International Investment's fourth annual survey on fund administration services shows that the industry is undergoing standardisation, focusing on technology and mass development, writes Anusha Roy
The fund administration industry is reaping the benefits of scale and, as a result, is undergoing standardisation, according to International Investment's fourth annual survey on fund administration services.
The focus by respondents on technology and mass production is one sign of this trend towards standardisation. Moreover, with the pressures of T+1 settlement, 24/7 services and the high level of competition in the market, fund managers are more geared than ever towards outsourcing the administration of funds. However, with the increase in trade volume caused by the advent of internet-based trading, fund administrators need to find the right balance between quality and quantity.
International Investment's fund administration survey showed that all respondents were positive to the role of fund administration in the modern fund industry. All 15 respondents believed that outsourcing will grow as a trend. The rationale behind this is that with increased competition, fund managers will want to concentrate on their core activities. Moreover, with a convergence of standards across Europe and the US, fund managers are likely to seek a favourable infrastructure within the fund administration industry they can rely on. This will not only result in lower costs, but also reduced risk.
As a result of these trends, e-commerce and internet development are on the agenda of most respondents. The majority of fund administrators now offers a standard system of technology to fund managers based on the internet. Moreover, most of them would allow for online transactions to take place.
'A fund administrator should aim to enhance its internet capabilities in a way that would effectively satisfy its client reporting needs. This system should be both effective and economical at the same time,' says Susan Dargan, director of client services at the Bank of Ireland Securities Services.
There is emphasis on developing technological systems that would provide efficient client interaction. The majority of the 15 respondents portrayed technology and the internet as being an area experiencing development, or where new services are being introduced. All of them operate proprietary systems that are compatible with clients through data integration between systems.
Some fund administrators go further to provide the client with an additional service. For example, JP Morgan offers a system that allows for daily-automated reconciliation to which fund managers can get direct access. Trinity Fund Administration, which specialises in hedge fund structures, is developing a proprietary software package called the M-Star whereby the system will generate reports to investment managers and their clients from any data stored in the system. The system allows investment managers and clients to be notified of changes over a mobile telephone network by text messages. This system is designed for time-constrained individuals to receive immediate information.
Simon Phillips, client relationship manager at Daiwa Securities Trust and Banking (Europe), points out that the industry is moving towards the provision of more sophisticated information and a sophisticated level of service. He believes that a significant aspect of a fund administrator's system is to offer the client a choice. 'The client should be given the choice of whether they want the information to be delivered straight into their system, or whether they want to access information electronically or by hard copy,' he says. 'A fund administrator's system must be able to handle that.'
Most fund administrators would offer similar core services. However, the approach they take towards the provision of services sometimes differs. The Bank of New York treats all of their services as core. This is because they operate under the philosophy that 'the key to providing true service is to provide all functionality as the core service.' Frank Parker, managing director European mutual funds at the Bank of New York, says: 'Every service is just as critical as any other. Some may be perceived to be value added in a historical sense, but they should be offered as a complete range. Only by offering a 'complete' core service are you offering a value-added service.'
Dargan points out that above all, a fund administrator should have a comprehensive range of services. She does agree that the range of services provided by fund administrators has grown through the years. With the rate of competition on the market and the need to provide more and more services, parts of the industry are experiencing standardisation in service. 'Most clients would be subject to standard sets of reports. The level of customisation is lower than it used to be. This has been facilitated by the standard way that fund managers operate these days. Customisation of services is more likely to be offered for new products where the right staff is necessary to understand and provide for the special needs of the client.'
Ian Stephenson, director of investment administration at HSBC Global Fund Services, agrees with this view. He says: 'We spend months designing our services, and we do not add any more to our range before we know we can deliver them. Most of the services and processes related to them are standard, but we allow customisation at a charge. We allow end users to create reports to develop different views from the same data.'
More and more fund administrators are proving to be flexible in providing a wide range of structures to clients. They are allowing for a greater number of fund structures that tend to target a specific sector of the market. As a result, hedge funds administration is becoming a popular trend.
Hedge fund administration is different from other sorts of administration in the sense that they have different regulatory requirements. Fund administrators might not always have the systems to cater for these. Simon Phillips, client relationship manager at Daiwa Securities Trust and Banking (Europe), agrees that the administration of hedge funds tends to be more complicated on the operational side than the administration of other funds.
Dargan says: 'We would consider certain hedge funds as new products that require special attention. Hedge funds have a wide range of meaning, but most of the time we refer to the vanilla type hedge funds. Administration of these types of funds would differ from another fund as a standard fund's assets will be held by a sub-custodian, but a hedge fund's asset are held with a prime broker.'
The administration of hedge funds, unlike traditional funds, cannot be standardised as they have complex fee structures. John McCann, managing director of Trinity Fund Administration, explains: 'Although we do provide administration services to all kinds of different fund structures, including traditional investment strategies, hedge fund administration is our speciality. Unlike traditional strategies, hedge fund administration is a crafted solution rather than a standard one. For example, something like equalisation and performance fees, which are intrinsic to hedge funds, are complex issues and their calculations are more complicated to undertake.'
The European market is undergoing dynamic changes on the road to consolidation and, as a result, fund managers are passing the buck to administrators. Parker says: 'It is an uncertain period ahead in Europe with regards to settlement and infrastructure. It is still uncertain which settlement model Europe will adopt and there is movement towards a T+1 environment ' fund administrators will have to keep up with these changes and adapt their systems accordingly.'
However, for the fund administrator, effecting these changes is not an issue. Dargan points out: 'Changes taking place in Europe do not pose any real difficulty for the fund administrator. Something like reducing the settlement time is not an issue as we are given sufficient notification and this is easily effected.'
With the growth of the fund administration industry, economies of scale are setting in and the industry is undergoing some degree of standardisation. Although a substantial amount of cost from investment in technology is being incurred by fund administrators, this is widely spread between an increasing client base. The question remains whether this type of investment is posing a barrier to smaller clients. According to Phillips, the boutique administrators would cater for smaller clients with special needs. 'Specialist administrators are willing to take a view on the client, based upon the client's expected growth and expansion plans,' says Phillips.
While depicting the growing trends of outsourcing in the industry, Phillips adds: 'This splits into two areas. First, the larger houses will be driven by the demand to reduce costs. As such they will look to concentrate on trading and maximising opportunities to explore benefits of scale. I see possibly as many as 50% outsourcing their back office. Secondly, smaller fund managers, they too would be looking to reduce costs but they may not fit into the 'customer profile' of the service providers and because their service may not be standard, I believe there will be less of an opportunity to outsource, possibly in the region of 5% per annum.'
McCann, on the other hand, believes that small asset managers do face certain economic barriers within the industry co-related to their viability and capital clout. He comments that bigger fund administrators have a certain client profile that may not be conducive to start-ups or newly-established operations. 'There are both direct and indirect barriers to small investment houses within the fund administration industry. The direct barriers would be the minimum asset requirement that certain fund administrators would set, while the indirect one is the cost of the quote for services charged. Smaller clients would be more of a going concern for administrators and, as such, many are neglected in the industry. Having said that, there is still a market for those emerging independent traders who can demonstrate their expertise and credibility and have the capability to move forward in terms of asset raising, but this would come at a cost to them, at least initially.'
Respondents were positive about the role of fund administration and believe that outsourcing will grow as a trend.
Hedge fund administration has different regulatory requirements and fund administrators may not always have the systems to cater for these.
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