Institutional investors should be prepared to make radical changes to their business models if they are to remain competitive amid volatile markets and gloomy long-term growth prospects, according to a new study by State Street.

“[Investors] should be prepared to reshape their business models if they want to compete a decade from now.”

The survey of 507 global asset managers and asset owners found that a majority of institutional investors did not believe they had the right strategy, operating model or technological infrastructure in place to deal with the challenges posed by an uncertain economic and investment outlook, tightening regulation, and more sophisticated investor demand.

“This is especially alarming as the research reveals investors plan to move towards increasingly complex portfolios in their search for better risk-adjusted return,” State Street said in the report, A New Climate for Growth.

Around two-thirds (66%) of those surveyed said it was becoming more challenging to achieve growth in the current market environment. European respondents were most concerned about regulations governing liquidity risk: some 40% ranked it as one of their top three threats to growth.

State Street said to meet this “profound, secular change”, institutional investors needed to adapt to “compete at scale, align technology with ambition, and cultivate the power of asset intelligence”. State Street described asset intelligence as a combination of digitised operating models, new data expertise, and analytical insights to deliver on firms’ investment objectives and risk management needs.

“The transformation hitting the investment industry is endangering incumbents’ existing business models and threatening the industry’s future growth potential,” the research paper said. “The industry response must be a radical one. Incumbents should be prepared to reshape their business models if they want to compete a decade from now.”

The study found that asset managers were under pressure to respond to investor demands for more global diversification and better pricing. More than 80% of industry respondents said asset managers would need wide-ranging investment and distribution capabilities to meet investors’ demands. State Street reported that 61% were actively broadening their offerings.

Some 71% of asset managers expected more consolidation of smaller pension funds over the next five years, while 76% said the rise of passive management will drive more active managers to consolidate.

Asset managers also felt they needed to expand distribution and reduce fees over the next five years to attract investors.

A quarter of asset owners and insurers surveyed said they would make their biggest portfolio allocation increase to emerging market equities over the next five years. For real estate this figure was 15%, and 15% said this would be the case for infrastructure assets.

For pension funds faced with demographic shifts, funding pressures, and challenges meeting aggressive return targets, the right technology and talent strategies would be crucial to success over the next five years, the report said.