Buy-side finally swayed on technology upgrades as the best opportunity for growth

Growing number of buy-side firms looking to blockchain, artificial intelligence and robotics for growth opportunities over the next five years.

Buy-side firms have come around to the potential of new technologies over the past year, though have been warned in a new report from State Street that their approach needs to change.

The bank’s annual ‘Growth Readiness Study’, conducted by Longitude Research of more than 500 industry executives from 20 countries, found nearly half of buy-side institutions believe technologies such as blockchain, artificial intelligence (AI) and robotics present growth over the next five years, up from 18% a year ago.

“[The findings] represent a huge change in how investment institutions are thinking about routes to growth. Now, they must follow this through by embedding an innovation mindset,” said State Street in a follow-up report on the results.

One buy-side institution that is taking advantage of new technologies is APG, the administrative organisation of Dutch pension fund Stichting Pensioenfonds ABP. It has set up the Brightlands Smart Services Campus to test practical applications of blockchain, AI and other technologies to improve operational management.

However, the study explained technology could be a doubled-edged sword for buy-side firms, as the possibility of digital disruption and the integration of new systems and platforms present an ongoing struggle.

“While investment institutions express a clear desire to integrate emerging technologies, their current approach is keeping them in the slow lane,” the report added.

“Upgrading existing infrastructure on a case-by-case basis will only exacerbate siloed legacy systems and make it harder to integrate emerging digital solutions, and it can be costly in the long-run.”

The report highlighted how the lack of expertise to manage the roll-out process of technology upgrades were among the top challenges for asset managers, while insufficient budget and capital to spend on technology are impeding asset owners.

“Given the costs of an architectural overhaul. Many firms are selectively seeking tech partners as a way to gain scale,” the study said.

The study also showed pressures on buy-side firms have increased over 2018, with the majority of asset owners and asset managers taking a defensive investment strategy in response.

Sixty-eight percent of respondents said it has become harder to achieve growth, against 66% who said the same a year ago.

In addition, 72% of asset owners have adopted a defensive investment strategy in response, as had 64% of asset managers and 59% of insurance companies.

The political outlook on key markets, combined with regulation governing liquidity risk, investment behaviour and regulatory attention on investment fees were cited as the greatest factors holding back growth.