By Gary Paulin is Global Head of Integrated Trading Solutions at Northern Trust.
Outsourcing, initially of the back office, and subsequently of the middle office, has been a feature of the asset management industry for some years. More recently, in the third wave of outsourcing, managers began to outsource non-core front office functions, and the pace of change has grown rapidly to the extent that the industry has passed the tipping point of this transition.
For example, in our survey taken during Q1 2020 of 300 heads of investment operations from global asset management firms with assets ranging from $10 billion to $500 billion, 85% of respondents said they were already outsourcing their trading capability or were interested in doing so within the next two years.
What started as simply a cost-efficiency endeavour has evolved. The outsourced trading model has moved from being a largely defensive strategy – a response to cost pressures – to a proactive move that can de-risk and streamline operations and enhance governance and operational resiliency while also responding to very real and relentless margin progression.
In short, outsourced trading is increasingly viewed as a more optimal state for asset managers, and as the timing of the Northern Trust survey shows, this turn in thinking predates the onset of the Covid-19 pandemic. The pandemic in our view is an accelerant of change, but not the catalyst. We can see its origins more than a year ago, well before the economic cataclysm and office shutdowns of 2020.
Recent years have seen increased deal flow in the asset management industry, along with significant restructurings and increased investment in technology, as firms sought to gain scale, cut fixed costs and automate functions. These are classic responses to margin pressure, which has persisted even during the recent bull market in equities.
In fact, the drivers of change are global and go far beyond simple margin pressure. They include aspects of competition, the ability to leverage economies of scale, business resilience, changing economic models, variable costs, demographics, technology and regulation – drivers no longer hidden under the veil of strong markets. Critically, this past year has marked a significant change in the economics of the industry, as margins for many asset managers fell despite assets under management going up.
Margins are not expected to fall in a bull market like that of 2019 – when the S&P 500 gained over 28% – yet according to investment market analysts this, for many, is what happened. The long-held assumption that strong market returns correlate with asset manager financial performance broke down. Strong markets failed to mask the structural drivers underneath and, we believe, this was the tipping point for the industry.
As economics change so must operations. The pandemic brought new urgency – and opportunity – for managers to undertake an internal review of their whole office. The question at the bottom of such a review is whether a range of front office functions, historically perceived to be core to a successful asset management operation, actually deliver value. If not, these functions must be considered a cost and susceptible to outsourcing to a more cost-efficient platform. Meanwhile, the extended work from home protocols of 2020 have undermined some of the core objections to outsourcing, such as the assumption that portfolio managers need to work in close physical proximity to their trading desk.
Beyond the value/cost equation, however, there is increasing recognition that front office outsourcing – whether whole or in part – is directly beneficial. For example, outsourcing to a global service provider has enabled a range of firms to expand their investment horizons internationally without concern about governance issues as apply to passing overnight trading to third-party brokers who will almost certainly be under the same pandemic pressure as all the rest of us. Other firms have seized the opportunity of moving to a variable pay-as-you-go cost dealing structure to offer a broader slate of investment strategies or to develop their inhouse research capabilities.
These and other opportunities are new, and underline our view that front office outsourcing leads to an optimal state for investment managers; one where the playing field is levelled enabling medium and smaller firms to compete on the basis of pure alpha with large scale players.
But today, it is not just the smaller or medium managers who are outsourcing front office functions; many of the ‘big players’ are also in active transition. Why? Because the benefits of outsourcing apply to the whole asset management industry, but a hyper-scale manager requires a hyper-scale global service provider to work with. These used not to exist, now they do and both sides are riding the wave.
Energy stocks drag down FTSE 100, IG Group slides
By Shivani Kumaresan
(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.
The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.
Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]
“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.
“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”
The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.
British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.
IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.
Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.
Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)
Wall Street bounce, upbeat earnings lift European stocks
By Amal S and Sruthi Shankar
(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.
The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.
All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.
Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.
Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.
Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.
The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.
“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.
The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.
“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.
Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.
Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.
Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.
Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.
(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)
Miners lead FTSE 100 higher on earnings cheer
By Shivani Kumaresan
(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.
BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.
Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.
“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.
The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.
The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.
Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.
Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.
WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)
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