1

Are you ready to rise?

The Hunt for Growth Across Asset Management: Outlook for the Front Office

THE FIS™ READINESS REPORT

2 The FIS™ Readiness Report: The Hunt for Growth | Contents2

Contents

3 Introduction

4 Industry outlook

7 Accelerating growth readiness

8 Strengthening automation

9 Mastering data management

10 Embracing emerging technology

11 Improving the customer experience

12 Assessing the talent mix

13 Increasing confidence in risk management

14 Our recommendations

16 Appendix

17 Methodology

Introduction

3

For asset managers, a gradually improving economic outlook and strong market performance in 2017 has created valuable opportunities for growth. But many organizations feel unequipped to capitalize, particularly as they face significant pressures from shifting investor demands, fee competition, regulatory change and evolving technology.

Our research into the views of asset management executives in trading and investment suggests that better use of emerging technology, investment in digital talent and more sophisticated exploitation of data are now key imperatives for the sector in its hunt for growth.

Our research, based on a survey of 1,042 senior-level decision-makers (see About the research), reveals key insights about how financial services firms must now rethink their operating models to position themselves for growth – and what the industry’s leaders are doing to set themselves apart.

Its message is clear: firms that are closest to achieving operational excellence across the front, middle and back office are reaping the rewards, growing more rapidly than their rivals.

This report discusses our key findings and learnings from front-office respondents who work within asset management institutions.

The FIS™ Readiness Report: The Hunt for Growth | Introduction

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1. Front-office executives are prioritizing investment performance, margin improvement and customer acquisition.

Just over half (51 percent) of front-office leaders within asset managers cite improving investment performance as a top growth objective for the next 12 months, but similar numbers of executives are focused on improving operating margins (47 percent) and acquiring new customers (46 percent) as well.

The focus on margins will be even more important given that asset managers expect that they will need to respond to downward pressure on fees. More than half (58 percent) say it is likely they will have to reduce fees on actively managed funds over the next 12 months, while 68 percent expect to introduce new performance-related fee structures for some funds.

The FIS™ Readiness Report: The Hunt for Growth | Industry Outlook

Industry outlook: The front-office perspective

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Figure 1. Growth objectives for the year ahead

Acquire new customers

Improve customer

retention rates

Improve investment

performance

Improveoperatingmargins

47%51%

Expand into new developed

markets

30%

Expand into new emerging

markets

26%

Enter new business lines

or products

22%

38%

46%

Merger/acquisition

14%

5

3. Executives are concerned about fee pressure, cybersecurity risk and market disruption as they seek to drive growth.

Notably, 32 percent cite fee pressure as one of the three biggest threats to growth in the years ahead, twice as many as the 16 percent of overall respondents with this concern. The same number of respondents (32 percent) are concerned by the threat of disruptive new market entrants, while cybersecurity risk is one of the biggest perceived threats to growth for 28 percent.

2. The front office is the most optimistic about the prospects of their organizations achieving their growth targets.

Almost two-thirds (63 percent) of investment and trading executives are somewhat or highly confident their organizations will achieve their growth targets over the next 12 months, versus only 53 percent of all of the financial services executives we surveyed. In part, this bullishness may be attributed to positive sentiment about the outlook for economic growth in their key markets; 46 percent cite this as one of the three biggest opportunities for growth over the next few years. Some 34 percent point to expected government spending in their key markets.

Figure 2. Opportunities and threats to growth over the next 3 - 5 years

ThreatOpportunity

Countries implementing protectionist policies 17%21%

Divergence in central bank interest rates 24%14%

Projected economic growth in my key market(s) 46%18%

Brexit - the U.K. leaving the European Union 22%24%

Political outlook in my key market(s) 29%24%

Government spending policy in my key market(s) 34%25%

Tax policy in my key market(s) 26%26%

Disruptive new market entrants 13%32%

Emerging technologies 22%16%

Cybersecurity 18%28%

Fee pressure 7%32%

The FIS™ Readiness Report: The Hunt for Growth | Industry Outlook

Figure 3. Changes to product offerings over the next 3 – 5 years

6 The FIS™ Readiness Report: The Hunt for Growth | Industry Outlook

4. Investment professionals foresee greater money flows into a broad range of asset classes, including alternatives.

Some 58 percent of asset management executives expect to see strong inflows – a net increase of more than 5 percent – into emerging market equities over the next three to five years, while 47 percent say the same of developed market equities. In the bond market, 46 percent forecast strong inflows into emerging market fixed income, while 37 percent expect to see this in developed markets.

Alternatives such as hedge funds and private equity (both 41 percent) are expected to attract strong inflows, along with real estate (34 percent), infrastructure (30 percent) and private debt (28 percent).

Don’t know Reduce ourexisting o ering

No change tocurrent o ering

Launch our firstever productof this type

Increase ourexisting o ering

N/A — We don’to er this anddon’t intend to

Liquid alternativestrategies 26%46%13%5%5% 5%

Outcome-orientedmulti-asset

solutions3%3% 5% 47% 42%

1%Actively-

managed ETFs 50%34%12%3%

1%Passive

ETF strategies 22%43%22%3%8%

1%Environmental, social

& governance (ESG)investing strategies

22%49%16%5%7%

Asset management executives also expect to respond to changing investor demands, with 45 percent predicting they will increase their existing offering of multi-asset solutions or launch new products in this area. Some 50 percent say the same of actively managed ETFs, while offerings involving liquid alternative strategies (30 percent), environmental, social and governance investing strategies (28 percent), and passive ETFs (26 percent) will be increased by a smaller but not insignificant number of managers.

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We view these six operational principles as critical for growth in the years ahead:

Automation: The level of process automation across the transaction lifecycle; artificial intelligence (AI) in combination with exception-based workflow is the highest parameter

Data management: Data management capability, including integration of data across the organization, predictive analytics and visualization

Emerging technology: Maturity of emerging technology adoption across mobile, AI and distributed ledger solutions

Digital innovation: Level of activity directed at strengthening digital innovation and propensity of organizational culture for innovation

Customer experience: Performance across customer service metrics, including customization of products and services, mobile delivery, responsiveness and transparency

Talent: Level of digital competencies in data analytics, software development, digital distribution and digital transformation

Five of these principles are shaping asset managers’ front office. This section of the report examines those principles, as well as assessing the risk management function. It outlines the areas that asset managers need to prioritize to help drive future growth and highlights how leading institutions are adapting their strategies.

The FIS™ Readiness Report: The Hunt for Growth | Accelerating Growth Readiness

88 The FIS™ Readiness Report: The Hunt for Growth | Strengthening Automation

Front-office executives are calling for operational and technology upgrades to support their growth ambitions.

Some 42 percent say their operational capabilities are below where they need to be. Automation is one area where there is scope for improvement – already, almost half of front-office leaders (49 percent) say they have reached near-full or full automation of trade execution, for example, while only 32 percent say this about performance attribution. Both areas, along with portfolio and order management, are expected to see further automation in the years ahead.

Meanwhile, 40 percent of executives say their current technological capabilities are not strong enough to fully support their growth plans. In addition, 43 percent see the front office as most in need of technology infrastructure improvement over the next 12 months, versus 34 percent for the middle office and 18 percent for the back office.

A third of executives (33 percent) think that technology spending could help to increase revenues, though strengthening cybersecurity, reducing operating costs and simplifying the IT infrastructure are also seen as important outcomes.

Accelerating growth readiness: Getting the front office fit for growth

Figure 4. Growth readiness

7%

1%

18% 34% 32% 8%

8% 18% 32% 33% 9%

Stronglyagree

Disagree Neither agreenor disagree

AgreeStronglydisagree

Don’t know

Our current operations function isnot strong enough to fully support

my organization's growth plans

Our current technology capability is not strong enough to fully support

my organization's growth plans

Strengthening automation

Front-office leaders stress the need for more sophisticated data analytics techniques to drive growth. Only 58 percent believe their organizations have effectively unified their internal data sources (versus 63 percent of executives across financial services), and 59 percent say they effectively add external data to the mix to inform their decision-making (versus 61 percent overall).

The major outlier, however, is with asset managers’ progress on developing advanced analytics for predictive identification of risk and opportunities. Only 43 percent of front-office leaders say they are effective at this. As more intelligent solutions – such as tools that utilize deep data algorithms to more accurately predict investment risk – become available, there is a danger that early adopters will pull away from the competition.

The FIS™ Readiness Report: The Hunt for Growth | Mastering Data Management

Figure 5. Data management capability

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Mastering data management

1%

1%

3%

Don’t know Ine�ective Highly e�ectiveNeither e�ective nor ine�ective

E�ectiveHighly ine�ective

Unifying data sourcesacross the organization

Combining external data withinternal data to better

inform our decision-making

Ability to visualize and simplifycomplex organizational data

for decision-making

Advanced analytics forpredictive identification of

risk and opportunities

42%28% 16%11%3%

46%37% 13%

39%30% 14%13%

32%26% 11%4% 25%

1%

1%

3%

“We’re now talking about enabling more self-servicing so consumers of the data would be able to build solutions for themselves in the future.”- Igor Lobanov, Legal & General Investment Management

AI is perceived as key to supporting front-office activity – but there are significant hurdles to speeding innovation.

Among front-office executives who say their firms are developing AI solutions, performance and analytics (55 percent) and market data management (47 percent) are seen as the areas where there is greatest scope for applications. For blockchain, these executives pick out collateral management (57 percent), clearing and settlement (43 percent) and reconciliation (43 percent).

But asset management executives continue to struggle with barriers to innovation – they are particularly likely to complain about complex legacy IT systems (cited by 38 percent against 27 percent of executives overall). Cybersecurity and lack of support from senior leadership, both cited by 24 percent, are also problematic.

Embracing emerging technology

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Figure 6. Barriers to digital innovation

Lack of available capital to invest 7%

Talent gaps 13%

Organizational culture 14%

Insu�cient support from senior leadership 24%

Insu�cient organizational understanding of digital issues 16%

Cybersecurity risk 24%

Regulatory risk 18%

Complex legacy IT systems/inadequate technology 38%

Job losses 22%Internal silos/lack of internal collaboration 22%

Other 1%

“Technology can definitely help to replace some of the very labor-intensive areas of our business, but I don’t believe a machine can replace a human being and power advice.”- Eleanor Wan, BEA Union

Investment Management

The FIS™ Readiness Report: The Hunt for Growth | Embracing Emerging Technology

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To improve the customer experience, front-office executives stress the need to invest in digitalization and to increase transparency.

Three-quarters believe their organizations effectively deliver a personalized service and customized products, but only 61 percent say the same of digital and mobile access to services. Some 68 percent say that their transparency on fees is effective.

More than two-thirds (68 percent) say that outdated or inadequate technology is to blame for an ineffective customer experience, while 63 percent point to structural issues such as organizational silos.

Improving the customer experience

The FIS™ Readiness Report: The Hunt for Growth | Improving the Customer Experience

“A new entrant into the business can be just as operationally sound and efficient as an incumbent; today, competitive advantage really comes down to cost and service and how you deliver to your clients in the most effective way.”- Oliver Murray, Bridgehouse Asset Management

Figure 7. Delivering on the customer experience

Don’t knowN/A Ine�ective Highly e�ectiveNeither e�ective nor ine�ective

E�ectiveHighly ine�ective

3%Transparency on costs/fees 28%41%8% 21%

1%

Customization of products 21%54%3% 21%

1%

Timeliness of response 37%43%3%3% 13%

1%1%1%

Digital/mobile access to services 14%46%13% 22%

Personalized/tailored service 18%57%18%

1%

3%3%

The FIS™ Readiness Report: The Hunt for Growth | Assessing the Talent Mix

Assessing the talent mix

Executives believe a range of digital skills will be important as they strive toward their growth objectives for the next 12 months. They are particularly likely to see expertise in software development and digital change as vital, with 66 percent citing these skills. Some 58 percent think big data skills will be important, and 53 percent pick out digital distribution expertise.

Figure 8. Skills needed to support growth

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In many of these areas, skills are not currently perceived as being at the required level. For both software development and digital change, only 54 percent believe that their in-house talent is good. Just a third (34 percent) say the same about their big data expertise, and talent in emerging areas such as AI (32 percent) and blockchain (26 percent) is currently sparse.

“We can and do outsource service provision across the business, and there are enough providers out there to support that, but each time our business changes, we also need to invest in human capital, and that is where the challenge lies.”- James Tan, Lion Global Investors

58%

Big data analytics/data

scienceexpertise

66%

So�ware development/programming

expertise

66%

Digital change/digitaltransformation

expertise

53%

Digital distribution/

delivery expertise

62%

Algorithmic and automated

tradingdevelopers

37%

Distributedledger

technologyexpertise

41%

Artificial intelligence/

robotics expertise

Increasing confidence in risk management

The FIS™ Readiness Report: The Hunt for Growth | Increasing Confidence in Risk Management

The majority of front-office leaders say they have achieved a holistic view on risk, but fewer are confident about their predictive risk insights.

Nearly three-quarters (74 percent) of front-office executives say they are strong when it comes to evaluating risk and performance across their entire portfolio, though challenges continue to grow alongside investor demands for multi-asset solutions.

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In addition, only 61 percent feel they are strong on conducting comprehensive, accurate scenario and stress testing of their investment portfolios. And 53 percent of these executives believe their organizations are effectively generating forward-looking risk management insights from their data, highlighting a key area for improvement.

1%

14%

7%

46%

46%

1%

1%

7%

8%

7%

30%

18%55%18%

39%Generating forward-lookingrisk insights from our data

Evaluating risk and performanceacross the entire portfolio

Conducting comprehensive,accurate scenario and stress

testing on our investment portfolio

Very weak Weak Neither strongnor weak

Strong Very strongDon't know

Figure 9. Risk management capability

Recommendations

14 The FIS™ Readiness Report: The Hunt for Growth | Recommendations

The asset management industry’s front-office executives are bullish about growth opportunities in the market, but they recognize that their institutions must achieve operational excellence to capture these opportunities in what remains a challenging environment for the industry. And that entails hyper-efficiency, organizational agility and accelerated digital innovation.

As they focus on differentiating their firm’s offering by enhancing their investment strategies, digitizing their distribution models and competing on fees, front-office executives are clear about the growth benefits they can unlock by strengthening six key areas of their operating model.

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1. DEEPEN AUTOMATION Institutions must respond to efficiency and data needs by increasing automation across more areas of trading and back-office operations – but also areas of low automation such as middle-office activities. They need to overlay workflow onto exception management before they can implement AI and machine learning solutions.

2. EXCEL WITH DATA At a minimum, firms need to draw a line under fragmented systems, moving to a single source of truth on data across the organization. But this is just the first step of a multi-tiered approach. Customized real-time data must be available to business users, while advanced AI solutions should be layered on top to create better predictive insights.

3. ADD VALUE WITH EMERGING TECHNOLOGY Senior leaders must take a longer-term outlook on embracing enabling technologies such as AI, blockchain and mobile to create a compelling new value proposition for customers. Players that redefine how they service customers will differentiate themselves the most and capture new opportunities.

4. ACCELERATE INNOVATION Responding to regulatory requirements, cyber risk and complex legacy IT is stifling progress on digital innovation. Institutions must find ways to overcome these issues to expedite the process. Teaming up with innovative third parties – and finding ways to make these collaborations more effective – will be an increasingly important part of the solution.

5. REIMAGINE THE CUSTOMER EXPERIENCE Finding new digitally-driven mechanisms for engaging customers will be a critical driver of growth in the years ahead. Digital and mobile access to services are the industry’s weakest area of customer servicing. New offerings will need to provide not only greater access to real-time information via online and mobile but through direct market access too, such as enabling trading activity.

6. RECRUIT THE SPECIALIST TALENT The new operating model for growth will be ineffective unless the financial services workforce is re-evaluated. In particular, this means putting new skills such as data science specialists in place, enabling them to work in close collaboration with the front office to drive more value and better outcomes for customers.

WHAT’S YOUR GROWTH READINESS?ARE YOU READY TO RISE?

Benchmark your growth readiness FISReadinessReport.com

The FIS™ Readiness Report: The Hunt for Growth | Recommendations

16 The FIS™ Readiness Report: The Hunt for Growth | Appendix

Appendix

Survey Between March and May 2017, in collaboration with Longitude Research, we conducted a survey of 239 senior-level asset managers as part of a larger survey of 1,042 executives from across the buy and sell side, including 509 buy-side respondents from asset managers, fund administrators, insurers and pension funds.

Interviews We also conducted more than 20 in-depth qualitative interviews with industry leaders (See Acknowledgements for full details).

About the research

Traditional asset managers (traditional equity and/or fixed income strategies)

36%

1%

26%

26%

13%

Private equity fund managers

Other asset managers

Boutique asset managers

Hedge funds

C-suite26%

74%

Head of business unit/director-level

Trading and investment

28%

19%

17%

4%4%

14%

14%

Risk and compliance

IT

SalesOther

Finance and treasury

Operations

North America

33%

31%

10%

26%

APAC

LAMEA

Europe

ASSET MANAGER TYPE

REGIONS

SENIORITY

FUNCTIONS

CHARTS MAY NOT ADD UP TO 100 PERCENT DUE TO ROUNDING.

The FIS™ Readiness Report: The Hunt for Growth | Methodology 17

AboutThe Readiness Index collates and measures companies’ self-assessed performance in six operational areas that FIS has identified as being representative of how firms achieve growth:

Methodology – The FIS Readiness Index

QuestionsFor each category, executives were asked to respond to a series of self-assessment questions about their company’s performance within each area (for example, how well their company performs in unifying data sources across the organization, or the extent to which it offers customers a tailored service). The questions were tailored to different types of business across the buy and sell side.

ScoringThe majority of questions included in the index asked executives to rank their businesses on a scale of 1 to 5, where 5 = highly effective/active, etc., and 1 = highly ineffective (respondents that ticked “don’t know” were given a neutral score of 3).

Several questions, such as those related to innovation, asked respondents to choose from a range of activities or strategies that their companies may be involved in (such as M&A, third-party collaborations or setting up incubator programs). For these questions, companies undertaking at least five activities were awarded a top score, with the remaining responses scaled accordingly.

Building the FIS Readiness IndexThe question scores were aggregated for each individual respondent, first to a category score and then overall. To allow for more refined insights, both category and overall scores were placed on a scale of 1 to 10, where 10 is best. As shown above, as we believe each area accords equal merit, the categories each receive an equal weighting in the Index.

Buy-side Readiness LeadersAsset managers provided 23 percent of respondents in the overall survey and constituted roughly the same proportion – 23 percent – of the Readiness Leader group.

©2017 FISFIS and the FIS logo are trademarks or registered trademarks of FIS or its subsidiaries in the U.S. and/or other countries. Other parties’ marks are the property of their respective owners.

326482

getinfo@fisglobal.comwww.fisglobal.com

AcknowledgementsWe thank all of those who participated in our interviews:Igor Lobanov, head of systems architecture at Legal & General Investment Management Oliver Murray, chief executive officer of Bridgehouse Asset ManagementJames Tan, chief operating officer at Lion Global InvestorsEleanor Wan, chief executive officer of BEA Union Investment Management

About FISFIS is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Florida, FIS employs more than 53,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of Standard & Poor’s 500® Index. For more information about FIS, visit www.fisglobal.com.