Challenges for Asset Managers

Challenges for Asset Managers

Both the insurance and the pensions sector experience challenging times. A global virus, political segregation, environmental issues and other uncertainties offer new challenges and risks, after years of economic prosperity. The current markets are drawn by economies of scale and specialization.

To achieve cost efficiency and compliancy, these market developments call for further process improvement. Next to challenges, new regulation, continuously developing technologies and promising sustainable initiatives offer opportunities. To cope with all challenges and to seize the opportunities, we offer a range of services in the area of treasury, risk, finance and technology. We have selected six areas of expertise to explain how you can benefit our support. And as no asset manager is equal, please let us know the challenges you meet!

IBOR Reform

In February, the Financial Conduct Authority (FCA) published a ‘Dear CEO’ letter addressing the impact of the end of LIBOR (London Interbank Offered Rate) on the asset management industry. Following their letter to banks and insurers, it was the first time the FCA specifically addressed the asset management industry on this topic. On June 30, DNB and AFM started a supervisory investigation with a selection of banks, pension funds, insurers and investment firms.

Although intermediate deadlines may shift, the FCA reiterated that it expects all asset managers to “take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or harm to consumers, and to support industry initiatives to ensure a smooth transition.”

The challenge for asset managers

As the LIBOR benchmarks are used in all kinds of asset classes, the overall market impact is substantial and certainly affect asset managers. Investment portfolios will be impacted as bonds, loans and derivatives will undergo a thorough transition.
But, apart from this contract transition, the LIBOR ending will impact asset managers from a process perspective as well:

  1. The investment process is impacted as contract definitions, valuation and hedging will need to be reviewed and potentially redesigned.
  2. The benchmark process will need to be re-evaluated as the LIBOR benchmarks are not suitable anymore, e.g. as a prospectus and/or performance benchmark.
  3. Operations will be hugely impacted as system demands will alter and asset managers should be capable of processing the changed (contractual) characteristics of their investment portfolios.

Search for yield

The yield on long-term government bonds and interest rate swaps has been very low – and even negative – for an extended period of time. There is a great need for safe investments, with a pick-up in yield compared to the traditional safe havens. In recent years, institutional investors like pension funds have already increasingly invested in Dutch mortgages, which are regarded as very safe. However, there is still a need for alternatives, which can be found in government guaranteed loans (e.g. WSW and WFZ loans) and guarantee-backed SME loans.

The challenge for asset managers

Asset managers are primarily active in financial markets. There, financial instruments are traded on an exchange (listed financial instruments) or bilaterally (OTC instruments). However, investing in loans introduces new challenges. Loans are less liquid and, since loans are not traded publicly, less information is available which makes this asset class less transparent. Therefore, investing in loans requires different expertise since valuation, performance measurement and risk management require other data, approach and methods to measure and manage inherent risks such as credit, liquidity and client behaviour risks.

Model risk, validation & regulation

To increase the robustness of the financial sector, the regulators’ scrutiny is picking up pace. Increased regulation of markets, fund regulations and prudential regulation forces asset managers to improve on their governance and reporting standards, as well as on liquidity, and capital. To confirm compliance with financial regulation, validations, will become a ‘new normal’ for asset managers.

The challenge for asset managers

A common requirement of these new financial regulations is a clearly defined model risk management, model development and model validation policy. In the wake of progressing automation and digitalization in the financial industry, the number of models used increases exponentially. As a result, an institution’s success or failure depends more and more on the accuracy and reliability of those models and how they are used.

Another important change concerns the long anticipated regulatory framework for prudential requirements specific for investment firms consisting of the Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD). Currently, investment firms including asset managers are, just like banks, subject to the requirements set out in the Capital Requirements Directive (CRD) and Capital Regulations Requirements (CRR).

As the CRR/CRD regulation was mainly aimed at banks, and therefore not suitable to investment firms, the new regulation is specifically tailored towards the risk profile of investment firms. This new regulation sets specific requirements for investment firms regarding own funds requirements, governance and risk reporting. The new regulation should be implemented in June 2021 with a five-year transitional period for firms that need to increase their capital drastically under the new regulation.

System selection, implementation & support

Systems create efficiency and overview. A suitable and well implemented system will support both internal and external processes at a financial institution tremendously. However, finding and implementing the system, depending on the relevant process within the system landscape, whether that is for the AM administration, bank connectivity, collateral management, treasury management or risk management, that provides the best fit for your organization’s specific requirements, may provide quite a challenge.

A key element of the selection and implementation process is to confirm the fit between the client’s requirements, the vendor’s proposed solutions and the best achievable implementation design.

The challenge for asset managers

The entire process related to either a system selection, implementation or any applicable system support demands a blend of technical and financial knowledge, as well as implementation and system selection experience and process overview. Next to this, key to the implementation or selection process is the confirmation of the system capabilities to match the implementation design and the business process. Insight in all elements of this process is essential to complete the picture and make the right judgement.

Robotic Process Automation (RPA)

By using apps to perform basic day-to-day tasks, such as managing our agenda, we free-up time to spend on the things we value. This is exactly what Robotics Process Automation (RPA) is about: a software that performs rule-based work, interacting with systems, websites, or applications in the same way a human would.

Robots are excellent at performing repetitive and rule-based operations, which means that humans can dedicate more time to work that requires value judgements and human interaction. RPA automation software directly integrates with any application and perfectly suits standardized and high-volume processes, such as those encountered in transactional, portfolio management, risk management, finance and treasury departments.

The challenge for asset managers

How can asset managers achieve ROI with RPA? We give you three examples:

  • Front office process – gathering data from several systems and sources to automatically create your dashboards and reports, prepare your factor analysis, check your mandate, KPI’s, performance, do your investment analysis, security selection, rebalancing, hedging, ticket creation / trade order, check pre-trade compliance, limits and other metrics, and automatically prepare e-mails to inform your clients. Process automation means more time for analysis and research.
  • Back office and control – Monitor covenant and counterparty limits (providing warning before covenant breach), perform month-end activities, reconciliations. Contract settlement and confirmations, payment and bank statement processes, where manual file uploads and downloads are still required using EBS systems or letters. Bots will reduce the effort, maintain confidentiality, and leave a digital audit trail that manual payment file handling does not have.
  • Risk management – The preparation of risk management information can be very time consuming and error prone especially when many sources and systems or non-standard information are involved. Processing data and market information, gathering positions and forecasts from all portfolios and balance sheet items in a robust way will speed up company-wide overview and insight in risk positions.

Green bonds

Green bonds are a way to raise money for environmentally friendly projects. To help guard against greenwashing or misleading environment claims, regulators are increasingly working on standards. As a result, companies or loans receive a green rating that also brings tax benefits for investors. Therefore, green bonds are both from a financial and marketing perspective interesting for investors and their clients.

Because of these regulations, but also to meet their market’s demands, investors are obliged to contribute to further greening of society. Investors’ demand for sustainable options has boomed in recent years and the supply is currently lacking behind!

The challenge for asset managers

Green bonds have become scarce and need scrutiny before investing. Not every green venture will last and many bonds faced issues up to an outright default. Zanders itself invested in renewables and energy saving projects and has a vast experience in selecting, analyzing and structuring investments. Our own investments have been carved out to Catena in 2014 ensuring independence.