Investment Technology

Asset Management 2022 vs 2035: from surviving to thriving – Part Two

Chris Brook

09/02/22

Co-authored by Stephen Collie, Technical Lead and Chris Brook Co-founder and Head of Platform Engineering, FINBOURNE Technology

In the first of this two-part blog, we explored how interoperability can help asset management firms tackle technical debt. And we set out our case for why firms must act now – in 2022 – to leverage interoperable solutions, building a bridge between their inhibiting legacy infrastructure and a future of innovation and growth.

In part two of Asset Management 2022 vs 2035: From surviving to thriving, we fast forward to 2035 and look at how SaaS technology, fintech innovation, and a new on-demand era has changed the way asset managers operate in the future. Gone are the days of building your own technology or waiting on your incumbent providers to do so. With interoperability now the operating model of choice across the global Buy Side, we imagine how it could shape emerging trends in 2035 and beyond.

Optimising ESG accountability

Sustainable investing has become one of the biggest trends in recent years. Once considered a specialist strategy, in 2035 ESG is now the new normal. Investors expect asset managers to generate sustainable returns across multi-asset portfolios. They also expect not just a portion of these investments but the majority of their portfolio, to positively impact on the community and the environment.

2030 net zero goals have given way to 2040 targets increasing the pressure on asset allocation. To meet these expectations, asset managers have looked to solutions that can scale and improve the industry’s ESG data management efforts. This is where interoperability plays its part, allowing quick integration of ESG datasets from chosen data vendors, to drive the investment process in a matter of seconds. Combined with an interoperable data management platform that can store data at the finest level of granularity, asset managers can now interpret their data readily, to deliver new insights, including which transactions their returns are coming from.

Where money flows, regulation follows. By 2022, The EU’s Sustainable Finance Disclosure Regulation (SFDR), had already put in place new reporting frameworks to help the sector tackle reporting gaps, creating a level playing field and greater transparency. And COP26 set the tone for the future, by putting biodiversity risk on the agenda. In 2035, these regulations are continuing to push the industry away from negative screening i.e. divestment, and towards positive screening i.e. engagement.

This has created a path for real world change but what about tracking net zero commitments? Native bitemporality, a feature of SaaS technology, now enables firms to see their data at any given point in history with complete lineage, delivering the trust that asset managers have long desired in their data. Firms can now demonstrate data fidelity, by easily rewinding ESG data and viewing a reproducible historical record of events. While this is critical for ESG regulatory reporting, it also enables firms to show accountability and impact towards their net zero progress. This technology combined with regulation and investor demand, is creating the positive shift needed to respond to the climate change crisis.

The rise of the fintechs part II

In 2022, some of the sector’s largest asset managers had already begun launching innovation hubs and incubators, resulting in technology arms that can potentially be spun off as separate businesses. Born from a dissatisfaction of incumbent tech providers not innovating fast enough, these formerly B2C businesses have now created a lucrative B2B market serving their fellow asset managers. In the fallout, they’ve also proliferated the buy-side software space to an all-time high.

Having ridden the first wave of fintech mania and taken on the giants in the industry, we’ve proven that SaaS technology and open software can deliver long-term benefits for the industry, with pioneering solutions like LUSID and Luminesce. In 2035, we are now extending that logic to help our clients achieve more efficiencies across their business as painlessly as possible.

This is where Marketplace, our curated fintech hub, comes in. Taking on complex market research, due diligence and procurement processes, Marketplace lowers the barrier to entry for innovative products, while reducing friction and risk for clients. It forms an open network allowing asset managers to connect to cutting-edge technology and niche solutions in the wider stratosphere, to do what they do best, in as fast a time as possible.

Taking the risk out of human capital

Digitisation and automation have taken on new meaning in 2035. Artificial Intelligence systems are now able to source clean datasets – on-demand – from trusted data sources, with firms assured of their accuracy and timeliness. Employees no longer spend hours each day reconciling, auditing and scrubbing through multiple copies of data.

Rather than replacing humans, interoperable technology has addressed the vast volumes of data submerging people and processes. Firms are now empowered and able to address their human capital risk by making their employees’ roles more valuable with greater focus on upskilling.

And with employees no longer confined by inherited technical debt and highly customised Excel spreadsheets, talent is once again invigorated. Asset managers are combining their resources’ knowledge and skills on alpha-generating tasks, together with newer technologies they can now adopt, to create value, drive growth and secure business continuity.

More than anything, in 2035 asset management employees feel they’re making a difference. They are no longer just ‘keeping the lights on’ and are now working with purpose, to make the world better. Gone are the days of key-person risk and the mass departures seen in the Great Resignation of 2020/21.

Turning up the volume in private market assets

In 2022, institutional investors had already put hefty capital to work in private market assets, as they sought higher returns from under-researched asset classes. According to PEI data, total private markets fundraising – for private equity, private debt, real estate and infrastructure – had leaped from $356.8bn in 2009 to $1211.2bn in 2021. In 2035 this growth continues at pace, as inflation pushes stock prices higher and asset owners increase allocations to find risk-adjusted value.

However, private markets are not exempt from data challenges and many investors are still struggling with translating unstructured data like dry powder valuations, or obtaining a fund-wide view of private market assets alongside ESG and publicly traded equities and bonds. This is where interoperability is forging a path for buy-side firms to futureproof their operations.

Many asset managers have since ditched niche private markets solutions, instead opting for one SaaS data platform across public and private markets. By addressing the data foundation on which their private market portfolios stand and supplementing it with emerging technologies like Natural Language Processing (NLP), firms are now reaping the benefits of a buoyant private assets market in 2035.

Democratisation of investment management

Back in 2022, we started to see investors going direct to market, bypassing traditional financial constructs, including asset managers themselves. In 2035, direct indexing has well and truly taken off, with Gen Z and millennial investors proving to be far savvier on investment strategies such as ESG and smart beta.

In response, asset managers have introduced a range of products to attract investors back but with this comes the challenge of running a range of customised portfolios. For example, understanding how to apply corporate actions en masse, or securing the processing power to scale thousands of transactions across hundreds of thousands of accounts.

At the same time, cryptocurrencies have also gained momentum across the Buy Side, with thousands of transactions daily. And while newer more stable digital currencies have come to market, since Bitcoin and Ethereum, there is still a general scepticism around the energy-intensive nature of cryptocurrencies, which has not surpassed the regulators attention.

The pace at which these investment trends are moving, along with the need to deliver on-demand client reporting has equally fuelled the need for scalable, cloud-native solutions that can deliver elasticity. In 2035, LUSID is now in its element, delivering firms with a real-time, financial data repository, that consolidates and translates multi-asset class transactions, market and reference data, in the public cloud. Using secure entitlements, it makes data available to both asset management firms and their clients.

Meanwhile, native bitemporality is now a critical component when it comes to pricing and measuring risk across the emerging digital asset space, enabling firms and their clients to see their data across two timelines. Where this SaaS feature really shines, is enabling asset managers and their clients to extend platforms like LUSID, with their own logic. For example, giving firms the ability to re-run portfolios against a particular risk-weighting, across two timelines i.e. pre- and post-risk weighting.

This delivers an improved risk profile and reduced exposure, optimally rebalancing where direct indexing is concerned, and offering deeper insights into trading patterns, for future cryptocurrency transactions. Given cryptocurrencies are not immune to bubble risk, the ability to manage exposure in real-time is not only a necessity but could also minimise the need to sell-off real assets and cover margins.

The road to 2035

While the scenarios here are hypothetical, the technology is not. There are many unknowns about the future but our vision of a resilient future is based on a SaaS platform that is living and breathing today, helping clients optimise their operations now and into the future.

Coming back to the Right to fail, while interoperability delivers the means, it’s fintech innovation and SaaS technologies – which have evolved through ideation, failure, sheer grit and determination – that will ultimately get asset managers to the end state they so desire.

The road to 2035 is in sight, but it means doing away with quick fixes, silver bullets and big bang transformation. We believe we have done the heavy lift to de-risk the process of change and deliver incremental steps towards a future of innovation. We have extended the confines of existing operations, helping firms to move away from firefighting data challenges, and to accessing, understanding and controlling their data from day one. Data that tells them exactly what they own and how much it is worth, at any given point in time.

The journey starts here. To reach this end game and achieve the operational change described, the Buy Side will need to work together as a community, leveraging the gains of interoperability across the investment ecosystem. Only then will asset managers move from surviving to thriving.

Chris Brook

09/02/22

twitterlinkedinfacebook