INSTITUTIONAL INVESTMENT
Emerging from COVID-19 BY SALLY SURGEON
A
The pandemic has accelerated trends for institutional funds that were already in the pipeline and some will shape the journey back to normality.
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
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