Asset Management in 2021: Scale Up or Miss Out

By Bob Guzman, Oliver Kroll & Dan Taylor

2020 was a challenging year for the asset management industry. The outbreak of Covid-19 intensified existing headwinds, which included increased competition, fee compression and rising client expectations. As the year drew to a close, news about the impending roll-out of vaccines fueled optimism across global markets. However, with Covid-19 cases still on the rise, timing of full vaccine deployment and further fiscal stimulus unknown, a challenging market environment is likely to prevail at least for the first half of 2021.

For asset managers, the impact of the pandemic accelerated the need to transform business models and processes to deal with the demanding environment. Despite Covid-19 presenting an opportunity for active managers to demonstrate their ability to navigate extreme volatility better than their passive peers, research demonstrates that only one third of active fixed income funds outperformed their benchmarks during the critical first six months of 2020.

Passive investing continues to gain ground as more and more investors choose the certainty of market returns at very low cost over the uncertainty and volatility of active returns at higher fees. The growing popularity of passive & systematic strategies continues to pressure fees for active management, aggravated further by a persistent low yield environment. But active managers are holding their ground by taking steps to boost their competitiveness in the market – investing in new skills, new technologies and new product strategies. Today’s informed customers expect demonstrable value for money delivered through innovative products and solutions.

In 2021, we expect a continuation of this trend as successful asset managers expand their efforts to pursue scale and differentiation. Many firms are attempting to achieve scale and leverage their cost base by merging with, or acquiring, competitors. Last year saw several high-profile deals across the industry, and this consolidation is likely to accelerate in 2021. However, we also expect an increased push for organic growth as many asset managers attempt to optimize performance and efficiency by applying technology to processes that enhance their human productivity in both portfolio management and research.

To stay competitive, intelligent automation is necessary and can be achieved through advanced technology and AI, providing a solution that enables automization and optimization of investment processes. With the right tools, large amounts of data can also be transformed into useful intelligence and allow asset managers to quickly adapt to a changing industry.

Going forward, the merging of data and digitization of firms’ human intellectual property will play a key role in not only helping asset managers accomplish their scale goals, but also improving efficiency and the ability to meet client objectives. By using smart technologies, asset managers can optimize critical parts of the investment process and systematize their strategies, which subsequently enables the creation of tailored investment solutions more aligned with specific client requirements.

Technology will not replace the asset manager anytime soon, but it is already changing the industry in ways that are differentiating early adopters of innovative technology from its skeptics. It is our firm view that the gap between the pioneers and the laggards will continue to widen, and the latter will most likely struggle to remain competitive in 2021 and beyond.