Tech Investments by Fund Managers May Not Equate to Increased Productivity

The asset management industry is increasingly turning to artificial intelligence (AI) to streamline operations, improve efficiency, and boost profitability. According to a recent study by McKinsey, AI can help asset managers recover margin levels, but its execution is crucial.

The study, which was based on firms representing 70% of global assets under management, found that increased technology spending has not consistently translated into higher productivity in asset management. The R2 value in the study is 1.3%, suggesting a virtually non-existent relationship between spend and productivity.

One area where AI is making a significant impact is in the generation of insights and decision-making. In investment management, generative AI is transforming the way insights are generated and decisions are made, with an 8% efficiency impact. Portfolio managers are using AI tools to refine strategies, narrow investment options, optimize portfolio construction, and enhance risk models.

Analysts are also using AI-powered research assistants to synthesize data from earnings calls, financial reports, and conferences, accelerating the insight generation process. This is particularly important in an industry where margins are under pressure. Pre-tax operating margins fell 3% in North America and 5% in Europe between 2019 and 2023.

The study found that on average, asset managers allocate 60% to 80% of their technology budget to "run-the-business" initiatives. This leaves only 20% to 40% of the technology budget for change-the-business operations, with 10% to 30% of this portion directed toward firmwide digital transformation.

To realize the full potential of AI, McKinsey recommends taking a role-based approach to automation, embedding virtual agents and traditional automation, and focusing on change management and adoption. Effectively embedding AI into the organization can help address mounting margin pressures and unlock significant value.

Several asset management firms have already increased their investments in technology. For example, Ondas Holdings plans to invest $150 million over two years to accelerate defense-related autonomous and AI systems, while Commonwealth Fusion Systems raised $863 million to develop fusion energy technology, supported by investors including Morgan Stanley and Google.

The report from McKinsey states that there is no clear correlation between higher tech spend and improved productivity in asset management. However, it does suggest that the investments target advancing technology development and deployment, which typically drive productivity improvements in related sectors.

The full report on AI in asset management can be read here. Interviews with senior executives from leading asset managers in the U.S and Europe were conducted for the study. It's clear that the asset management industry is at a critical juncture, and AI is set to play a key role in its future success.