Asset Managers Build Resilience Amid Friction

Throughout the past year, as severe challenges have continued to arise across the globe, the asset management industry has demonstrated its resilience in a variety of ways. 

Russia’s war in Ukraine, worldwide economic stagnation and the continuing global disruption related to the COVID-19 pandemic have contributed to a sobering environment for asset management firms. The ongoing regulatory burden and increasingly complex technology landscape also have created challenges.

The modest rebound on stock markets this first quarter, following a dismal performance having plunged to near double-digit rates in 2022, has meant growing anyone’s investment portfolio is still extremely difficult. In The Grant Thornton International (GTI) Business Report, in the second half of 2022, one percent of asset management firm respondents reported optimism about their own economy. That’s the lowest optimism mark in the past five semi-yearly GTI surveys.

In the face of the current economic uncertainty, asset management leaders have been refocusing their attention on core business issues and assessing the key risks to continued growth. They are employing targeted strategies that react to investors’ demands, ensure a resilient operating environment and streamline operations to focus on revenue generating activities.

These strategies are helping asset management firms adapt, build resilience and succeed during these difficult times. 

The GTI Business Report reveals that during the second half of 2022, for mid-market companies the percentage of asset management respondents expecting to increase profitability fell by double digits; however, fifty-six percent of these respondents still predicted that their profits would rise in the next 12 months. 

Asset managers are now at an inflection point, leaving a long-extended bull market and realigning their business in the short and long term.

Mergers and acquisitions remain a prominent focus in asset management as scaling operations through acquisition has proven a successful way to survive and thrive in the uncertain environment.

Consolidation helps firms spread risks and opportunities across a larger client base, opening doors to new geographies and presenting opportunities to diversify products.

We continue to see a trend of vertical integration in which organizations are expanding the breadth of services and products they can offer across the life cycle and supply chain, from advice through to distribution of services and beyond.

Of course, consolidation as a strategy comes with its own risks. First, a transaction is only successful if integration is carried out thoughtfully and skilfully. Merging talent, processes and systems can increase efficiency and effectiveness, but creating strong alignment within the first 90 days after a transaction is critical for success.

Second, mergers can lead to increasingly complex operational structures that can bog down operations in bureaucracy. Therefore, constructing optimum operating models and determining how operations will be integrated either in-house or in partnerships with third-party providers is important for maintaining efficiency.

Across the industry, we see common areas for outsourcing being those that are either highly technical and require deep specialist expertise, such as cybersecurity, or highly voluminous activities that can be resource heavy, such as AML, finance and reporting. Outsourcing is also common for non-core activities, such as vendor management or procurement activities.  There is no one-size-fits-all approach to outsourcing, and each organisation is tailoring how it works with third parties to best serve its client base and take advantage of broader market expertise and talent.

This trend will continue in the coming years as talent shortages continue and cost reduction remains a key focus. Where appropriate, consolidation can provide strength in numbers as organizations in asset management continue to display the resilience needed to succeed in challenging times.