INVESTMENT & OPERATIONS OUTLOOK 2016 - … · Investment & operations outlook 2016 ... Changing horizons ... with a majority of asset owners expecting to invest more in global and

A REPORT ON ISSUES FACING ASSET OWNERS AND MANAGERS IN AUSTRALIA

INVESTMENT & OPERATIONS OUTLOOK 2016

Contents

Table of

Contents

Contents

Investment & operations outlook 2016

Executive summary

Changing horizons

Increasing business efficiency to offset low returns

Where to invest: Going global – in part

New products planned

Changing attitudes to risk

Increasing focus on investment risk

Improving efficiency of reporting

Risk management a core competency

ESG risk

Changing technology

Changing business models: partnering for success

Conclusion

04

06

08

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15

15

16

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Investment & operations outlook 2016

Themes shaping Australia’s investment industry Australia’s two trillion-dollar superannuation and investment industry continues to undergo change – from within and without, from domestic and global pressures, from politicians and regulators and from ever-more demanding investors.

As one of the world’s leading custodians, BNP Paribas Securities Services, in conjunction with local Investor Strategy News, undertook research – for the second year in a row – to identify the changes and the most pressing issues weighing on the industry today.

The industry’s greatest concerns, the big issues that keep those in it awake of a night, were identified as:

¡ How to generate investment returns, along with

¡ Apprehension about further economic and/or market shocks affecting returns.

Generating returns remains a challenge for a majority of the industry and the need to enhance efficiency is still present. However, the previous focus on cutting costs has shifted to adeptness and partnerships to help achieve that. Areas being considered by Australian asset owners and managers for this include ‘fintech’ and middle and/or back office outsourcing.

Risk management also remains high on the agenda, though shifting from high levels of concern on regulatory risk a year ago to being more about investment risk today.

As for investing, respondents rated offshore equities as the most-promising asset classes for investors this year, with a majority of asset owners expecting to invest more in global and emerging market shares. This was followed by investment in direct assets such as infrastructure and private equity.

Despite change and challenges, the research found that the industry is in good health and poised for further growth – albeit with some difficulties ahead. How each organisation faces the future will obviously vary.

We hope that this data contributes to discussions focused on enhancing the Australian investment industry.

David Braga Greg Bright Head of Australia and New Zealand Editor BNP Paribas Securities Services Investment Strategy News

¡ 5 ¡

Executive summary

Executive summary

Global markets remain volatile and expectations are for further divergence as the world’s central banks differ in terms of monetary policy.

Reducing risk It is little surprise then, that in these volatile and low-yielding markets, institutional investors report they continue to seek ways to further dial down the level of risk in their portfolios, while trying to maintain consistent real returns to meet their commitments.

How to generate and maintain those returns, along with worries about further economic or market shocks, top the list of the industry’s greatest concerns for 2016.

As for improving operations, the greatest challenge is considered to be how to improve reporting and make it more efficient – including how to better analyse and report all aspects of investing, including performance as well as meeting regulatory requirements.

Going global – in part Despite the global market challenges, the local industry expects offshore equities will generate the greatest return for investors this year.

A majority of those surveyed around the country say they will invest more in this asset class over the next 12 months.

Digital disruption & technologyThe progress of financial technology – known colloquially as ‘fintech’ along with expected ‘digital disruption’ – continues to fascinate the industry.

The survey finds the industry is anxious about the unpredictable and fast-moving nature of technology and the fintech revolution. New and disruptive technology along with new entrants could have a significant impact on the market.

Fortunately, the industry is also considering how to best harness technology. It will, for example, be key to developing more personalised engagement as well as providing real-time and bespoke data, delivered more ways across more platforms.

There can be no denying that complexity is rising and the need to change and adapt is paramount. Finding the best way to do plot a course and navigate to a sustainable business model is the overriding challenge for the local industry.

¡ 7 ¡

Executive summary

Changing horizons

There is a wide a range of issues that concern those in our local industry.

The ability to generate real and sustainable returns in today’s volatile and low-yield markets, along with nervousness about further market shocks, are the greatest concerns of those in the industry today.

These two over-riding anxieties are not misplaced. The International Monetary Fund, for example, forecasts the world will enter a five-year period of low growth until 2020, while the OECD predicts global growth will slow to an average of just 3.6% over 2010-2020. As for further economic and/or market disruption, the World Competitiveness Centre notes that the world has been afflicted by an economic crisis every six years, on average, since World War II.

Respondents also rated other major concerns as technology changes (11%), regulatory change (10%) and investment issues (7%). Only one of the 115 respondents around the country replied that “nothing” kept them awake.

What single issue keeps you awake the most at night?

0% 5% 10% 15% 20%

Generate returns

Economic or market shocks

Data, IT & technology

Regulatory changes/issues

Investment issues

Increased complexity

Engagement of investors

Insourcing v outsourcing

Low-yield markets

Other

Improving cost efficiency

Ageing population

Operational issues

Staff management

Tax issues

Improving transparency

Personalisation of reporting

Risk analysis & management

Nothing

Source: BNP Paribas Securities Services and Investor Strategy News as at February 2016

Year-on-year, generating returns was the second greatest concern last year, after regulatory concerns. Today, it is at the top, equally with concerns about the markets and economy.

¡ 9 ¡

Changing horizons

Increasing business efficiency to offset low returns While broad issues, such as market returns and volatility, are absorbing the wider industry, respondents also report they are facing specific challenges within their own operations.

Some 40% of respondents placed investment strategies as their key management concern. Trying to generate sustainable returns is increasingly complex – and costly. As a result, asset owners and managers report looking at the drivers of returns as well as those within their organisations and are trying to identify how to improve these.

This was followed by meeting investment and investor needs through improving asset servicing (33%), then data and risk management (27%). Cost control and technology upgrading were ranked well down along with ESG (environment, social and governance) and sustainable investing (11%), as shown below.

What is your main business focus? (1 = most important, 5 = least important)

Asset servicing

Investment strategies

Data and risk management

Cost control

Technology upgrade

Sustainable investing

0 1 2 3 4

Source: BNP Paribas Securities Services as at February 2016

The majority (60%) of respondents are also intent on lifting their business performance by focusing on efficiency improvements.

The research identified one-in five (20%) of asset owners and managers are increasingly exploring using external providers to help them meet challenges and improve efficiency and reduce costs. This was followed by insourcing (13%).

In improving cost efficiencies, what areas are you focusing on?

0% 10% 20% 30% 40% 50%

Efficiency & scalability

External providers

Investment insourcing

Implementation strategies

Middle office outsourcing

Other


Changing horizons

¡ 10 ¡

¡ 11 ¡

Changing horizons

Where to invest: Going global – in partGiven the changes occurring in markets, we asked the industry where investors should look for returns.

Despite the global investment challenges, the industry forecasts offshore equities will generate the greatest return for investors this year, Global equities alone were favoured by one-in-six (17%) respondents with another 12% favouring emerging market shares.

Local property and global fixed income are the least favoured.

Which asset class do you expect to return the most this year?

0% 10% 20% 30%

Global equities

Other

Cash

Local shares

Infrastructure

Global fixed income

Local fixed income

Emerging market equities

Emerging market fixed

US fixed income

Asian fixed income

Private equity

Hedge funds

Local property

Global property

US equities

Asian equities


New products plannedOver a third (37%) of respondents expect to expand their investment product range to meet today’s challenges.

However, over half (54%) plan to offer the same range of investment products and services and one-in-10 plan to contract their offerings this year.

Do you plan to expand or contract your range of investment offerings over 2016?

0% 10% 20% 30% 40% 50% 60%

Remain the same

Expand

Contract


As to what new offerings, a third of respondents reported they expect to increase their development of, and investment in, direct asset products this year.

Direct assets have been some of the most popular institutional investments in recent years. For example, the rise in appetite for infrastructure is in line with respondents who said that as they seek to further dial down the level of risk in their portfolios, while still seeking consistent real returns coupled with capital stability.

However, with the increase in the popularity of direct assets have come accompanying challenges. As demand has increased so too have valuations and the prices paid for these assets. There have been warnings of a bubble developing in the valuation of some direct investments, such as certain types of infrastructure. Over-paying for an asset can reduce the rate of return. Accordingly, accurate valuation and comparison of earning potential to other assets is key to extracting the best value and return. Issues have also been identified with respect to consistency in valuations, pricing and performance data as well as measuring, understanding and managing the risks involved in direct investments.

Also, in Australia, proposed new regulatory requirements will require superannuation funds to publicly disclose the book value of their holdings of direct assets – and explain how they reached those valuations. Not all organisations are prepared for this.

It is not surprising then that two-out-of-five (21%) of respondents said they need assistance with private/direct investing reporting and administration.

Changing horizons

¡ 12 ¡

Do you plan to increase private/direct investments (private equity, direct real estate, and infrastructure) in 2016?

0% 10% 20% 30% 40% 50% 60%

Yes

The same/certain

No


¡ 13 ¡

Changing horizons


¡ 15 ¡

The greatest concern among respondents last year was meeting regulatory requirements and the risk that this entailed. This concern has slid down the rankings to fourth position in this year’s poll, suggesting that the industry is getting used to continued regulatory change.

Increasing focus on investment riskToday, the risk focus is more on investment risk. Asset owners, managers and investors want to better understand how much risk is being taken to obtain returns.

Understanding investment risk and exposure to asset and liability mismatches is crucial for asset owners and managers. They increasingly need to be able to model both assets and liabilities, including all asset classes and derivatives to analyse investment and market risks.

For example, as asset owners and managers diversify further into additional assets, such as direct assets, and they report encountering issues in understanding and aggregating risks, exposures and performance. This is due to the fact that some asset classes are more opaque than others (such as infrastructure and private equity), while data can be inconsistent and hard to compare when coming from multiple sources.

Asset owners and managers who have been pursuing investment returns with very limited risk attribution analysis may have to improve their processes: as investors seek to compare what risks one manager takes compared to another for the returns generated.

What risk challenge do you need to address the most?

0% 10% 20% 30% 40% 50%

Analysis & reporting

Risk and returns

Data consistency

Measure illiquid assets

None

Other

Collateral management


Improving efficiency of reportingReporting was specifically picked out as a major concern by a quarter of respondents.

They seek to improve their reporting and make it more efficient – including how to better analyse and report all aspects of investing, including performance – as well as more easily meeting regulatory requirements.

The study also found that management is increasing attention on analytics and reporting; requiring immediacy of access to information and the ability to act on it. Management is also looking for a more detailed breakdown of data. As a result, reporting and analytics teams are producing many more ad-hoc, customised reports, with a large number of respondents citing that they still rely on spreadsheets to track and report.


Interestingly, some 14% of respondents said they were not satisfied with their risk measurement and reporting, while 20% were uncertain. Some 16% said they were also concerned about data consistency.

What do you require most from risk analytics?

Improve risk return

Risk across multiple assets

Meet risk reporting

How to reduce risk

Other

Understand ESG risk

Stress testing

Support new investment

0% 10% 20% 30% 40%


Risk management a core competencyThe research also identified a growing recognition of the need to integrate risk management into business practices as well as investment. As such, risk management is no longer an optional value-add, but rather a cornerstone requirement in all investment and business decision-making.

Australians are not alone. On a global level, a separate worldwide survey undertaken by BNP Paribas Securities Services last year identified risk management as becoming more complex and was rated the greatest challenge the industry faced.


¡ 16 ¡

ESG risk Interestingly, ESG slipped in importance in this survey and came out as one of the least important areas of focus. One possible explanation for this is the need in the current market environment to look at shorter term needs and this might be producing more immediate returns as opposed to taking a view on longer term investment.

Do you plan to increase your focus on ESG/sustainable investing in 2016?

0% 10% 20% 30% 40% 50% 60%

No

Yes

Uncertain


ESG analysis of investments is an important tool for institutional investors when considering the long-term impact of their holdings. Yet, despite the great advances in measuring classic financial risks – market, credit, liquidity – measuring ESG remains a challenge. ESG risk assessments require consistent and comparable metrics that capture and describe factors and apply these across asset classes and investment vehicles to enable consistent analysis and rating of companies and jurisdictions.

¡ 17 ¡


Changing technology

While recent media focus on fintech and digital disruption might highlight the threat posed by new technology and players outside the industry, the dramatic headlines gloss over how the industry can benefit from the same technological upgrades.

Digital disruption is not simply about technology, but also about people. Technology can help make asset owners and managers better providers; but it is not the end game. We are all in the business of meeting people’s needs. Technology is an enabler.

As such, asset owners and managers alike need to continue to demonstrate their relevance to their members and investors – or the danger is that someone else will. New providers who use technology to develop more powerful engagement and relevance models could potentially steal a march on traditional financial institutions.

Along with increased use of technology, the survey also shows the industry expects ‘big data’ to play an ever-more prominent role in business operations.

‘Big data’ has become something of a buzz-phrase over the last couple of years as technology has enabled entities to collect and compare vast reams of information. For example, some 90% of all data stored in the world today was created in the past two years. Google and Facebook, perhaps, are the trendsetters in this space but financial firms, too, are already natural ‘big data’ players.

But data on its own is meaningless: it is the transformation of the data into useful information that is key. The investment industry will have to move on from simply collecting data to designing ways to turn that information into useful tools for investors (while maintaining their privacy).

Accordingly, we expect more personalised distribution and investor engagement strategies, such as an increase in real time, flexible and bespoke personalised data delivered on mobile platforms.

Approximately 80% of asset managers are expected to replace paper reporting to institutional clients with digital delivery within five years – and soon after to all clients, including retail investors.

Also, the issue of sharing data between stakeholders and then reporting them correctly and cost-efficiently to regulators has yet to be resolved.

Which operational issue do you expect to concern you the most in 2016?

Reporting

Data, IT & technology

Risk management

Investment complexity

Other

Security

Staff management

Reducing costs

0% 10% 20% 30%


Technology will continue to be used to streamline costs and improve efficiencies as well as facilitate more rigorous compliance and regulatory reporting, while underpinning best-of-breed infrastructure for front, middle and back offices. Though, it is important for participants to plan and move towards what the future may hold, rather than simply play catch-up after the fact.

These technical developments, taken together, will help enable the industry to grow.

Last year, the greatest concern among operational issues was staff management and how to improve risk return, followed by data management. This was almost a reverse in order over the past 12 months.

¡ 19 ¡

Changing technology


There is recognition that business models need to change to improve efficiencies where possible. Besides technology, reporting and risk management, other major operational concerns of asset owners and managers includes how to over complexity of day-to-day operations.

High on the list of strategic management priorities is improving middle and back office functions. One in five respondents (20%) say they are looking at external providers for this, with just over half that number (13%) considering insourcing.

What are most important to you in terms of administration, custodial and operational services?

0% 10% 20% 30%

Improving efficiency

Distribution networks

Execution

Administration

Performance analytics

Liquidity management

Custody

Client services

Management reportingRegulatory updates

Global regional extensionOther

Back and middle office support

Middle and back office

Meeting regulations

Security infrastructure

Improving risk management

Real time reporting

Front office support


In recent years for example, some asset owners and managers have contracted back and middle office operations to cut costs. This has, in some cases, resulted in infrastructure that is inflexible and unable to be scaled for increasing product complexity and regulatory requirements. Another unintended consequence has been that this sometimes resulted in an associated increase in operational and reputational risk, as manual systems errors increased as too many resources spent too much time managing volumes of data, while the ability to quickly respond to regulatory bodies and demands from customers for transparency was severely strained.

Some institutions are recognising that improving middle office functions can contribute to improved efficiency, streamlined compliance with regulators and meet client and regulatory demands for transparency.

Over the past few years, several Australian superannuation funds and investments managers have embraced the trend to partner with their third party providers to provide middle and back offices functions to enable them to better focus on their core investment business, relationship management and investor engagement.

Combinations of outsourcing of trading execution, middle and back office services as asset owners and managers recognise that these models can be more efficient in terms of cost, liquidity management and access to a wider range of capital market expertise, as well as settlement services to improve transparency and reporting requirements.

Overall, respondents cite that they want their own operations, as well as the overall industry, to be more efficient. They want complexity reduced.

Service providers are responding to this call and providing support across the trading lifecycle to meet the long term needs of the industry.

¡ 21 ¡


Conclusion

This year’s findings compared to last year’s is a grip on reality. Investment strategies have remained the same with the long term objective to improve performance through sustained growth strategies. Risk analytics and operational issues are creating a sense of urgency for investors to re-think their operating model in a holistic manner.

The business environment never stands still and this is particularly true in 2016. The complex and challenging investment landscape is putting pressure on investment managers to ensure they remain sustainably competitive. They need to identify and generate returns, to manage risk and be able to explain how they do this to investors.

Investment managers are changing. As the industry and consumption goes into its digital phase they need to make decisions on how they are going to make best use of the opportunities and efficiencies that are appearing all along the investment cycle. Facing such complex markets means that managers have to ensure they are focusing on their competencies. This could mean a decision on whether now is the time to outsource part of their operations to maximise efficiency

These challenges do not have to be faced alone. Developing partnerships will be a key to the future of not just individual organisations and their people, but also our industry. Understanding change and forging partnerships can help meet increasing complexity, as well as reduce it. By working together we can lift the standard and maintain our role as one of the world’s greatest savings systems.

About this reportThe research in this report was undertaken in February 2016 by Investor Strategy News on behalf of BNP Paribas Securities Services.

The majority of the 115 respondents were from asset managers (20%), asset owners and superannuation funds (19%). Other respondents included financial advisory groups (18%), banks (11%), wealth managers (7%), corporate funds, insurers and a sovereign wealth fund. The majority, over a quarter (27%), were c-suite, followed by consultants, operations managers, portfolio managers, trustees, compliance and risk managers. All responses were provided anonymously.

About the contributorsBNP Paribas Securities Services, a wholly-owned subsidiary of the BNP Paribas Group, is a leading global custodian and securities services provider backed by the strength of a universal bank. It provides integrated solutions for all participants in the investment cycle, from the buy-side and sell-side to corporates and issuers. Covering over 100 markets, with our own offices in 34 countries, the BNP Paribas Securities Services network is one of the most extensive in the industry. We bring together local insight and a global network to enable clients to maximize their market and investment opportunities worldwide. As of 30 June 2015, it had US$9 trillion in assets under custody, 8,132 administered funds and 8,800 employees.

IO&C is a privately owned media business which publishes Investor Strategy News, the leading weekly newsletter for the institutional investment market in Australia and the Asia Pacific. IO&C, which also produces conferences – such as the upcoming My Platform Rules II – and other events, is owned by Binalong Advisory Services, which is in turn owned by its directors, Greg and Christine Bright. My Platform Rules is a joint-venture with Patrick Liddy’s MSI Group. Everything we do is aimed at providing the best possible analyses, news and views aimed at improving the strategies and operational efficiency of fiduciary investors, especially superannuation funds. Apart from the strategies and processes being employed by super funds and other fiduciary investors, news coverage includes the activities, products and people in: fund managers; asset consultants; custodian banks; investment administrators; systems providers; and large financial advisory firms.

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Conclusion

The bankfor a changing

world

For further information please contact:Ian PerkinsBNP Paribas Securities ServicesTel: +612 9619 [email protected]

BNP Paribas Securities Services is incorporated in France as a partnership limited by shares and is authorised and supervised by the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers).The information contained within this document (‘information’) is believed to be reliable but neither BNP Paribas Securities Services nor any of its related entities warrant its completeness or accuracy nor accept any responsibility to the extent that such information is relied upon by any party. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ or its related entities’ judgment at the time of printing and are subject to change without notice. This document is not intended as an offer or solicitation for the purchase or sale of any financial product or service. The information contained in this document does not constitute financial advice, is general in nature and does not take into account your individual objectives, financial situation or needs. You should obtain your own independent professional advice before making any decision in relation to this information. The information contained in this document is not intended for retail investors.BNP Paribas Securities Services ARBN 149 440 291 (AFSL No: 402467) has been registered in Australia as a foreign company under the Corporations Act 2001(Cth) and is a foreign ADI within the meaning of s 5(1) of the Banking Act 1959. This document is not intended as an offer or solicitation for the purchase or sale of any financial product or service outside of Australia and is intended for ‘wholesale clients’ only (as such term is defined in the Corporations Act 2001 (Cth)). BNP Paribas Securities Services, acting through its Hong Kong Branch, is regulated by the Hong Kong Monetary Authority and is licensed by the SFC to conduct Type 1 (dealing in securities) regulated activity. BNP Paribas Securities Services, acting through its Singapore Branch, is regulated by the Monetary Authority of Singapore.The New Zealand securities services business operates through BNP Paribas Fund Services Australasia Pty Ltd. BNP Paribas Fund Services Australasia Pty Ltd is a wholly owned subsidiary of BNP Paribas Securities Services. BNP Paribas Fund Services Australasia Pty Ltd ABN 71 002 655 674 (‘BPFSA’) is an Australian incorporated company which is registered with the New Zealand Companies Office under registration number 1010736. BPFSA is also registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. Printed on recycled paper with vegetable inks – Designed by the graphics department, corporate communications, BNP Paribas Securities Services.160512C_IOOAU_BR_EN

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INVESTMENT & OPERATIONS OUTLOOK 2016 - … · Investment & operations outlook 2016 ... Changing horizons ... with a majority of asset owners expecting to invest more in global and