The North American asset management industry started seeing negative flows in 2016, with pessimism persisting in 2017 despite a rebound in performance. Still, some data management actions could protect asset managers against new “secular trends” in the industry that could persist for the next 20 years, according to a new report from McKinsey & Company.
The trends that 2017’s improved performance may not solve without data management changes include moderation in long-term investment returns, aging demographics moving investments from accumulation to withdrawal, runoffs of large pension funds and pricing pressure driven by passive investment. The report by McKinsey’s Global Wealth and Asset Management Practice, “The Best of Times, The Worst of Times: North American Asset Management,” identifies benchmarking data, improving data management to manage products with greater precision, and using advanced analytics and non-traditional data sources to support more scalable and efficient investment process, and digitization of operations, as ways to push back against those asset management trends.
The McKinsey report is based in part on an annual survey gathering benchmarking data from more than 300 asset managers, including more than 100 in North America. Pairing information about how managers are doing in comparison with benchmarks with granular breakdowns of historical and forward-looking assessments of assets under management, revenue and net flow data, produces better insights for asset management. It’s a good example of how efficient use of data can lead to better asset management.
Another way that data can be a key tool for asset management is through using data to accurately cull less successful funds from portfolios. Investment products proliferated during 2016, but that growth has reversed in 2017. The industry had designed more product to meet client demands for more exposures, but had not weeded out funds with less client participation. Evaluating data about funds helps reduce operational complexity caused by having too many funds to manage, many of which may be chasing the same asset flows.
For the last two decades, investment processes have not been changed in response to intense competition and greater information access, but the McKinsey report points out that data technologies such as advanced analytics and access to non-traditional data sources have created an opportunity to improve the art of investing. In addition, the report points to the use of shared research utilities and technology infrastructure as smarter ways to obtain data. These also reduce the cost of investment processes, which doesn’t directly improve asset management, but certainly makes a manager more competitive in serving clients.
Similarly, the increased availability of data presents another challenge to the asset management operating model, since accessing more sources can raise costs, even if obtaining more available data could make an asset manager more successful. The McKinsey report recommends applying “shock therapy” to the traditional asset management model by digitizing more parts of its operations. Improving data management technology not only lowers data management costs, but also puts more information at asset managers’ disposal so they have a better chance at making fully informed decisions – and thus, a better chance at raising returns.
Regardless of which way asset management inflows go in 2018, analytics, benchmark information and applying the latest and best technology to data management are all ways that asset managers can strengthen the foundations of their investment operations.
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