Asset owners emerge as hidden competitor for buy-side

Northern Trust’s director of strategy for asset servicing warned at InvestOps USA that asset owners are a less obvious competitor for the buy-side, as insourcing assets could become more popular.

Asset owners are slowly emerging as serious competitors for traditional asset managers should they opt to take assets in-house for greater control and to battle rising costs.

Speaking at InvestOps 2019 in the US, Northern Trust’s director of strategy for asset servicing, Marc Mallett, told delegates that asset owners are a hidden and less obvious competitor for asset managers, at a time when costs are rising for the buy-side.

He added that for a long time in Canada, around 80% of pension funds have managed their assets in-house, and then can outsource everything from trade execution, IBOR, to fund accounting, to service providers with significantly lower costs. Although there is currently no rush for the majority of US pension funds to do the same, Mallett said that over time and as cost pressures continue, something will have to give.

Outsourcing has been a major theme at this year’s InvestOps conference in Florida, with many market participants debating the pros and cons of undertaking the process for various front, middle and back office functions.

Speaking during a fireside chat, COO of investments at American Family Insurance, Vincent Pasqualicchio, told delegates that his company used to outsource most of its assets, but recently reversed this.

“We had 70% of our assets externally managed, but we went through a business transformation where our focus was on bringing the right technology and skill sets onboard so that we can make decisions on what we continue to outsource,” Pasqualicchio said.

“We looked at people, processes and technology from front to back office, and looked at the opportunities of insourcing versus outsourcing. Now, 70% of our assets have from being externally manage to internally managed because we think we can do it better ourselves. We are looking for that to grow to 90% over the coming months.”

Despite a surge in electronic trading, automation and the use of technology to bring those costs down, buy-side trading desks are still seeing costs rise. Citing a report from Greenwich Associates, Mallett said that costs on buy-side trading desks are set to increase by a further 10% this year alone.

Assets under management have been growing just as fast as costs, a recent change for the industry, but it’s no longer the case that growth means profit. Mallett warned that asset management operating models may not be able to support a market correction, recession or stall in asset growth.

“For asset managers, maintaining a strong performance will help but it won’t be enough because the real focus is on cost. You have to become more efficient to compete. Automating processes, outsourcing and reviewing compensation are the most effective ways of reducing costs,” Mallett stated.

“Those that can reduce costs will create a disincentive for asset owners to insource. Traditionally, outsourcing always started at the post-execution phase, but now, we can help you outsource from post-order generation. Agency execution is also critical when outsourcing, because you need someone that is trading only on your behalf and in your direction.”