Research & Thoughts

Understanding Business Economics for Investment Managers

Navigating toward sustainable growth and profitability

This Capco white paper explores how one innovation — strategic cost management — can help investment managers measure profitability more accurately and in richer detail. Jump-started through a rapid prototyping approach to profitability modeling, such analysis provides a multidimensional view of products, channels, geographies and, ultimately, customers and can help organizations chart a clear course to maximize profit potential.

The complex dynamics of world financial markets yield inherent uncertainty and the prospect of periods of enhanced volatility. As investment managers interpret clients’ evolving risk tolerances and investment objectives, striving to unlock opportunity in a fast-paced and ever-changing world, they also need to navigate their own course toward sustainable growth and profitability.

To stay strong and competitive, investment managers are looking for ways to differentiate by enhancing products and services, offering new investment solutions, accessing new channels to expand client relationships, and working to meet investor demands for more information, greater transparency, and increased involvement in the investment process. To maximize resources available to advance these initiatives, they are evaluating strategies to lower operating expenses by improving process efficiency, restructuring operations, and ensuring alignment of global resource deployment.

Historically, many investment managers used assets under management (AUM) as the proxy for profitability of individual funds and businesses. Growing AUM indicated growth in profitability such that funds with higher AUM balances were viewed as more profitable than those with smaller AUM balances. Revenue and effective fee rate analyses were added to enhance the measure of business performance, reflecting the fact that fee and profit realization differ across asset classes and strategies. However, measuring only top-line metrics is overly simplistic. Understanding whether business development initiatives actually improve profitability is essential to fostering sustainable growth. As a result, forward-looking managers seek to make strategic decisions based on accurate and comprehensive revenue and expense information. As new funds are launched in new markets across the globe, are they accretive to profitability? As new channels are opened to new customers, does the outlay of marketing, sales, and client service resources generate sufficient new business to support the targeted return on investment over time? Growth at any price can be a short-sighted strategy, whether the lens is portfolio construction or corporate management.

No matter the market climate, but especially in times of economic stress and volatility, the ability to provide a comprehensive, reconciled, cross-functional, and multidimensional analytical framework for understanding economic performance empowers business executives to adeptly make more confident resource allocation, pricing, and service delivery decisions. Over time, within the context of such a framework, executives across an organization can better understand the economic impacts of product offerings, client solution characteristics, channel dynamics, and regional differentiation as the analysis is shared, debated, and advanced.