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The asset management industry faces operational challenges and the challenge of steering portfolios. How to steer the stormy waters created by COVID-19.

COVID-19 is presenting multifaceted challenges to the asset management industry, including asset managers and asset owners such as pension funds and private wealth funds. These include both operational challenges and the challenge of steering portfolios and organizations through the stormy waters created by COVID-19-related uncertainty.

Asset managers' initial response to the COVID-19 crisis was to ensure the well-being of their personal and to implement the Dutch government's working from home guidance. Those asset managers and owners that had created and used operational capabilities to work remotely prior to the COVID-19 crisis did not face any meaningful challenges in switching to 100% remote working or continuing to work in the office with a small number of staff for critical functions that could not be performed remotely.

They were able to stay connected by smoothly switching communications with clients and internally within organizations, using tools such as Microsoft Teams, WebEx and Zoom. They did have to pay particular attention to outsourcing relationships, as not all business continuity plans were set up to cope with a pandemic. Despite the limited preparations in business continuity plans aimed at coping with extended periods of limited access to working premises, asset owners and asset managers were generally able to resume their operations quickly and efficiently. 

Nearly three months into the COVID-19 crisis, most asset managers and asset owners continue to work remotely, and there are signs this is now seen as the new normal. Following this initial response situation, the key now is to focus on what this new reality could entail and what this will mean for the asset management industry.

A new reality? It goes without saying that the COVID-19 outbreak will have a lasting impact on society in general and the asset management industry as a part of this society. Remote working and virtual meetings also have clear efficiency and cost benefits, as they reduce travel time and expenses, and they are now likely to remain part of our working life. Faced with this new reality, asset managers and owners are starting to evaluate their primary processes, from a perspective of resilience and robustness. They are likely to evaluate outsourcing relationships bearing in mind the new operational risks and the ability of the service provider to deliver the required service levels. Nevertheless, for the asset management industry itself we anticipate that trends that were dominating the industry will persist or even be reinforced.

Ongoing search for yield – Following the COVID-19 outbreak, policy makers across the world announced large stimulus packages to support economies, and central banks lowered interest rates or announced large asset purchase programs. In light of high debt levels, central banks may be inclined to maintain interest rates at very low levels for the foreseeable future. Low interest rates will reinforce the search for yield that has persisted over a good part of last decade. Nevertheless, the disruptions and changes in behavioral patterns could trigger repricing in certain market segments and could provide investment opportunities, especially for private equity investors.

Regulatory scrutiny will continue – Over the past decade, we have seen an expansion of regulatory requirements for asset managers and pension funds. Regulators have increased scrutiny on fund managers and regulated asset owners, with a particular focus on the investment and risk domain, while asset managers face increasing challenges in implementing new legislation. Although COVID-19 may result in a pause on new regulatory initiatives, it is unlikely to reverse this regulatory trend. Regulators may also reevaluate their supervisory methods and may start looking to increase the digitalization of regulatory processes. In addition, the COVID-19 outbreak has highlighted the need for robust risk management, especially with respect to non-financial risks related to IT security and outsourcing risks, which have already been on the radar of regulators for some time.

ESG moving front and center - Over the past few years, environmental, social and governance (ESG) aspects of responsible investing have become a hot topic on the agenda of asset managers. Society, stakeholders and regulators have put pressure on asset managers to not focus solely on financial gains, but also on social gains. The COVID-19 outbreak has given a new boost to ESG considerations. The lockdowns have reinforced the awareness of the significant footprint that our routines leave on the environment.

Step-up in digitalization – The need for remote working has given another boost to digitalization in the asset management industry. We anticipate that asset managers and owners will seek to further digitalize any operations that are performed in-house. Technological innovations are both a possible enabler and disrupter. This calls for an offensive attitude to innovation, plus generic efforts to increase IT savviness and model agility.

Continued pressure on costs – Low yields and downward pressure on fees are increasing the need to be critical regarding operational costs. Whilst generic cost cutting has its limits and could be self-defeating, investing in the automatization of operational processes and certain client processes, as well as increasing scale, could be one offensive approach aimed at dealing with cost pressures.

Need for robust portfolio management systems – Asset managers' critical client portfolio management processes are often executed with a limited level of robustness, using in-house developed tooling that is prone to errors. The many uncertainties created by this COVID-19 crisis underline the need for robust portfolio management systems for, among other things, the running of scenario analyses. This is why we are seeing an increasing urge for more robust and professional tooling.

We conclude that while COVID-19 is having a disruptive impact on society and the economy, and is also having a profound impact on the way asset managers and asset owners perform their business, the trends that have shaped the asset management industry over recent years are likely to persist and may even be reinforced. For asset managers, it therefore remains key to have a clear focus on the fit-for-purpose management of financial and non-financial risks, as well as a clear digital strategy.