Navigating the Industry's Headwinds in 2022 and Beyond

For the past several years, Cutter Associates has been working with asset managers and asset owners as they’ve navigated a series of strong headwinds. During this time, investors have favored lower-cost passive strategies over active management, while market data costs have continued to increase. These factors strain margins and increase the focus on controlling costs, making a firm’s search for alpha even more challenging. Meanwhile, the pandemic has clearly strengthened these headwinds by exposing the flaws within many investment firms’ operating models.

Various themes have emerged. Alternative investments have gone prime time and the intense focus on ESG has continued to build. Data management and analytics are becoming requirements for internal and external strategies. At Cutter, we recognize that these themes remain relevant and topical. Asset managers, asset owners, and service providers are knee-deep in dealing with them and now find themselves going deeper. Frankly, when it comes to these challenges, the industry has a lot to contend with — and these headwinds will persist for years to come.

For 2022 and beyond, we expect asset managers and asset owners to go deeper with M&A activity for scale and growth opportunities. Firms will continue to add complex investments to their asset mix and invest in technology to support these assets. Meanwhile, vendors that support investment managers will continue with their own M&A activity, but they’ll go deeper in their client support by partnering with competitors to offer interoperability, modularity, and more opportunities for service support.

Profound changes in operating models and how we work

Many of our clients are either planning for or are already underway with their transformations. In addition to finding the best way to aggregate/organize business services into the organization and technologies, you now have several options on how to source those services between in-house capabilities, external services, and/or cloud. While services once were available only for post-trade execution functions, they are now apply across the enterprise. Additionally, there is much higher demand for more real-time data for decision support, including the integration of real-time custody data. Much of this cannot be accomplished through legacy technologies. This and many other functions require transformation to newer technologies that fully support a digital environment.

Generational change

Our industry is also going through generational changes. Our workforce and clients are evolving into a more demanding, just-in-time culture. All participants have more technical ability and are more demanding for deeper and faster access to information. Given the clients’ increasing appetite for digital communication, inbound data becomes a critical function for product development, marketing, and sales. This requires a mature data management function that supports high quality mastering combined with a robust analytics infrastructure.

Transformed corporate cultures and operating models

After two years of the pandemic restrictions, corporate culture and operating models will be different going forward. There will be more support for a hybrid work model supplemented with more advanced collaboration tools for virtual workspaces. At the same time, the labor market has become increasingly competitive and volatile, adding more pressure to operating margins due to increases in staff acquisition costs, compensation, and benefits. It is unclear if this is a short- or long-term change.

ESG’s impact

Regulatory agencies and asset owners continue to push for more ESG disclosures. Younger investors and younger potential employees are asking hard questions. They want to ensure that the asset management firm they’re investing with is investing responsibly, while younger employee candidates want assurance that the asset management firm they work for is a good corporate steward. Watch for asset managers to continue building out their ESG strategies from the top down, including implementing new ESG-related datasets and frameworks to evaluate both investee companies as well as third-party suppliers. Asset managers and asset owners also will go deeper in incorporating diversity, equity, and inclusion (DEI) efforts into their organizations.

Although the headwinds continue to build in asset management, today’s firms remain committed to advancing and progressing. As the industry’s work environment and corporate culture transform, we at Cutter remain committed to helping asset managers reach operational efficiency and support alpha generation responsibly.

To learn more, read our Trends in Asset Management: 2022 and Beyond whitepaper or contact us at connect@cutterassociates.com to speak with a Cutter consultant.