Pandemic Perspectives – The Impact of COVID-19 on the Investment Management Industry
The COVID-19 pandemic has presented asset managers with a unique opportunity to assess and re-prioritize their strategic agenda. Deloitte and Casey Quirk, a Deloitte business, investigate how asset managers can navigate the drastically changing market environment and instigate transformational change in their businesses.
As the COVID-19 health crisis persists around the world, there is still significant uncertainty about the length and duration of its impact on the global population. Whilst protecting people’s health is clearly the most important priority, asset managers are also grappling with the ongoing damage inflicted on their businesses.
Casey Quirk, a Deloitte business, has completed extensive research and published a number of findings on asset managers’ reactions during and after the pandemic, including:
- The market environment created by COVID-19, including a comparison to 2007-8
- Implications for asset managers as they focus on protecting the health and safety of their employees whilst coping with the necessity to consider near and long-term repercussions
- Areas that should represent strategic priorities for asset managers as they navigate through the prevailing market environment and make necessary decisions to protect and grow their businesses
Taking each in turn:
Managers were challenged before the pandemic with declining growth in assets under management (AUM) and increased fixed costs. In addition, fee pressure persists, with the median fee declining to 46 basis points in 2019 from 55 basis points in 2007 as identified in Casey Quirk’s Performance Intelligence Survey. As 2020 began, asset managers were already observing these factors culminating in reduced profitability.
Changing Capital Markets
The capital markets also looked very different before COVID-19 struck. Since 2008, exchange listings and credit spreads have seen steady declines, whilst dry-powder and central bank assets have accumulated. Today, the assets of the top five central banks (the U.S., UK, EU, Japanese and Swiss) sit at US$16 trillion. In many cases, central banks are morphing into massive asset managers and, in the negative interest rate environments of many, there is a need to pay to store excess reserves.
The spread of COVID-19 has resulted in declines in value across asset managers’ portfolios as the world copes with economic depression and recession. Research shows that during Q1 2020, there was evidence of significant outflows and investors shifting their assets from active equity funds to less lucrative money market and fixed income funds and passive strategies that charge lower fees.
Length & Depth
Many asset managers are presently stretched and the prospects for alleviating this pressure depend partly on the length and depth of the crisis. The release of a safe vaccine will contribute significantly, but the timeline for both vaccines and effective treatment, in spite of great progress, remains unknown. In the meantime, however, there are a variety of outcomes and implications with which asset managers need to contend.
Implications for Asset Managers
Health and Social Impacts
Following the protectionary government-imposed lockdowns around the world, employers are turning their focus to ‘return to normal.’ With health and safety paramount, human resources and operations leadership will be essential in creating and implementing ‘return to business’ plans. Working from home will become more prevalent, creating the necessity for the development of durable virtual operations and long-term work culture protocols.
Cost Cutting – A Near-Term Help
In the near-term, we anticipate that asset managers (like many other businesses) will need to take cost-cutting measures to cushion the blow COVID-19 has had on profitability. The challenge for asset managers will be to earn “quick win” adjustments that can track expected revenue declines to a sustainable degree. Tactical cost reduction strategies are likely to impact travel expenses, marketing budgets, bonuses and salaries. Casey Quirk’s Chief Strategy Officer COVID Pulse Survey focused on the cost cutting strategies already initiated and COVID-19’s effect. Saving strategies surrounding the renegotiation of service provider contracts, location strategies and governance structures have been the most accelerated in response to the pandemic.
Economic Scenario Analysis
Accounting for the uncertainty surrounding the duration and severity of the COVID-19 crisis, asset managers should prepare for three scenarios:
- Mild economic case: A deep but quick recession with economic activity rebounding slowly in late 2020; tactical, targeted cost reductionsmay prove sufficient for many asset managers;
- Harsh economic case: The virus abates and subsequently peaks resulting in economic recovery commencing in late 2021, which would still require businesses to consider front office transformation; and
- Severe economic case: The pandemic continues through 2021 as the search for a safe vaccine progresses at a slower pace and economic recovery is not observed until mid or late 2022 resulting in the need for asset managers to consider fundamental changes to their current operations.
Opportunity for Transformational Change
Casey Quirk’s Chief Strategy Officer COVID Pulse Survey of asset managers has provided clear evidence that leaders within the industry view this challenging time as an opportunity to accelerate transformational change, with 75% of responders supporting this suggestion. This transformational change will take various forms and underpin the strategic priorities of asset managers in the medium and long term.
Below is a list of the most pressing strategic priorities Casey Quirk has identified for asset managers and the tough decisions they will need to make in relation to each.
Redesign Organizational Culture - A work-from-home dynamic will spur asset managers to tackle key decisions that will define their culture, particularly those with a previous focus on in-person interactions.
Outsource and Automate - Assessments surrounding the processes to automate, standardize and outsource are likely to occur helping to reduce cost and improve efficiency. Outsourcing and offshoring non-core activities and optimizing workflows by removing or consolidating processes and systems are distinctly possible within organizations.
Modernize Engagement for Remote Delivery - Distribution and customer experience will need to change in line with the new environment that minimizes in-person engagement. The client journey is likely to be very different and asset managers will need to respond to this, most likely by focusing on developing distribution technology and client data capabilities.
Reactivate Active Management - In response to investors moving to the safer havens that money market funds and passive strategies may present, asset managers will need to innovate active management to defend and expand their market share amid the crisis. Managers will need to assess their portfolio of strategies and then set a path to transform their investment platform.
Re-evaluate Globalization - The crisis will force managers to retrench, or double down and extend, global operations.
Leverage M&A to Drive Value - There is an opportunity for managers to use differing forms of M&A to drive growth, including internal business unit integration, bolt-on capability transactions and enterprise-wide M&A.
Amidst the crisis, asset managers should seek a fresh perspective and step back from the day-to-day challenges to consider the long-term evolution of their businesses. This moment offers a unique opportunity to do so.
For more information: Unprecedented: Asset Management During and After the Pandemic
By Jonathan Doolan, principal and head of EMEA, Casey Quirk, and Eoin Kelly, Senior Manager, Deloitte