Institutional investors’ long-term forecasts brighter than a year ago despite Covid-19, says State Street study

Despite the impact of Covid-19, State Street's survey annual Growth Readiness Study reveals that more than two-thirds of European institutional investors (67 per cent) were able to meet or exceed their investment performance targets over the last 12 months. 

Confidence in the one-year growth outlook has dropped ten per cent since 2019, with 44 per cent of respondents now optimistic about meeting their growth objectives over the next 12 months.

Long-term forecasts are also bright, with just over three-quarters (76 per cent) optimistic about achieving their growth targets in the next five years, representing a 10 per cent increase from 2019 – even though the majority believe that new regulations or taxation as a result of Covid-19 or an economic recession and vendors’ financial vulnerability will likely hinder expansion plans moving forward. Somewhat surprisingly, only 34 per cent of European respondents are worried about geopolitical tensions being a top threat to growth, compared to 40 per cent globally.

Against this backdrop, respondents identified several actions as critical to achieving growth in 2021 including:

• Elevating organisational productivity/capacity (71 per cent)
• Migrating more technology systems to the cloud (68 per cent)
• Increasing investment in new technologies instead of maintaining legacy IT systems (68 per cent).
 
“Although 2020 has proved a trying year for many, our findings confirm that institutional investors in Europe and around the world believe the long-term future is bright,” says Joerg Ambrosius, head of Europe, Middle East and Africa at State Street. “The Covid-19 crisis ushered in new operational complexities for the investment industry, which accelerated and intensified the search for resiliency and efficiency. Enhancing productivity and technologies will be key priorities for growth in the coming year. Looking forward, we also expect to see an increase in M&A activity to allow managers to take greater advantage of economies of scale and add new capabilities, making them potentially more resilient in an increasingly competitive market.”

Forty-four per cent of respondents said that relationships with outsourcing partners have strengthened in the last year as they have shouldered increased operational burdens and spikes with capacity demands due to the pandemic. European institutions appear more keen than their global counterparts to outsource non-strategic functions, with 61 per cent of institutional investors (versus 56 per cent globally) likely to outsource more activities that are not central to the pursuit of strategic goals in the next 12 months. However, similar to their global peers, 52 per cent plan to consolidate/reduce the number of outsourcing partners to focus on deeper, more strategic relationships in the next 12 months.

In addition, this year’s Growth Study also revealed that appetite for using alternative data to improve investment intelligence is growing, with 62 per cent of European respondents citing this as a bigger priority now due to Covid-19. However, 41 per cent of respondents are concerned they do not have the necessary capabilities and tools in place to make the best use of this data, and as a result many are looking to external specialists for help with analysing and understanding alternative data rather than looking to build their own in-house infrastructure.

“As institutional investors in Europe look to transform their operations and carefully manage costs, it will be critical for them to harmonise and seamlessly manage data across the investment cycle,” adds Ambrosius. “Integrating front, middle and back-office solutions into one single platform like State Street AlphaSM, can improve data consistency and efficiency, which helps lead to more informed business and investment decisions, as well as meets the increasing demand of regulatory reporting requirements.”

Remote working arrangements have also gained a wider acceptance as a long-term strategy due to the onset of the pandemic, as just over half of European institutional investors (53 per cent) view increased moves to more remote working arrangements for employees as an opportunity, versus 19 per cent who see it as a threat. To that end, 57 per cent believe that their organisation would likely allow all or most employees to permanently work remotely, while 62 per cent of respondents said organisations would likely seek to reduce their physical footprint and 50 per cent will look to move more low-value business processes to offshore service centres.