A new Deloitte report on the year ahead says that 2018, globally, “could be the year that records the highest average [mergers and acquisitions] deal value” for the investment manager sector.
Also, this will be a big year for artificial intelligence and machine-learning algorithms; Deloitte predicts that 70% of new hedge fund launches “will likely include investment processes that are supported by computer models, including AI and machine learning algorithms,” in contrast with just 47% in 2015.
Managers looking to remain up to date will have to be working with and through a flexible operating model, one that can keep them in compliance with changing regulations, manage a range of products, and straddle the different geographies. At US buyside firms, managers’ confidence in operating systems is somewhat less robust that it is amongst their East Asian or their European colleagues. Asked to rate their own systems, only 15.4% of the US managers surveyed said they were confident the systems could comply quickly with new operations, the same amount said their systems could expand into new geographies, and a somewhat larger percentage but still only 23%, said they could quickly introduce new product classes.
The report observes that expense discipline is critical for many IM firms and will remain so. As a consequence, in recent years, “many IM firms have started to rely on full-service providers for various front-and-middle-office functions, such as dedicated trading desks and settlement functions.” This trend will continue.
What about the Cloud?
Relying on the computational abilities of “the cloud” rather than on-site and proprietary tech is the silicon analog of outsourcing the settlement function. Deloitte says that many in the IM sector “are implementing low-cost, agile cloud-based solutions instead of upgrading their existing proprietary infrastructure as they feel the pressure to improve efficiency and agility.”
As action steps, Deloitte recommends that firms:
- Review their current and future operational needs against their existing staff and tech infrastructure;
- Target the functions that require sizeable further tech investment for potential transformation;
- Determine if cloud solutions fit with their strategic plans;
- Develop management controls around process changes “tailored to the peculiarity of the outsourced components”;
- And consider risk-based resource allocation to be part of a broader operating model transformation.
According to survey data, only 40% of respondents from IM firms “agree” or “strongly agree” that their organizations have a clear and coherent digital strategy. Deloitte see a future in which “most IT firms” (the other 60% presumably) “appear to be falling behind customer expectations for a digital experience and are not likely to catch up in the next few years.”
Worse, only 2% of IM firms have a digital strategy that extends beyond five years.
There is a generational divide at play. Millennials (roughly, people born between 1982 and 2004) prefer digital interactions whereas the elders might still desire face-to-face or at least voice-to-voice exchanges. Some IM firms target Millennials, and such a strategy “could demand quantum change … early adoption of new approaches is often needed to target them.”
The world’s largest money-market fund is one created by an affiliate of China’s Alibaba Group, known as Yu’e Bao, a phrase that translates into English as “Found Treasure.”
Deloitte recommends looking to this fund as an example of the coming transformation, the way that what quite recently seemed a “futuristic vision” is now fact. Yu’e Bao is “the result of processes and technology coming together to meet the needs of a large, underserved segment.” Yu’e Bao has generated its assets under management of more than $200 billion by “locating idle balances in the largest digital payment platform in China and sweeping them into the fund.” The fund thus has many low-balance accounts but with 400 million customers in 2017, even low balance accounts add up nicely.
A Year of Exceptions
Deloitte’s report concludes that looking back, from 2019 or further out, 2018 will be seen as a year of exceptions. Some exceptional firms will be seen as having got it right, combining the elements of growth, agility, and customer service.
“These exceptional firms will likely set the stage to meet or exceed their five and 10-year goals. A vision of the future and the will to apply the resources in the present … could be the prerequisites for success in 2018, and the years ahead.”