Steve Stormonth, Audit Partner at KPMG in the Crown Dependencies, offers some tips for navigating current market turbulence
These are interesting times. Central banks have been raising interest rates aggressively and, coupled with low investor confidence, equity and bond markets have been heavily impacted.
What really makes the current situation so interesting, however, is that this is all happening amid a massive global effort to re-engineer the world economy to be greener and more equitable.
Add in the disruptive power of new technologies such as generative AI, as well as general dislocation caused by geopolitical turmoil, and it seems clear that global market fundamentals are under considerable stress.
The impact on the wider asset management industry has been significant. High inflation and weaker markets have pushed down asset valuations.
That, coupled with a clear shift of funds into cash and deposit accounts, suggests the amount of industry assets under management (AUM) is shrinking. For many managers, that means management fees are under pressure.
While some asset managers may view this period as a massive risk, others see it as an opportunity. Most, however, seem to recognise that their business is in a period of significant disruption.
This is not a short-term economic blip, nor a sort of market correction. The fundamentals of asset management are changing and the need for new ideas and new models has never been more urgent.
KPMG believes that the most successful asset managers are likely to be those that realign their business around value, clients and purpose:
• Value: This means different things to different investors. For some, it’s about preserving financial value, creating higher rates of return and reducing costs. For others, it may be about trust, confidence and relationships. Understanding what represents value for specific clients will be critical.
• Clients: Whether you cater to the mass market or to select clients, the key is to get to know your clients in a way that allows you to not only provide them with value-driven products and services, but also to anticipate their expectations and trends. Understand your clients and you will understand your opportunities.
• Purpose: Investors are increasingly influenced by what motivates their asset managers. So too are employees. Being able to articulate your purpose — particularly regarding the drive to net zero and decarbonisation — will allow asset managers to articulate their value propositions more clearly to clients.
Finding trust in technology
While this may seem like a challenging mix of priorities to juggle, technology is already playing an enabling role, particularly in allowing managers to get closer to their clients, innovate their product offering and deliver transparency.
Retail asset managers, for example, are exploring opportunities to tokenise electronic fund transfers (EFTs) using blockchain technologies – both to make their products more accessible and to get closer to clients, allowing them to cut out the intermediaries.
In much the same way, hedge funds are beginning to think about digital assets as an investable asset class and real estate players are also looking at tokenising their asset portfolios.
Technology is also allowing the more innovative asset management firms to create new revenue streams and solidify existing ones.
Over the past few months in particular, a growing number of asset managers have brought their internal tools and platforms to the market as a service.
Smaller asset managers are using these technologies to allow them to focus on creating the best products for their clients at the best price.
Five steps to the future
Our experience of working with asset managers to assess their future business models, operating models and value propositions suggests there are five things they could start doing today to prepare for the changes coming in the very near future:
• Understand your clients: Client needs and expectations are changing rapidly, as are their investment goals. Consider how you can get closer to your clients, perhaps by working more closely with intermediaries to deliver personalised strategies (or removing some intermediaries entirely), to better identify and predict future trends. Think about the types of products and solutions they may want in the future, as well as how they will want to interact with their asset managers and what type of information they may require.
• Articulate your values and purpose: Climate change is one of the world’s biggest challenges. Asset managers are in the unique position to use their investment decisions to achieve real impact and drive positive change – by helping their investee companies to reduce their environmental footprint
and develop greener products and solutions. Those who can articulate their purpose to society and investors can differentiate in a highly competitive and value-driven market.
• Communicate continuously: Communication is a key enabler of purpose and client-centricity. Today’s leading asset managers are continuously communicating with their stakeholders on a wide range of topics – helping them build trust with their customers, employees and regulators.
• Reassess your business and operating model: The shift in client expectations and sagging margins is creating pressure on current business models. That, combined with a clear trend towards value-based products and services centred on clients, suggests that new business models will be needed. At the same time, asset managers should be looking for opportunities, perhaps through technology, process or outsourcing, to improve operational efficiency and business flexibility in the operating model.
• Explore technology: From opportunities to use technology to drive operational efficiency and better client engagement, through to the emergence of new investment opportunities and potential revenue streams, technology can deliver significant value to asset managers in today’s environment. Carefully consider how technology, culture and people intersect to ensure that technology investments are creating a positive impact and value for clients and employees. Understand your future state model and start developing your technology roadmap to get there.
Unprecedented times call for unprecedented measures. Asset managers should not simply maintain the status quo and hope to ride this disruption out.
Whether you are operating locally within our Crown Dependencies or on a wider basis, the only way to navigate the rapidly changing macroeconomic, geopolitical and social environment is to start undertaking radical change. In our view, those who do so with value, clients and purpose at the core are likely to come out on top.
Find out how KPMG can help you realign your business around these principles by contacting a member of our Asset Management team or by visiting kpmg.com/cds
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The KPMG firms in the Channel Islands and the Isle of Man have combined to create KPMG in the Crown Dependencies. This creates a professional services business of more than 500 people, locally owned and dedicated to serving the key industry sectors across the three islands.
• This advertising feature was first published in the Funds Edition of Businesslife magazine in November 2023