As we all dare to dream about the light at the end of the COVID-19 tunnel, it is increasingly clear that the institutional funds sector is already moving to codify the lessons learned from the pandemic.
It was just over 12 months ago that the entire institutional funds sector, alongside the rest of the workforce, had to adapt to different ways of working almost overnight.
Together, the entire financial services system has demonstrated an enormous amount of flexibility to ensure everything kept working in an efficient and secure manner.
At Northern Trust, we believe the past 12 months has accelerated some trends already in the pipeline. Like most journeys, there will be twists and turns and every participant will have a unique experience. However, we believe the following trends will play a significant role in shaping the path back to normality.
SCALE AND EFFICIENCY CONSIDERATIONS
As a natural reaction to uncertainty, the onset of the COVID-19 pandemic resulted in some institutional investors pausing significant projects around consolidation and changing operating models.
This pause was a temporary response and institutional investors have or are now recommencing these important projects as they seek to mitigate risk, and enhance scale and capabilities to future proof their operations.
At a macro-level, superannuation funds are expected to continue to focus on reducing costs to ensure they meet the Australian Prudential Regulation Authority’s (APRA’s) mandated standards around performance and value to members.
This will lead to further consolidation through mergers which will provide opportunities for increasing scale, operational efficiency and benefits to members.
Additionally, institutional investors are continuing the 30-year trend towards outsourcing certain functions. Beginning in the early 1990s, outsourcing kicked off with custody and fund accounting.
In the 2000s it extended to the middle office with outsourcing of post-trade execution activities, including trade matching, reconciliations and client and regulatory reporting.
Fast forward to today, where we are increasingly witnessing the outsourcing of front office functions. For example, at Northern Trust, our Integrated Trading Solutions (ITS) offering, which is outsourced trade execution, is increasingly in demand from institutional investors seeking to future-proof their operations and enhance their operational efficiency.
Overall, institutional investors are realising great value in outsourcing their back, middle and select front office functions such as institutional brokerage to service providers like Northern Trust who have a global operating model, innovative technology solutions, as well as proven scale and experience to meet the ongoing needs of sophisticated institutional investors.
DATA DEMANDS TO CONTINUE
Asset servicing providers are playing a key role in assisting institutional investors to meet a variety of data and reporting needs. The thirst for increased data and transparency on investments has been a theme for a number of years and the impact of COVID-19 has continued to accelerate this trend.
During the onset of COVID-19, asset servicing providers were processing and reporting unprecedented volumes of transaction activity as institutional investors responded to the evolving market volatility. During this time, the role of asset servicing providers in maintaining consistent servicing and providing up-to-date portfolio information was never more important.
Many institutional investors have been evaluating their data management governance and operating models.
The pandemic highlighted the importance of strong data governance and many are now continuing on that journey to future-proof their operating models with enhanced tools, talent and data to support decision making, oversight activities, and ongoing changes to regulatory reporting obligations.
NEW TYPES OF INVESTMENTS
Another trend is the increasing array of assets that are on offer to institutional investors. The sophistication and complexity of these emerging opportunities will require a strong ecosystem to ensure they are properly accounted for, valued, and serviced. With the potential emergence of new asset classes we can also expect a continued focus on digitalisation.
Digitalisation continues to accelerate, and institutional investors are continuing to show a strong appetite for conversations in this direction. Northern Trust developed the first distributed ledger technology solution for private equity administration, and we continue to work with Singapore-based BondEvalue while they rollout their world-first blockchain solution for trading bonds.
We are also taking part in conversations about cryptocurrencies and their role in the portfolios of institutional investors. Like other digital assets, the creation of an ecosystem to account, value and service the asset will be required to provide investors with the requisite level of confidence and assurance. In this space, Northern Trust recently announced it had partnered with Standard Chartered to launch Zodia, a cryptocurrency custodian for institutional investors.
Separate to digitalisation, the prevalence of lower for longer returns is another COVID-19 legacy which has given rise to the trend for institutional investors investing into private assets in search of additional returns.
REGULATORY CONVERSATIONS BACK IN THE SPOTLIGHT
During 2020, financial services regulators went to great lengths to understand and accommodate the impact COVID-19 had on both the broader economy and the financial services and super funds sector, including a lightening of the regulatory change agenda.
As the economy returns to a more normal post-COVID setting, we anticipate that ongoing regulatory conversations will be front and centre for institutional investors as they adapt to new regulatory requirements.
There is no doubt that asset servicing providers will play an important role in helping clients meet these new requirements and standards.
Further from our shores, global regulatory changes, like derivatives regulations and upcoming LIBOR changes, continue at pace and will continue to impact local institutional investors as they seek returns in markets beyond Australia.
DIVERSITY, EQUITY AND INCLUSION OUTCOMES
COVID-19’s impact on the office and how we work is expected to have far-reaching impacts on diversity, equity and inclusion outcomes.
The financial services system was able to quickly adapt to the need to work from home. Temporary regulatory relief and quick thinking ensured challenges around wet ink signatures, document execution and cheques were overcome in a timely fashion. As work from home orders begin to lift, the industry is well placed to continue leveraging these efficiency gains.
On the same topic, accelerated investments in technology and online collaboration tools proved that working from home was not only possible, but in many cases supported greater inclusion because everyone was working remotely.
Whilst the lines between work and home were blurred and the hours increased, there were also the benefits of increased flexibility due to the elimination of daily travel time between home and office.
That said, many of us look forward to returning to the office and face to face meetings with our colleagues and clients.
COVID-19 has normalised working from home and challenged any perceptions of the effectiveness of remote work. Looking forward, maintaining a level of workplace flexibility will encourage and facilitate an increased participation of women in financial services and ultimately the number of female leaders within our industry.
In conclusion, the journey out of COVID-19 will have twists and turns and will be unique for each and every institutional investor. It is clear the journey will be made easier with a committed, service driven partner.
Sally Surgeon is head of client services and head of the Sydney office at Northern Trust.