Reshaping Investment Strategies: sharp and efficient cost saving decisions

Transformation plans are not enough to answer short term challenges faced by Asset Managers

In a context of both high and short term cost pressure, Asset Management firms cannot rely on medium term transformation initiatives only. Strong business decisions are needed right now to help mitigating 4 adverse market trends :

1/Market volatility and gloomy market conditions. Higher volatility changed clients’ allocation from Q4 2018. The sharp decline in equity markets in the end of 2018 (Stoxx 600 -12% vs Q3 2018) triggered strong risk aversion from institutional and retail clients.

2/The rise of passive strategies in Europe. Indexed funds and ETFs experiencenet inflows of €42,2B in 2018 despite adverse market conditions. Assets are more and more concentrated around 4 players in Europe: iShares, Vanguard, DB, Lyxor, letting little room now for new comers.

3/Growing pressure on fees. Margins are down from 34% to 31% for main AM between 2015 and 2018, due to higher costs (operations, regulatory mainly) and also regular decrease in management fees, by ~5% a year on funds between 2015 and 2018.

4/Outflows from the most profitable MLT strategies. European Asset Managers experienced around €90B of outflows on Q4 with a durable switch from MLT to Money Market products despite the market rebound on Q1

The ability to manage more assets with less people is a key driver to reach significant cost reductions

Adverse market trends and macro-economic environment jeopardize strategic plans of Asset Management firms. Even if ongoing Transformation initiatives are paramount, they are not enough to fill the gap to reach profitability targets. As a consequence, all Asset Management firms need to find short term levers to increase financial performance by the end of 2019.

To do so, we have selected two key indicators: AUM managed by Investment Team member and Gross Margin. 

Illustration 1 – Comparison of AUM managed per staff member and Margins

These 2 simple ratios, allow us identifying 2 viable models, 1 being threatened and 1 dangerous zone.

  • Our two preferred models are “Plain vanilla power house” and “Niche players”
  • The Active power house” model is risky due to the difficulty to outperform benchmarks and pressures on margins for active strategies
  • In all cases, the increase of AUM managed per PM is a core axis for all players

Illustration 2 – 4 key business models for Asset Management firms

A quick review of Investment Strategy is needed to identify those with lower profitability

One key short term objective is to increase investment management productivity thanks to an in-depth review of portfolios. This review should lead to 4 strong strategic choices as described below.

Illustration 3 – Strategic choices to adapt Investment Strategies

Short term decisions on Investment Strategies trigger trickle-down effects with the rise of augmented and data-driven investment

The review of investment strategies is just the beginning of the journey and should be the starting point for structuring  changes on the operational, IT and Legal setup. Indeed, a streamlined and more data-driven set of investment strategies is the best way to unlock a halo effect to slash structure costs.

Illustration 4 – From data-driven investment to simpler and more efficient operational setup

How to impulse the Change in a couple of months and reach a tangible impact on profitability?

Asset Managers need for a strong and transparent approach enabling quick business decisions and a clear roadmap supported by transparent indicators for a successful implementation and tracking. To do so, decisions should be taken in a few months for an implementation right away. We believe the action plan can be designed in 3 to 4 months, with an implementation period of 6 months.

Illustration 5 – High level organisational scheme

How Headlink Partners can help

We are supporting various Asset Managers in their transformation programs and have an in-depth knowledge of market trends and best practices. Contact us to further discuss the adaptation of our Investment Strategies.