Northern Trust: Institutional investors are facing some big changes

New report sets out the megatrends that will shape the industry in the years ahead

Northern Trust: Institutional investors are facing some big changes
Steve Randall

Things rarely stand still in the world of finance, with significant changes seen in recent years, but what’s ahead for institutional investors?

Investment managers and asset owners need to be aware of the trends that are shaping their future, to allow them to be prepared and seize opportunities.

But what are those trends?

Northern Trust has identified the clear themes that will bring change in the coming years and drive the institutional investment industry’s development.

Alternatives, digital

The first of these ‘megatrends’ is the increased market share of alternative asset classes and the rise and complexity of digital assets.

Alternatives such as real estate and private equity may have seen a substantial rise in asset allocations in the last two decades, but private market allocations are accelerating, especially among cash-heavy investors.

“Cash is a terrible thing to hold, especially in an inflationary environment,” said Gary Paulin, Northern Trust’s head of global strategic solutions. “Every investment manager and asset owner is looking further up the risk and liquidity spectrum to get the profile that they need. That’s taking them into alternative assets.”

The report highlights increased use of technology to help asset allocators understand the performance of private assets.

Meanwhile, the growing importance of digital assets means that those managers that are not prepared may fall behind and Justin Chapman, global head of market advocacy & innovation research, says that now is the right time to look at how the growth of digital assets can impact portfolios and business models.

He added that the digital assets infrastructure is also supportive of sustainable investing objectives, aiding the growth of ESG factors in investment decisions.

Cost management

Northern Trust’s second institutional investment megatrend is increased scrutiny of costs.

Paulin believes that 2022 may be a pivotal year with investment managers unable to hide from cost pressures and accepted narratives challenged. Operating models will see continued change as a result.

The division into larger asset management houses and smaller, niche firms is set to continue while smaller mid-size firms may find it hard to define themselves, especially as the biggest firms grow further.

Enhanced use of data analytics is another key trend.

AI and ‘big data’ will play important roles in bolstering asset managers’ investment processes.

ESG-focused asset owners

Asset owners are collaborating to drive change in the important global issues.

“You are really starting to see some consortiums and groups form around tackling ESG challenges. Investors are starting to align with one another,” said Melanie Pickett, head of asset owners.

By working together, institutional investors are able to better evaluate, analyze, and score different ESG approaches.

Again, data increasingly informs decisions based on performance, transparency, monitoring, and reporting.

There will also be a greater focus on core values and the role that asset owners play in society. This will intensify efforts on ESG factors such as net zero commitments, diversity and inclusion, conflicts of interest, and transparency.

Overall, the report says that 2022 will be a year of change in the institutional investment industry, with challenges tackled to enable opportunities for growth and better solutions for its future.