Growth Readiness

New Routesto Growth

A CLEAR PATH FORWARD

Economic powerhouses have long taken bold steps to carve out new routes to growth.

From the Han dynasty’s develop-ment of the Silk Road in the second century BC, to Beijing’s Belt and Road Initiative today, a willingness to find new paths and disrupt the status quo has been key to fulfilling growth ambitions.

Today’s investment institutions must be equally bold.

Research from our annual Growth Readiness Study reveals how industry participants — asset managers and institutional investors — are charting a new way forward. Leading firms are now looking to emerging technology tools as important drivers for growth.

Continuing to rely on well-trodden paths will not be enough. Our research shows how the industry is adapting to a new reality.

2 NEW ROUTES TO GROWTH

GROWTH READINESS

Navigating the route to growth

Map the new landscapeInstitutions are conscious of the need for a new mindset. Sixty-eight percent of respondents say it’s increasingly difficult to achieve growth.

Accelerate progress with new toolsNearly half (48 percent) of respondents recognize emerging technology as a top enabler of growth over the next five years — up dramatically from just 18 percent in 2017.

Anticipate and defendAs market uncertainty heightens, 72 percent of asset owners and 59 percent of insurers are adopting a more defensive investment strategy. Meanwhile, 72 percent of asset managers expect to slow their plans for expansion over the next five years. A more cautious outlook prevails across the industry.

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¹ US Congressional Budget Office, “The Budget and Economic Outlook: 2019 to 2029,” January 28, 2019² National Bureau of Statistics of China, “National Economic Performance Maintained Within an Appropriate Range in 2018 with Main Development Goals Achieved,” January 21, 2019

Global trends in real gross domestic product (GDP) suggest the market has entered a period of structurally lower growth.

In the US for example, real GDP growth is expected to slow over the next decade, averaging only 1.7 percent annually from 2019 to 2029.1 Even the economy of China, which recorded annual GDP growth of 9 percent or more every year between 2002 and 2011, has slowed over the last four years. Its real GDP rate fell to 6.6 percent in 2018, its lowest point since 1990.2

Interest rates, though rising, remain at near-historic lows in many markets. Increased investment competition and shrinking profit margins are also contributing to the intense pressures facing investment industry incumbents.

Against this gloomier economic backdrop, our study participants also see regulation as a growing challenge to achieving growth, particularly rules governing investment behavior and liquidity risk. For instance, Europe’s Solvency II regime impacts the attractiveness of some illiquid asset classes for insurers and can complicate hedging strategies. And while pension funds may recognize a need to turn to new asset classes to seek alpha, many still have limited scope to increase their allocations to private assets.

GROWING GETS TOUGHER

GROWTH READINESS

4 NEW ROUTES TO GROWTH

Figure 1: Threats to growth persist

Which of these factors pose the greatest threat to your organization’s growth over the next five years?

50%

42%

39%

Regulation governing liquidity risk

40%

36%

Political outlook in our key markets

37%

33%

Economic growth in our key markets

35%

26%

Monetary policy in our key markets

34%

38%

Regulatory attention to investment fees

32%

17%

Fixed-income outlook in our key markets

29%

27%

Equity outlook in our key markets

27%

14%

Emerging technologies (e.g., blockchain, asset intelligence, etc.)

43%

37%

Regulation governing investment behavior

2018 201750%

Source: State Street Growth Readiness Study, 2017 and 2018

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Our research also points to the political outlook as another perceived drag on growth. The industry is more focused on the risks than the opportunities of geopolitical developments such as Brexit and the escalation of protectionist trade measures. A combination of growing geopolitical uncertainty, a return to monetary tightening and signs of increased market volatility suggest that institutions cannot afford to be cavalier in their pursuit of growth.

These trends are weighing heavily on the sentiment of our study participants: 68 percent say it is becoming more challenging to find avenues to growth in the current market environment. Additionally,

66 percent of the institutions we surveyed are adopting more defensive investment strategies to respond to adverse market conditions, and 67 percent are undertaking a slower, more targeted expansion of their operations.

Despite this caution, significant growth opportunities still exist for those who can get on the right side of change. A positive outlook prevails: 76 percent of industry respondents remain optimistic about achieving their growth objectives over the next five years.

To justify this optimism, however, the industry must identify and embark on new routes to growth.

GROWTH READINESS

6 NEW ROUTES TO GROWTH

As industry participants adapt to the new strains on their business, our research finds that — in stark contrast to last year — they are seeking to channel emerging technologies as the major facilitator of growth opportunity.

How will this new focus on emerging technology manifest itself? And how will it translate into better growth outcomes? To win, industry players must be disciplined to avoid the common pitfalls of implementation. Unfortunately, our research suggests that neither leadership nor the workforce is ready for the scale and pace of change demanded. Fully 87 percent of our study participants say their organizations need better education to successfully adopt new technologies.

Plugging capability gaps

In 2017, our operational gap analysis found that respondents were struggling, at a general level, to align their technology strategy with the rate of business change.

However, in 2018, we find that while respondents feel many areas of their operating models are better equipped to support growth ambitions, two challenges stand out:

• Targeted technology solutions that can help to remediate risks

• More intelligent tools to extract meaningful insights from data

TURNING TO TECH

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Figure 2: Doubling down on emerging technology

Which of the following factors provide the greatest opportunity for your organization’s growth over the next five years?

Source: State Street Growth Readiness Study, 2017 and 2018

2018 2017

EmergingTechnologies

48%

18%

EconomicGrowth Outlook(in our key markets)

47%

49%

MonetaryPolicy

(in our key markets)

36%

26%

EquityOutlook

(in our key markets)

35%

28%

Fixed-IncomeOutlook

(in our key markets)

34%

26%

PoliticalOutlook

(in our key markets)

32%

32%

RegulationGoverningInvestment

Behavior

29%

34%

RegulatoryAttention toInvestment

Fees

18%

32%

We see that part of the industry is responding with stronger technology investment strategies. Our study suggests that in the immediate term, there will be a sharp focus on new technologies that can strengthen cybersecurity, improve investment performance analytics and enhance risk analytics. This underlines the two key fronts that technology strategy must help institutions

address: the ability to remediate organizational risks and to achieve an alpha investment advantage.

Leading investment institutions will look to gain an edge through cognitive computing solutions. Examples include investment tools that mine alternative information sources and identify patterns, risk management solutions that detect anomalies and

GROWTH READINESS

8 NEW ROUTES TO GROWTH

Figure 3: Mind the gap

How important do you think these internal capabilities will be in enabling your organization to meet its growth targets over the next five years? And how would you rate your organization’s current level of capability/effectiveness in each of these areas?

Impo

rtan

ce (%

)

KEY AREAS FOR IMPROVEMENT KEY AREAS OF COMPETENCE

LOWER PRIORITY AREAS OF IMPROVEMENT LOWER PRIORITY AREAS OF COMPETENCE

55 60 65 70

70

65

60

55

Strong organizational culture thatis connected to our mission and values

Ability to manage investment risks

Strong governance framework

Ability to adapt to industry regulation

Ability to manage operational risks

Geographic scope of our distribution network

Adequacy of our talent to keep pace with evolving business needs

Efficiency of our investment operations

Performance (%)

Investment expertise in new asset classes(e.g., private debt)

Ability of our technology to keep pace with evolving business needs

Proficiency in digital distribution of our products and services

Ability to managetechnology risks

Ability to extractmeaningful insights

from data

Source: State Street Growth Readiness Study, 2018

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protect against cyber threats or credit risk, or behavioral analytics that give asset managers a clearer understanding of their clients’ needs. Success in the industry is becoming ever-more reliant on the ability to access and analyze huge volumes of accurate, real-time data.

Underpinning these solutions, investors need an agile IT architecture that supports innovation and provides vast computing power, or partners who can deliver intelligent investment and risk management support.

Traveling light: Embedding long-term agility

Over the next five years, operational efficiency will prove to be even more important than new investment technologies for asset owners as they position themselves to compete in the new environment.

A key component of these initiatives will be the implementation of robotic process automation (RPA), which can automate rules-based, manual tasks.

The importance of this approach is several-fold:

• Streamlining: Enable institutions to automate complex processes, streamline operations and help combat pressure on margins

• Accelerating artificial intelligence (AI): Provide process automation support to accelerate development of advanced technologies like machine learning

• Assisting analytics: Assist in the analysis of big data to uncover valuable business insights

• Reducing risk: Remove manual processing to cut the risk of human error

• Improving client experience: Enable faster turnaround on client deliverables and free up staff to focus on adding greater value

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GROWTH READINESS

10 NEW ROUTES TO GROWTH

Figure 4: Focusing on risk remediation and alpha advantage

What are the most important outcomes your technology investment must deliver over the next 12 months, to help realize your institution’s growth ambitions?

Source: State Street Growth Readiness Study, 2018

Strengthening cybersecurity

45%

Improving investment performance and analytics

44%

Improving risk and liquidity analytics

43%

Harnessing unstructured data to improve investment outcomes

40%

Improving the experience we can offer to end investors/clients

39%

Optimizing back- and middle-office efficiency

36%

Cutting our costs

35%

Creating new services (e.g., robo-advice)

34%

Providing more detailed information to clients

28%

50%

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Figure 5: Getting lean

Which of the following three areas will your organization prioritize most urgently over the next five years?

Asset Manager Insurance Asset Owner

Adopting new digitaltechnologies to give us an

investment advantage

Improving the efficiencyof operational and

compliance processes(i.e., through automation)

Improving our abilityto protect

enterprise data

10

20

30

40

50

42%40%

32%

37%

30%

37%

19%

29% 29%

Source: State Street Growth Readiness Study, 2018

GROWTH READINESS

12 NEW ROUTES TO GROWTH

‘Global Giants’ Will Gobble Up Robotics Gains One particular segment of respondents in our study will be making a major investment push on RPA — the so-called Global Giants.

This industry segment includes

asset managers, asset owners and

insurers with more than $100 billion

in assets under management.

They are the most likely respondents

to say that improving the efficiency

of operational and compliance

processes through automation is

their most urgent priority over the

next five years. They rank it ahead

of adopting digital tools to deliver an

investment advantage or enhancing

the protection of enterprise data.

The Global Giants are also the most likely

industry segment to perceive RPA as a

very high priority for investment among

emerging technologies, with 39 percent

saying this is the case compared to

26 percent for the rest of the industry.

As some of the biggest players in the

market, operating across geographies,

asset classes and client segments,

the effective implementation of RPA

over the next five years will be critical

to the Global Giants’ growth performance.

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The investment industry has long been reliant on technology to support its growth aspirations, but there is a new recognition that emerging technologies must be at the very core of those strategies.

As old routes to growth become less optimal, it is critical for the industry to forge new ones. Just as the Han dynasty represented a golden age of Chinese culture, with its spirit of exploration and technological discovery, today’s leading investment institutions must embody the same kind of restless reinvention.

Organizations that can accelerate the adoption of new tools, and put them into practice to remediate risk and generate an alpha advantage, will go on to dominate the future industry landscape.

TECHNOLOGY PAVES NEW ROUTES TO GROWTH

GROWTH READINESS

14 NEW ROUTES TO GROWTH

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2499730.2.1.GBL.RTLExpiration date: 11.30.2021

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About the Research

State Street commissioned Longitude Research to conduct a global survey of more than 500 executive respondents representing institutional asset owners, asset managers and insurance companies during July and August of 2018.

The respondents span investment, operations and distribution roles and collectively represent 19 countries. Approximately 37 percent of respondents were located in the Americas, 40 percent in Europe and 23 percent in Asia Pacific.

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