealth solutions for the workplace and provide their advisors with another channel for clients.5

Creating operational efficiencies

In the outlook, we noted the trend that investment managers are fast embracing the cloud and advanced analytics for differentiating processes in the front office and for non-differentiating processes in the middle office.

Are firms continuing to follow the advanced analytics trend called out in the outlook? It appears so, even in the front office where firms are concerned about the balance between talent and technology, because the talent is highly skilled and knowledgeable. While many firms are reluctant to discuss strategy, Franklin Templeton revealed it plans to develop advanced analytics in the front office to improve efficiency and alpha-generating capabilities.6 Admittedly, this evidence is anecdotal, but until a comprehensive dataset covering the industry emerges, there isn’t much better to go on. Let’s say the trend is likely to continue.

We made two predictions: that the use of proprietary indices in ETFs would accelerate, and that PE firms and long-only managers would join hedge funds with utilization of alternative data in their investment decision processes.

Utilization of proprietary indices has continued, but it has not accelerated. As of July, roughly 22 percent of the index funds brought to market during 2019 have used proprietary indexes compared to 30.3 percent in 2018 and 27.4 percent of ETFs launched in 2017.7 One of the important reasons for the slight downturn may be the increased regulatory scrutiny of proprietary indices, focused on disclosures.

As for alternative data adoption in the investment management process by PE firms and long-only managers, there is evidence to support that prediction8. Long-only firms are developing alternative data capabilities, and PE firms are as well, albeit with slightly customized buying approaches to mesh with the buy and hold strategies in PE funds9.

Delivering the next level of customer experience

The ability to develop and deploy applications to capture the next generation of investors was emphasized in our outlook. We noted that digital maturity was lagging in investment management compared to other industries. We also stressed the coming importance of digital voice assistants (DVA), because it is an emerging technology interface that incorporates AI, and because it represents an opportunity for fintech firms to come between investment managers and their customers. This one, we nailed. Several of the largest investment managers are reported to be deep into DVA development10.

The predictions for customer experience are less pointed than some of the others, because it is much more subjective. We said that “customer engagement and building meaningful relationships will be more in focus than ever as investment managers compete for AUM in 2019,” and that “many investment managers will strive to offer newly designed customer portals, most likely by acquisition or partnership with tech-savvy firms.” We can’t say customer engagement is more in focus than ever. On the other hand, new customer portals are being developed, giving us a solid 50 percent on these predictions11,12.

This exercise reveals that trend identification is valuable and important, and that predictions are inherently uncertain. What is your experience? Are trends playing out as you expected? Are your strategic plans unfolding as expected in 2019? 2020 will soon be upon us. As we take a look back to how we thought 2019 would unfold, we also begin planning for the next year. Don’t hesitate to call on us to share our insights and perspectives to inform your planning process. Look for the next investment management outlook to come out before the start of 2020.

What do you think?

How is 2019 shaping up for the investment management industry?

Join the conversation on Twitter: @DeloitteFinSvcs.

Endnotes

1 Martin Järvengren and Dr. Roger Kiem,” Financial Institutions M&A: Sector trends - June 2019: Asset/Wealth management,” White & Case LLP, July 8, 2019, https://www.jdsupra.com/legalnews/financial-institutions-m-a-sector-38176/

2 Website: “Industry Stats”, Alternativedata.org, accessed 8 August 2019, https://alternativedata.org/stats/

3 Geoff Zochodne, “How CPPIB is tapping ‘alternative data’ to refine its investment processes”, Financial Post, 18 March 2019, https://business.financialpost.com/news/fp-street/how-cppib-is-tapping-alternative-data-to-refine-its-investment-processes

4 Matt Egan, “How elite investors use artificial intelligence and machine learning to gain an edge,” CNN Business, February 17, 2019, https://edition.cnn.com/2019/02/17/investing/artificial-intelligence-investors-machine-learning/index.html

5 Liz Hoffman, “Morgan Stanley, in Its Biggest Deal Since Crisis, Courts Future Millionaires,” The Wall Street Journal, February 11, 2019, https://www.wsj.com/articles/morgan-stanley-in-its-biggest-deal-since-crisis-courts-future-millionaires-11549885394?shareToken=ste095a4ad968946119842bd59e64ae065

6 Randy Bean, “Franklin Templeton Embarks On Ambitious Data And Analytics Transformation”, Forbes, 13 Mar 2019. https://www.forbes.com/sites/ciocentral/2019/03/13/franklin-templeton-embarks-on-ambitious-data-and-analytics-transformation/#75efca4da706

7 Jill Gregorie, “SEC Examiners Flagging Flaws in Custom-Built Indexes,” Ignites, July 15, 2019, https://www.ignites.com/c/2438173/289523/examiners_flagging_flaws_custom_built_indexes

8 Nick Wells, “Alternative data comes of age and investors are noticing”, CNBC, April 23, 2019. https://www.cnbc.com/2019/04/23/alternative-data-comes-of-age.html

9 Press release, “Eagle Alpha Announces New Solutions for Private Equity Firms”, BusinessWire, 11 April, 2019. https://www.businesswire.com/news/home/20190411005868/en/Eagle-Alpha-Announces-New-Solutions-Private-Equity

10 Meghan Morris, “'Alexa, what ETF should I buy?'”, Business Insider, June 13, 2019. https://www.businessinsider.in/Alexa-what-ETF-should-I-buy-Asset-managers-like-BlackRock-and-Invesco-are-testing-out-voice-assistants-but-its-too-early-to-tell-if-customers-will-actually-use-them/articleshow/69773482.cms

11 Dieter Holger, “Startups Target Millennials With Social-Investing Apps”, Wall Street Journal, June 10, 2019. https://www.wsj.com/articles/startups-target-millennials-with-social-investing-apps-11560219180

12 Lananh Nguyen, “JPMorgan app draws Millennial investors with lure of free trades”, Bloomberg, May 15, 2019. https://www.bloomberg.com/news/articles/2019-05-15/jpmorgan-app-draws-millennial-investors-with-lure-of-free-trades

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.

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