The future of fund administration lies in improving the services to managers in a way that benefits returns, increases efficiency and makes best use of technology
These are days of difficult predictions. Prognosticators and pundits read the markets with a cautious eye, reluctant to indicate any specific direction the world economy may take.
Contemplations on the future are mainly of interest because of their reflection of contemporary concerns, rather than their insight into the future. Orwell's 1984 is as compelling a portrait of angst over fascism in the 1940s as it is a window into an imagined and sinister future world. 2001: A Space Odyssey elicits the contrasting views of optimism and pessimism during the late 1960s as well as a science fictive vision of a computer dominated future.
This is an image of strength and health, and of a market catering to educated and enthusiastic investors. Unfortunately, in the main we see a different world than this projection. But a focused review of that landscape reveals that in certain niches, it may actually be within reach.
In today's environment, asset managers are not only focusing on the growth of assets under management but also recognise the necessity to develop skills and acquire services which enhance investment returns and simultaneously realise cost reductions. The reality of the situation has taken root across all sectors of the industry. Provisional tactics have been supplanted by a longer-term plan to deal with the reality of a sustained depression in asset values.
Recent analysis suggests a prolonged period during which operating margins for asset management firms will remain tight, requiring increased vigilance and creativity in the areas of geographic integration, client management and outsourcing, among others. This situation should enhance the relative strategic importance of third-party service providers to their clients going forward. An opportunity exists for both ends of prospective partnerships to develop strength-on-strength programs that will help steer them not just through these particularly rocky shoals, but establish superior operations for brighter years ahead.
It is essential that providers seek to understand their clients' businesses and operating philosophies and customise solutions specifically to those needs, rather than tailoring the client to the products the provider can sell to them. This alone will offer significant steps towards managing costs and leveraging operating environments, skills which have not necessarily been critical for survival until now. Growth in assets under management had in the past compensated for certain operational inefficiencies that became embedded in asset managers' operations and, during the bull-run, did not justify the diversion of resources to fix them.
However, the skills to manage these processes are available. The custody and administration world has risen to the call in developing appropriate response mechanisms; working with the right provider can enhance the process of analysis and efficiency implementation. A sector that was once bogged down by the expectation of the commoditisation of assumed service provision has been supplanted by a need for targeted solutions focused on the bottom line.
Taking in this landscape and assessing prevalent needs and remedies, European asset managers are positioning themselves for changes under three variables: regulation, technology, and investor appetite.
Regulation ' the slow march
Regulation, not surprisingly, remains the core concern in product development in the context of the European mutual fund. The basic building block for the development of a European cross-border distribution model is still Ucits (Undertaking for Collective Investment in Transferable Securities). It has yet to achieve the status in the vernacular that the phrase '401k' or even 'mutual fund' has in the US.
However, that process of acclimatisation is in train. Interestingly enough, there is no suggestion of a significant change in the regulator's perception of the role of the administrator in the current implementation of the revised directive. There still remains a role for a demonstrably independent valuation process and a significant overlay of investor protection. Regulatory legislators have instead concentrated on drafting language to reflect increasingly complex product strategies suitable for sale to the retail public.
The new Ucits product directive is not going to bring about any radical change in the investment landscape, however. It is an evolution not a revolution, recognising historical developments in the fund sphere rather than driving new developments in the future.
This is most apparent in the rise of funds distribution platforms. The vision of individual investors surfing the internet to investigate funds of their choosing has not yet come to pass, but the resources are coming of age and interest is fast developing. PriceWaterhouseCoopers reports that less than 20% of households own funds in most European countries, but participation is expected to grow as educational resources are further discovered by the investing public.
The internet has played its primary role to date within the confines of the asset management industry ' products have not come up short, but have delivered services in stages. Relatively few investors have engaged completely with the range of investment options available directly to them on the web, and the potential of the internet extends well beyond those first steps. Current product lines reflect an understanding of what may come.
By example, Brown Brothers Harriman has built its Fund WorldView supermarket platform with the intent not just to sell funds, but to provide analytical tools that can be put to use by institutions guiding their investment clients. The product was initially launched over three years ago, and has since been developed from a point of access to fund families into a research and execution centre. Its recent adoption of Morningstar ratings and analytical elements is indicative of the educationally-focused direction of the industry.
Transparency of information now available through these resources is likely to be the new driver of investor appetite. As investors begin to acclimatise to the amount of information that is available about a wide range of funds, a better understanding of their personal earnings potential may come to light. Whereas previously the connection was not drawn between world market events and the fluctuations of portfolios, the resources at institutions and on the internet now enable investors to see what impacts their holdings. This alone should bring to life an investment vehicle that until now has been largely unappreciated by the European market.
Transparency of information is major enhancement to the attractiveness of the mutual fund as an asset allocation tool.
Trained for Technology
It is in this sphere of technology that the main developments can take place. During a continuous technological 'cold war', providers in the marketplace have been attempting to differentiate themselves from the competition. However, the core requirements of the third-party service provider have not changed as radically as the technology and service proposition surrounding them have over the last decade. Effective exploitation of the internet has proved to be an effective enabler of sophisticated and operationally efficient global asset management techniques. With this background now in hand, exchanging trading data effectively across multiple jurisdictions, messaging formats and time zones is possible at a significantly improved cost base.
Outsourcing continues to prove itself a critical piece of answering those objectives. Solutions that address back and middle office communication gaps, enable message translation to speed order delivery and execution, and supply straight-through processing capability have the power to immediately and effective impact an investment manager's bottom line. Constructed on a modular basis, these programs can be tailored to fit specific needs and avoid overcompensation and implementation of unnecessary elements.
This type of development is a marked demonstration of how working with a creative, operationally-focused, technologically-sound provider is an enabler of operations and distribution enhancement up the line. Though the current environment is not pleasant for any participant in the marketplace, working with those who can take a long-term view tailored to individual needs is a vital component of being positioned to benefit from the recovery.
Fund managers are looking for ways to enhance returns and cut costs, not just gather more assets.
Technological strategies are vital for many improvements in service.
Outsourcing continues to prove critical in achieving these objectives.
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