Project Finance 2018 12 Wealth & Finance International - 2018 Project Finance Awards Market commentators have predicted that the growing market for securities lending could explode in 2019, as fund managers and banks seek new revenue streams amid lower returns and rising costs. End-of-year reports have revealed that asset managers, banks and a host of other financial institutions made $10bn (1) in revenues through securities lending, the practice of lending out stocks, bonds and ETFs in exchange for a lending fee. Profit squeeze Asset managers are facing a plethora of challenges as we enter 2019: Central Banks wind down their Quantitative Easing (QE) programmes; market volatility increasing dramatically; clients continuing to move towards passive strategies whilst aggressively negotiating fees and operational costs rising dramatically. New McKinsey research found that operational costs for European fund managers had risen 5% year-on- year at the end of 2017 - compared with just a 3% increase in assets under management (AUM) over the same period. Total costs for asset managers over the past ten years have increased by 60%. Asset managers, in particular, have been hit by market conditions. Michelle Seitz, Chief Executive of Russell Investments, recently warned that funds must focus on controlling costs amid “cut-throat competition” and “enormous structural changes”. Record year ahead as markets expand With costs outpacing AUM growth, and profits facing downward pressure, investment managers are turning to alternative strategies in search of alpha and cost-offsetting. In fact, over a third (36%) of investment managers now view securities lending as a key strategy for offsetting rising costs. Boaz Yaari, CEO and founder of Sharegain, sees these as early signs that securities lending is becoming ‘mainstream’ in the financial industry: “Change is coming. Market forces are driving demand for securities lending to become a more accessible, transparent, performant market - this is a $2.5tn secret that’s about to be opened up to every investor, from the world’s largest funds through to, eventually, even private investors.” Financial markets just endured their worst year in a decade - but it’s not all doom and gloom. Whether you’re a global institution looking for alpha in a low-yield, high-cost environment, or a family office seeking a low-risk way to improve returns, securities lending is becoming an increasingly attractive option. Revenues have already returned to the highest levels in a decade - and we expect to see it explode into the mainstream as a go-to strategy among investors next year.” Securities Lending To Go Mainstream As Revenues Hit Record $9.96bn In 2018 Securities lending (SL) revenue reached highest levels since 2008, offering exciting opportunities in the sector. Oct18476