Growth Readiness
New Routesto Growth
A CLEAR PATH FORWARD
Economic powerhouses have long taken bold steps to carve out new routes to growth.
From the Han dynasty’s develop-ment of the Silk Road in the second century BC, to Beijing’s Belt and Road Initiative today, a willingness to find new paths and disrupt the status quo has been key to fulfilling growth ambitions.
Today’s investment institutions must be equally bold.
Research from our annual Growth Readiness Study reveals how industry participants — asset managers and institutional investors — are charting a new way forward. Leading firms are now looking to emerging technology tools as important drivers for growth.
Continuing to rely on well-trodden paths will not be enough. Our research shows how the industry is adapting to a new reality.
2 NEW ROUTES TO GROWTH
GROWTH READINESS
Navigating the route to growth
Map the new landscapeInstitutions are conscious of the need for a new mindset. Sixty-eight percent of respondents say it’s increasingly difficult to achieve growth.
Accelerate progress with new toolsNearly half (48 percent) of respondents recognize emerging technology as a top enabler of growth over the next five years — up dramatically from just 18 percent in 2017.
Anticipate and defendAs market uncertainty heightens, 72 percent of asset owners and 59 percent of insurers are adopting a more defensive investment strategy. Meanwhile, 72 percent of asset managers expect to slow their plans for expansion over the next five years. A more cautious outlook prevails across the industry.
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¹ US Congressional Budget Office, “The Budget and Economic Outlook: 2019 to 2029,” January 28, 2019² National Bureau of Statistics of China, “National Economic Performance Maintained Within an Appropriate Range in 2018 with Main Development Goals Achieved,” January 21, 2019
Global trends in real gross domestic product (GDP) suggest the market has entered a period of structurally lower growth.
In the US for example, real GDP growth is expected to slow over the next decade, averaging only 1.7 percent annually from 2019 to 2029.1 Even the economy of China, which recorded annual GDP growth of 9 percent or more every year between 2002 and 2011, has slowed over the last four years. Its real GDP rate fell to 6.6 percent in 2018, its lowest point since 1990.2
Interest rates, though rising, remain at near-historic lows in many markets. Increased investment competition and shrinking profit margins are also contributing to the intense pressures facing investment industry incumbents.
Against this gloomier economic backdrop, our study participants also see regulation as a growing challenge to achieving growth, particularly rules governing investment behavior and liquidity risk. For instance, Europe’s Solvency II regime impacts the attractiveness of some illiquid asset classes for insurers and can complicate hedging strategies. And while pension funds may recognize a need to turn to new asset classes to seek alpha, many still have limited scope to increase their allocations to private assets.
GROWING GETS TOUGHER
GROWTH READINESS
4 NEW ROUTES TO GROWTH
Figure 1: Threats to growth persist
Which of these factors pose the greatest threat to your organization’s growth over the next five years?
50%
42%
39%
Regulation governing liquidity risk
40%
36%
Political outlook in our key markets
37%
33%
Economic growth in our key markets
35%
26%
Monetary policy in our key markets
34%
38%
Regulatory attention to investment fees
32%
17%
Fixed-income outlook in our key markets
29%
27%
Equity outlook in our key markets
27%
14%
Emerging technologies (e.g., blockchain, asset intelligence, etc.)
43%
37%
Regulation governing investment behavior
2018 201750%
Source: State Street Growth Readiness Study, 2017 and 2018
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Our research also points to the political outlook as another perceived drag on growth. The industry is more focused on the risks than the opportunities of geopolitical developments such as Brexit and the escalation of protectionist trade measures. A combination of growing geopolitical uncertainty, a return to monetary tightening and signs of increased market volatility suggest that institutions cannot afford to be cavalier in their pursuit of growth.
These trends are weighing heavily on the sentiment of our study participants: 68 percent say it is becoming more challenging to find avenues to growth in the current market environment. Additionally,
66 percent of the institutions we surveyed are adopting more defensive investment strategies to respond to adverse market conditions, and 67 percent are undertaking a slower, more targeted expansion of their operations.
Despite this caution, significant growth opportunities still exist for those who can get on the right side of change. A positive outlook prevails: 76 percent of industry respondents remain optimistic about achieving their growth objectives over the next five years.
To justify this optimism, however, the industry must identify and embark on new routes to growth.
GROWTH READINESS
6 NEW ROUTES TO GROWTH
As industry participants adapt to the new strains on their business, our research finds that — in stark contrast to last year — they are seeking to channel emerging technologies as the major facilitator of growth opportunity.
How will this new focus on emerging technology manifest itself? And how will it translate into better growth outcomes? To win, industry players must be disciplined to avoid the common pitfalls of implementation. Unfortunately, our research suggests that neither leadership nor the workforce is ready for the scale and pace of change demanded. Fully 87 percent of our study participants say their organizations need better education to successfully adopt new technologies.
Plugging capability gaps
In 2017, our operational gap analysis found that respondents were struggling, at a general level, to align their technology strategy with the rate of business change.
However, in 2018, we find that while respondents feel many areas of their operating models are better equipped to support growth ambitions, two challenges stand out:
• Targeted technology solutions that can help to remediate risks
• More intelligent tools to extract meaningful insights from data
TURNING TO TECH
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Figure 2: Doubling down on emerging technology
Which of the following factors provide the greatest opportunity for your organization’s growth over the next five years?
Source: State Street Growth Readiness Study, 2017 and 2018
2018 2017
EmergingTechnologies
48%
18%
EconomicGrowth Outlook(in our key markets)
47%
49%
MonetaryPolicy
(in our key markets)
36%
26%
EquityOutlook
(in our key markets)
35%
28%
Fixed-IncomeOutlook
(in our key markets)
34%
26%
PoliticalOutlook
(in our key markets)
32%
32%
RegulationGoverningInvestment
Behavior
29%
34%
RegulatoryAttention toInvestment
Fees
18%
32%
We see that part of the industry is responding with stronger technology investment strategies. Our study suggests that in the immediate term, there will be a sharp focus on new technologies that can strengthen cybersecurity, improve investment performance analytics and enhance risk analytics. This underlines the two key fronts that technology strategy must help institutions
address: the ability to remediate organizational risks and to achieve an alpha investment advantage.
Leading investment institutions will look to gain an edge through cognitive computing solutions. Examples include investment tools that mine alternative information sources and identify patterns, risk management solutions that detect anomalies and
GROWTH READINESS
8 NEW ROUTES TO GROWTH
Figure 3: Mind the gap
How important do you think these internal capabilities will be in enabling your organization to meet its growth targets over the next five years? And how would you rate your organization’s current level of capability/effectiveness in each of these areas?
Impo
rtan
ce (%
)
KEY AREAS FOR IMPROVEMENT KEY AREAS OF COMPETENCE
LOWER PRIORITY AREAS OF IMPROVEMENT LOWER PRIORITY AREAS OF COMPETENCE
55 60 65 70
70
65
60
55
Strong organizational culture thatis connected to our mission and values
Ability to manage investment risks
Strong governance framework
Ability to adapt to industry regulation
Ability to manage operational risks
Geographic scope of our distribution network
Adequacy of our talent to keep pace with evolving business needs
Efficiency of our investment operations
Performance (%)
Investment expertise in new asset classes(e.g., private debt)
Ability of our technology to keep pace with evolving business needs
Proficiency in digital distribution of our products and services
Ability to managetechnology risks
Ability to extractmeaningful insights
from data
Source: State Street Growth Readiness Study, 2018
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protect against cyber threats or credit risk, or behavioral analytics that give asset managers a clearer understanding of their clients’ needs. Success in the industry is becoming ever-more reliant on the ability to access and analyze huge volumes of accurate, real-time data.
Underpinning these solutions, investors need an agile IT architecture that supports innovation and provides vast computing power, or partners who can deliver intelligent investment and risk management support.
Traveling light: Embedding long-term agility
Over the next five years, operational efficiency will prove to be even more important than new investment technologies for asset owners as they position themselves to compete in the new environment.
A key component of these initiatives will be the implementation of robotic process automation (RPA), which can automate rules-based, manual tasks.
The importance of this approach is several-fold:
• Streamlining: Enable institutions to automate complex processes, streamline operations and help combat pressure on margins
• Accelerating artificial intelligence (AI): Provide process automation support to accelerate development of advanced technologies like machine learning
• Assisting analytics: Assist in the analysis of big data to uncover valuable business insights
• Reducing risk: Remove manual processing to cut the risk of human error
• Improving client experience: Enable faster turnaround on client deliverables and free up staff to focus on adding greater value
10 NEW ROUTES TO GROWTH
GROWTH READINESS
10 NEW ROUTES TO GROWTH
Figure 4: Focusing on risk remediation and alpha advantage
What are the most important outcomes your technology investment must deliver over the next 12 months, to help realize your institution’s growth ambitions?
Source: State Street Growth Readiness Study, 2018
Strengthening cybersecurity
45%
Improving investment performance and analytics
44%
Improving risk and liquidity analytics
43%
Harnessing unstructured data to improve investment outcomes
40%
Improving the experience we can offer to end investors/clients
39%
Optimizing back- and middle-office efficiency
36%
Cutting our costs
35%
Creating new services (e.g., robo-advice)
34%
Providing more detailed information to clients
28%
50%
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Figure 5: Getting lean
Which of the following three areas will your organization prioritize most urgently over the next five years?
Asset Manager Insurance Asset Owner
Adopting new digitaltechnologies to give us an
investment advantage
Improving the efficiencyof operational and
compliance processes(i.e., through automation)
Improving our abilityto protect
enterprise data
10
20
30
40
50
42%40%
32%
37%
30%
37%
19%
29% 29%
Source: State Street Growth Readiness Study, 2018
GROWTH READINESS
12 NEW ROUTES TO GROWTH
‘Global Giants’ Will Gobble Up Robotics Gains One particular segment of respondents in our study will be making a major investment push on RPA — the so-called Global Giants.
This industry segment includes
asset managers, asset owners and
insurers with more than $100 billion
in assets under management.
They are the most likely respondents
to say that improving the efficiency
of operational and compliance
processes through automation is
their most urgent priority over the
next five years. They rank it ahead
of adopting digital tools to deliver an
investment advantage or enhancing
the protection of enterprise data.
The Global Giants are also the most likely
industry segment to perceive RPA as a
very high priority for investment among
emerging technologies, with 39 percent
saying this is the case compared to
26 percent for the rest of the industry.
As some of the biggest players in the
market, operating across geographies,
asset classes and client segments,
the effective implementation of RPA
over the next five years will be critical
to the Global Giants’ growth performance.
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The investment industry has long been reliant on technology to support its growth aspirations, but there is a new recognition that emerging technologies must be at the very core of those strategies.
As old routes to growth become less optimal, it is critical for the industry to forge new ones. Just as the Han dynasty represented a golden age of Chinese culture, with its spirit of exploration and technological discovery, today’s leading investment institutions must embody the same kind of restless reinvention.
Organizations that can accelerate the adoption of new tools, and put them into practice to remediate risk and generate an alpha advantage, will go on to dominate the future industry landscape.
TECHNOLOGY PAVES NEW ROUTES TO GROWTH
GROWTH READINESS
14 NEW ROUTES TO GROWTH
GROWTH READINESS
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About the Research
State Street commissioned Longitude Research to conduct a global survey of more than 500 executive respondents representing institutional asset owners, asset managers and insurance companies during July and August of 2018.
The respondents span investment, operations and distribution roles and collectively represent 19 countries. Approximately 37 percent of respondents were located in the Americas, 40 percent in Europe and 23 percent in Asia Pacific.
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