Over the past 12 to 18 months Customer Relationship Management (CRM) strategy and capability has featured high up the priority list of many Investment Management firms globally. Those that are embarking on or considering change programmes in the CRM space are doing so for a variety of reasons. However, some common trends are emerging as industry-wide objectives:

By focussing on the industrialisation of the traditional cottage industries of Sales, Marketing and Client Service business areas, it is possible to address these core objectives and drive out a genuine competitive advantage versus your peers:

The Challenge of CRM Change.

CRM programmes frequently fail to deliver the business benefits envisaged. On the other hand those implementations that succeed often have a much higher return on investment and further reaching benefits than the original business case.

It is crucial that businesses recognise the fact that effecting CRM change is not just about implementing a new CRM system. Indeed, the proportionate effort of selecting the right CRM technical solution and configuring it ready for release is, in our experience, c. 10% of the overall change effort.

As well as supporting our clients end to end from the naissance of their CRM strategy to the successful implementation, Alpha FMC has frequently been engaged by our clients to rescue existing CRM projects or re-invigorate/re-launch a “failed” CRM implementation. In both cases, the causes of failure can all be attributed to one or more fundamental elements that have not been addressed (see below).

Sponsors and the Project Team need to plan mitigation strategies well in advance of deployment of the tool to the business users and monitor impact throughout the user adoption cycle.

CRM Vendor Landscape – Investment Management

There are a vast number of CRM suppliers out in the marketplace today. However, in Alpha’s view, there are 2 or 3 CRM vendors that are emerging/have already emerged as clear market leaders within the Investment Management Industry specifically. The diagram below gives an indicative view of how it is possible to quickly filter the selection process down to a suitable shortlist.

Therefore, we believe that it is no longer necessary to undertake lengthy and costly RFI/RFP processes. By leveraging Alpha’s extensive knowledge of the Investment Management industry and nuances of/differing capabilities between the leading CRM vendors, our clients can move straight to focussed negotiations around contracts and commercials with a shortlist of Vendors and, if appropriate, run a focussed “model office” review period.

Alpha’s Approach to CRM

CRM is a core consulting offering for Alpha FMC. As a mark of our commitment to this area, we recently acquired TomTom Consultants (a CRM implementation specialist consultancy) to further strengthen our capability and credentials. We are now in a position to support our clients end to end from CRM strategy definition, tool selection through to implementation of that Strategy and toolset.

Alpha’s approach to delivery is underpinned by 3 guiding principles:

1. Seamless & Comprehensive Delivery – we manage end to end delivery without the need to engage with multiple partners, consultants or 3rd parties to fill skill gaps. This reduces complexity, role duplication, risk and cost for our clients
2. Lean Team – We will leverage client resources where available to ensure that we are not over-engineering our resourcing model and that costs are minimised
3. Knowledge Transfer & Client “Up-skilling” – working with client resources to ensure knowledge is transferred to their internal people, enabling our clients to take on later phases of delivery alone and build internal expertise

For further information about CRM and how Alpha FMC can support your business, please contact Mike Smith: mike.smith@alphafmc.com

Investments in Client Reporting and Institutional Client Support are starting to pay off for Asset Management Operations Departments

The 2011 annual Alpha FMC Investment Operations and TA Benchmarking Study is now being concluded and we have seen a number of interesting developments in operational performance across the industry.

Significant improvements in both cost and service performance for Institutional Client Reporting/ Client Support.

Over the past few years, our institutionally focused clients have directed a significant share of their operational development efforts into improving the customer-facing side of operations, but up until this year we had seen comparatively little tangible improvement in the results from the study. However, the 2011 findings show that these investments are starting to bear fruit.

The average cost per institutional client report produced report is c.20% lower than last year. This appears to be driven by both increased levels of automation as well as greater standardisation of processes and templates

Increased levels of automation have also allowed for greater economies of scale within the reporting function

• Vendor applications for work-flow management are replacing legacy Excel and internally built systems
• The average lead time for getting reports out to clients has been reduced and the number of reporting errors have been reduced to a minimum

However, during the coming 12 months, most managers will see the focus shift from the institutional reporting process to the retail side with the introduction of KIID documents. We will be looking to track and compare the different approaches that are emerging in this space.

Greater automation in the core Investment Operations functions drive continuously improving service performance.

The trends we have seen in recent years of both higher levels of automation and lower error rates continued this year. In particular, we saw a noticeable improvement corporate actions processing. We also observed a further reduction in NAV error rates, shorter derivatives confirmation times, and a stabilisation at last year’s levels for failed trades and reconciliations breaks (which in last year’s study has shown noticeable improvement from previous years).

The share of participants who reconcile stocks on a daily basis increased from 40% in last year’s study to 50% this year and we believe it is only a matter of time before daily stock reconciliation is the market norm.

With the exception of Customer Support, costs remain stable

We did not see any significant changes in the costs for non-client centred operational functions. However this is not necessarily surprising as a significant share of asset managers are outsourced and tied into long-term contracts.

As in previous years, outsourced participants in the study had, on average, lower costs than those who maintain in-house operations.

The 2012 study will launch in Q1 of next year and we are starting to recruit the participants for next year’s study now. If you are interested in further information, please contact Bo Lantorp, Alpha FMC’s Benchmarking Director, on bo.lantorp@alphafmc.com or +44 (0) 7958 304053

For Latin American fund managers casting covetous glances at the lucrative possibilities of global distribution, the good news is that there is an increasingly sophisticated asset servicing infrastructure available to facilitate geographic expansion. Improved capabilities of global securities services providers provide an ever-clearer route to attractive, flexible and globally-distributed fund structures (witness the Asian appetite for UCITS funds). Yet as ever, enticing opportunities need to be approached with care. For fund managers engaging in any sort of significant operating model expansion, the devil is most certainly in the detail.

The most obvious first step for many expanding Latin American firms will probably be establishing a foreign-domiciled fund for global distribution. A range of locations currently compete for this business – from Luxembourg as the base for UCITS-compliant SICAVs, to Dublin and Cayman which remain the most high-profile domiciles for alternatives funds, to numerous other specialised ‘offshore’ locations such as the Channel Islands or Gibraltar. Each of these locations are established hubs of expertise, and once a fund manager has selected the target fund type, most major global service providers will offer operating models that support these domiciles.

The evolving regulatory environment will likely impact choice of domicile. Luxembourg currently appears to be a winner from UCITS IV provisions - it was an early implementer of supporting legislation, and has seen significant recent growth in fund domiciliation. Ireland’s treatment at the hands of the Chilean regulator perhaps serves as a cautionary tale for domiciles which are struggling with sovereign debt issues (albeit fund inflows remain at record levels), and it has been suggested (and equally denied!) that Cayman may struggle under the AIFM regime.

So to the good news. You want to be a global fund manager, so you need a global operating model to support you. This is particularly important if your intention is to maintain the location of investment and dealing expertise in your home market whilst running funds domiciled abroad. Securities service providers have long boasted of their global servicing models; but in reality a great deal of investment in global support platforms has occurred in the last few years which means that there is now a range of genuinely global servicing alternatives.

You also don't want geographic expansion to cost....the earth. Here again, this will lead most LATAM Fund Managers down the road of engaging a global securities servicing partner. Many of these firms are beginning to pass on the tariff benefits associated with strategic and scalable platforms. Moreover, tariff competition between major providers remains (perhaps a little unexpectedly) intense. And all of this may come as a pleasant surprise to some LATAM Fund Managers dealing with domestic resources and cost bases that are notoriously expensive (some managers have found operational costs to be lower in the US than in Latin America). Markets throughout the world will have their own support and interface requirements (e.g. Euroclear, FundSettle, FIX, SWIFT). Leveraging the expertise and existing infrastructure of a global securities servicing firm avoids the considerable time, cost and effort involved in stretching legacy, in-house operating models to support global ambitions.

(Some managers may, of course, be looking to create in-house manufacturing centres outside their home markets - in which case all the above considerations will still apply, but many more besides from an internal structural and operating perspective.)

And finally, you want global expansion to provide easy access to global distribution channels. Here again, the ease of global distribution and appeal of UCITS funds - in particular SICAVs - means that through effective servicing and distribution partnerships, well-marketed, European-domiciled funds are an increasingly light-touch first step on the road to a global presence.

But caution and thorough due diligence are natural and obvious pre-requisites to selecting a global asset servicing partner, and establishing a commercial and operational model that will effectively support, rather than hinder, business expansion.

Firstly, 'global operating models' mean different things to different people, and there are several aspects such models that demand close scrutiny. From which location will your provider service your investment records? Does your asset service provider operate a full and effective 'pass-the-book' model globally - and does this mean that your investment business is fully supported for trading hours in your local market? Does this extend to full trade support late into the European night or from crack of the US dawn? And moreover, does this extend to full access to operational teams for your own in-house teams throughout your hours of operation? The advantage of your westerly time zone should mean that your fund managers will be able to start their trading day based off fully priced and updated positions - but this assumption deserves scrutiny and will be subject to the constituents and trading locations of your business.

Secondly, you won't want things lost in translation. Most global asset servicers will be able to interact with their clients across a range of languages - but certainly in English and the local language of administration location. But LATAM managers may not have staff as fluent in Northern European languages as managers in other parts of the world - and the experience of many managers setting up in or expanding from Latin America suggests that it's well worth ensuring a strong language bridge between fund manager and service suppliers.

Next up, risk, which must be monitored effectively across global businesses in the post-Lehman world. Increasingly sophisticated risk measurement services are available from the major providers, but this is still a function most commonly maintained in-house by asset managers. Expanding managers must quickly develop a clear view of how they monitor and manage risk across their business, and how their service provider supports them in doing so. Issues of data consistency and integrity in support of risk measurement will be more complex in global company with outsourced operations.

LATAM managers will also have specific requirements based on their domestic regulatory and tax environment. For example, the 2% Brazilian government tax on BRL FX instructions means that an effective FX netting capability should be employed across the book of business. All providers are likely to provide netting services of some description - but the extent, frequency and hence effectiveness of netting becomes important.

And finally, LATAM managers will face the same questions as all other managers seeking to partner with or leverage the capabilities of global suppliers - in terms of the scope and complexity of services they wish to purchase. Global expansion is going to mean more (multi-currency?) share classes and assets - why not let your provider hedge these for you, so long as you're satisfied the service is robust and economically viable? KIID reporting, end-client reporting, performance measurement? All such functions and more may be good candidates for leveraging existing supplier platforms and expertise. Nevertheless, all such functions will require close due diligence because despite what it may say on the tin, capability, service delivery and cost will vary substantially across the market.

The popularity of Emerging Market funds has been well documented in recent years, and increasingly sophisticated and credible LATAM fund managers are understandably keen to tap into the positive sentiment on their region. They will find plenty of willing and capable asset servicing partners, who in many cases will be major global institutions seeking a partnership beyond the traditional parameters of asset servicing. Establishing in-house asset servicing capability abroad is of course an option, but may prove restrictive commercially, technically, and from a time-to-market perspective. Leveraging the capabilities of existing TPA relationships may also be possible for some, but commercially, fund managers will find a favourable provider landscape. Technically, they will benefit from global platforms that have seen huge investment. They should seize the moment.

If you have any comments on this article, or would like to talk to Alpha about our experience or expertise in global asset servicing, please contact Nick Fienberg: nick.fienberg@alphafmc.com.

In the wake of the 2008 financial turmoil, the Performance and Risk functions of Asset Managers are coming under ever increasing scrutiny.

Both Risk and Performance are traditionally a mix of more tailored Front Office functions, and process-driven tasks more closely aligned to a Middle Office. A variety of organisational structures are adopted throughout the industry, with Risk and Performance responsibility either highly fragmented, or sitting in one team under a common head. This has borne a number of operating models and organisational or process issues, the results of which manifested themselves dramatically when the financial climate turned malign.

In response, a plethora of forces are now driving investment and change in these areas, ranging from internal management, through existing and new client demands, to the evolving regulatory landscape. The asset management community is more engaged that ever in the search for scalable, automated solutions that are better able to accommodate more varied and onerous demands from these different actors. Increasing numbers of asset managers are reviewing their operating models, with several identifying an urgent requirement to invest in their capabilities.

How organisations address such demands in a fragmented environment is becoming one of the hottest topics in the industry, with some firms actively looking at Risk and Performance capability as an opportunity to steal a march on their competitors and market their capabilities as part of their strategy for retaining and winning new business.

“A robust, scaleable, automated solution for both Performance and Risk is becoming a necessity”

The perfect storm driving improvements in Risk and Performance capability is the culmination of pressure from three fronts. Clients are becoming increasingly sophisticated in their requirements for evidence of robust risk control processes and performance reviews, evidenced in their demands for detailed performance and risk reporting. At the same time, asset managers are subject to unprecedented regulatory scrutiny, including evidence of daily VaR calculations and monthly stress testing for UCITS funds. The three-way pincer effect is completed by internal requirements to review and improve the investment process, which include enhanced MIS used (for example) to calculate Fund Manager bonuses and assess the effectiveness of the manufacturing processes.

Whilst the specific issues faced by asset managers within the Risk and Performance capabilities are unique to individual organisations, several common themes have emerged:

1. Inconsistent Risk and/or Performance output: Frequently, there are multiple sources of performance and risk output, for example Fund Manager calculations, other front office teams or the official performance team. There may also be a geographic dimension with different teams working from different data or different platforms in an inconsistent environment
2. Inefficiency of the Risk / Performance function: Work is often duplicated across the organisation given the mix of front office / middle office tasks. Mis-matches between the requirements of the end user and the solution put in place are frequently observed.
3. Problems meeting increasing and onerous client and regulatory requirements: The evolving regulatory landscape is evolving, impacting risk and performance capabilities, for example with increasing moves into UCITS funds, there is an increasing requirement for daily VaR and stress testing. Clients also increasingly require evidence of more robust tools and process, supporting both new business and client retention strategies.
4. Inaccurate Data and Output: Data integrity and accuracy are critical components to get right. If these are not achieved, risk and performance figures can be incorrect causing reputational and / or financial damage.
5. Opaque Responsibility & Reporting Lines: Asset managers have a wide variety of reporting lines for performance and risk, with the boundary between Operations departments and the Investment function often opaque, causing issues with responsibility, accountability and consistency.

To outsource, or not to outsource…..

Historically, the Risk and Performance functions remained in-house at an Asset Manager, and many have therefore faced a “buy or build” decision. With the range of depth of problems described above, could this be the time for a change of strategy?

The market for outsourced provision of these services has remained comparatively underdeveloped. Third Party Administrator (TPA) capabilities are extremely variable with some having mature platforms serving numerous clients, whilst others have not yet established a core platform to provide Performance or Risk reporting services. The more advanced TPAs have typically only offered Performance reporting services as an add-on to Middle-Office and Back-Office functions. As TPA-client relationships mature, administrators are seeking to provide more of these sorts of front office tailored services to their clients over and above the more traditional operational functions. More administrators are now looking at offering a Performance calculation service on a standalone basis, as a strong value add to their business and are investing in new capabilities as a result.

However there remain inherent challenges in a set-up where Performance services are outsourced to a different provider than the Fund Accountant / Investment Operations provider, and challenges for TPAs in whether to position their offering as a cheaper service than an in-house alternatives, or a service of enhanced quality (potentially more expensive).

Many asset managers still choose to retain performance in-house, often due to sensitivities around sharing what is regarded as market sensitive data. In addition, performance is often a function residing in or very close to the front office which would increase complexity and potentially making outsourcing politically challenging. For Fund Managers making this choice, however, significant investment awaits due to client-driven demand, entailing either enhancing or re-purposing in-house builds, or implementing new off-the-shelf packages. Selecting the right model, with the right tools or partner will be critical in the evolving landscape for performance reporting.

The provision of risk reporting as an outsourced service, on the other hand, is currently in its infancy - although increasingly administrators are looking into enhancing their capabilities as a key competitive differentiator. Nevertheless, for the majority of managers, the focus in this space is on existing in-house systems.

Whilst there are a range of risk systems on the market, new requirements have in many instances necessitated investment in new or enhanced platforms, particularly UCITS III daily VaR calculations, stress testing and external client demands for greater transparency. There is also increasing demand for managers to demonstrate a clearer understanding of the investment process than in the past, particularly for new business.

To achieve this, many asset managers use a combination of multiple systems to provide the desired functionality. Leveraging external packages is attractive although as with performance tools, some risk platforms have a particular bias towards a particular class of asset. Selecting the right tool or tools is therefore critical to the new risk-focused environment.

Many TPAs have recognised the importance of this service to their clients and have started to invest in this space. Given the fixed and industry standard requirements for UCITS III reporting this appears to be a service that could potentially be outsourced. Some providers are aiming to provide a fully integrated view of performance and risk reporting and are moving from providing standalone risk models to more complex ex-ante scenario analysis and stress testing.

Typically, only the more mature outsourced relationships are moving into this space although some providers are developing the ability to provide a Risk reporting offering on a standalone basis. This would result in a complex operating model if 2 providers were involved, but an intriguing hybrid model would be a manager with Investment Operations in-house outsourcing Risk reporting on a standalone basis. RiskMetrics have historically provided this service to Hedge Funds although this will come under scrutiny given recent corporate activity.

For asset managers considering outsourcing Risk reporting, a further hurdle will be that a typical financial business case may not be an appropriate decision criterion, and a more thorough review of capabilities would be required. Enhanced risk reporting capability is a key competitive differentiator in the current market, but given the wide variation in current TPA capability, selecting the right provider will be crucial.

Getting it right.

Whichever route asset managers choose to go, there is no escaping the client, regulatory and front office demands that are driving the need to stabilise or indeed significantly enhance Risk and Performance reporting capabilities. Potentially large investment and operating model upheaval looms, and any solution must be scalable, automated and robust. Both asset managers and TPAs increasingly view this space as an opportunity to differentiate and develop competitive advantage to meet ever more sophisticated client requirements. On offer to asset managers is the intriguing possibility of maturing outsourced capability, but given the current variance in TPA service capabilities, their choice will need to be made carefully.  There is no one size fits all solution, with the right answer being driven by existing capability and operating model, asset mix, client and geographical spread. Getting it wrong is not an option.

An entirely new approach to partnership between asset managers and their service suppliers is becoming evident in the more progressive deals, and it may yet prove a watershed in the effectiveness and profitability of outsourcing.

The maturing of asset manager outsourcing deals over the past few years has been well documented. Alpha FMC’s annual benchmarking studies have borne out this trend through improving and stabilising service delivery across an increasingly wide scope of services. But perhaps now, more so than ever, there is pressure on asset managers to reduce their cost base and improve service quality at the same time as service providers need to increase revenues and profitability.  These pressures are leading providers to extend their relationship with their asset manager clients to new services to supplement the margin squeezed, traditional core services.

Jon Benson, a Principal at Alpha, comments: “The provision of pure administration and custody services has long since ceased to be commercially or strategically exciting for most suppliers. Those suppliers who manage their client relationship proactively and offer a wholesale, strategic direction are more likely to develop long term, valuable relationships with their clients. Those asset managers who create wide ranging and deep strategic partnerships with their outsource suppliers are more likely to generate the maximum benefits and synergies from their suppliers.”

A number of asset managers are, with varying degrees of engagement, looking closely at how they can more effectively leverage the capabilities offered by their supplier. The most successful managers in this respect are those that have adopted a clear and structured approach to developing their outsourced operations. Often, through effective collaboration, asset managers can lead suppliers in tailoring their market offering. Such collaboration includes the ongoing and active management of a strategic plan to help both the asset manager and service provider grow their businesses.

The most effective suppliers will be those most adept at the identification, understanding and management of their evolving client needs. Suppliers need to present a clear & complete view of the full scope of services that they can provide (often easier said than done!), as well as a compelling narrative of how their service offering is evolving to address market developments and the business growth strategy of their client. The focus should then be on identifying the right new products to sell to clients to help them maximise the benefits achieved from the supplier – which in turn can lead the supplier into precisely the higher-margin areas to which they aspire.

Alpha is involved first hand in the evolution of these relationships from both perspectives. Of course, it would be an overstatement that this is a description of a general market trend at this stage. For every client/supplier relationship which is proactively forging ahead into new territory, there is at least another one where a genuine spirit of partnership innovation has yet to take hold. But for those with the will to explore extending their relationship, the opportunities are significant and varied.

In Alpha’s experience, the nature of such opportunities will depend on the asset manager’s motivation and the readiness and ability of suppliers to access more difficult service areas. However, key themes include:

• The Administration of Alternative Funds e.g. Real Estate, Private Equity, Fund of Hedge Funds.  Joe Docker, Manager at Alpha explains: “Market consolidation has meant that traditional asset managers have often broadened the scope of investments. This brings both operational management issues and compliance and risk management challenges. However, this in turn has created an opportunity for service providers to create scalable and robust Alternative Funds service models to help reduce costs for Investment Managers. For instance, a large securities service provider might look to leverage existing but fragmented property administration services to create an effective one-stop-shop for outsourced property fund administration. It’s an offering that can prove effective, even in the face of stiff competition from specialist providers.”
• The provision of dealing functions: by leveraging existing infrastructure suppliers may be able to generate market orders which can be filled automatically. The supplier may be able to build scale and hence reduce the operational costs associated with dealing in the market. Investment Managers in turn may be able to identify cost reductions for the dealing of vanilla, market priced securities. Suppliers can take an internal, fixed cost function and deliver a transaction-based cost model delivering dealing, matching, settlement process synergies.
• Financing – where suppliers can leverage long-standing administration client relationships to introduce their investment manager clients to Investment Banking functions to the benefit of the wider relationship, for example when an Investment Manager embarks on corporate activity.
• Foreign Exchange Overlay services: outsourcing the administration of currency exposure may offer clients a cost effective way to manage FX exposure
• Outsourced client reporting and performance services: suppliers will typically deliver month end data to investment managers for creation of client reports or calculation of performance and attribution reports. This is a logical extension to the outsource relationship and a key emerging area of opportunity, which is explored further in a separate article.
• Extending relationships across geographies: many asset managers are looking to leverage global platforms to enable a common service and operational model across all operational geographies. This is only achieved through a joint, strategic partnership with the supplier - which can minimise supplier interfaces, cost and create a common operational direction.

The common thread running through all of the above examples is an attempt on the part of both service suppliers and their asset manager clients to deepen the nature of their interaction, and to each leverage the widest possible array of capability available to drive value and revenue out of existing relationships. Suppliers attached to large banks in particular will increasingly look to sell all available group services to their clients – and this often means extending traditional service supplier relationships into the realm of corporate services, as well as the extension of a traditional service portfolio into wider and more complex areas. For their part, asset managers may well be looking to the wider group capabilities of their suppliers to see not just how service and cost might be managed through the relationship, but what value and custom the supplier can bring to their core asset and client base. And once we’re into this sort space, a huge realm of possibilities does begin to open up.

Of course the above examples represent a broad array of opportunities, which are being leveraged to differing extents across the industry. But far from settling into an established pattern, a number of asset manager / supplier relationships are increasingly being explored for mutual value opportunities. The most successful will be those that most effectively extend the scope of service provision into higher value areas in a secure fashion. As Benson notes, “No two suppliers or clients are the same. Knowing your client/supplier and effectively identifying the breadth of services that can be offered will enable the suppliers and clients to effectively grow together and meet their joint strategic service and financial goals.”

And this type of corporate partnership approach will certainly be required if suppliers are going to crack the increasingly aged problem of profitable securities services outsourcing, and if asset managers are going to drive the maximum value possible from their existing service outsourcing arrangements.

If you would like to know more about our Supplier and Client Management expertise and credentials, please contact Jon Benson on jon.benson@alphafmc.com or +44 (0) 7941 320299.

Alpha FMC has over the past few months conducted a survey of attitudes to benchmarking of Operations among Senior Executives from the European Asset Management Industry. The survey, which looked at attitudes to benchmarking in general and not to any particular studies or providers, generated a number of interesting findings:

Most managers use benchmarking studies to assess the performance of at least some operations functions

Even allowing for the fact that companies who have experience of benchmarking are more likely to respond to a survey like this, the share of respondents who reported that they had

participated in benchmarking studies over the past three year was, at 80%, higher than we had expected. Fund Accounting and Custody were the most popular functions for which to benchmark service and/or cost efficiency, with all of the positive respondents reporting they had done so in the past 3 years. Half the respondents reported they had benchmarked Investment Operations, Derivatives Processing and TA while 30% said they had also benchmarked Client Reporting and Performance & Attribution performance.

The most common reason cited for why companies had not participated was concern over the effort required to collect the data. This was in many cases an acknowledgement of a worry that internal operational MI was not comprehensive and granular enough to fit into the standardised models used by the benchmarking providers.

The most common reasons to benchmark are to identify areas for improvement and to gain reassurance of competitiveness

Understanding areas of underperformance and gaining assurance that of competitiveness were, not surprisingly, quoted as the most common reasons for taking part in operations benchmarking. The third most common reason was to support cost reduction activities – a likely reflection of the pressures caused by the recent market crisis.

Outsourced asset managers also quoted the ability to provide leverage with TPAs to improve cost or service performance as a key reason. It is becoming increasingly common to have regular benchmarking enshrined in outsourcing contracts between asset managers and outsource providers. Done correctly, this can be a very useful tool for both parties to ensure that tariff and service are maintained in line with market norms throughout the life of a contract. However, in Alpha’s experience, many companies who have these types of provision do not use them to the fullest extent and are not therefore realising the intended service and cost benefits.

In most cases, participating in benchmarking studies achieve the objectives set out

More than three quarters of the respondents agreed that taking part in investment operations benchmarking studies had allowed them to meet the objectives they set out, in particular with regards to identifying areas for potential improvement and for monitoring the performance of outsource providers.

However, there were also a couple of areas where the perceived benefits had been less clear. Less than half of the participants felt that the studies had allowed them to better understand key operational risk levels and a similar number reported limited benefits in terms of monitoring results of improvement activities. The very different approaches taken by companies when defining and measuring risk means that this has always been a hard area for benchmarking providers to cover. However an increased focus on risk among operational executives following the recent market turbulence is likely to put more emphasis into measuring and comparing this area in future studies.

Annual benchmarking of service performance and biannual cost comparisons was considered appropriate

Undertaking annual service reviews and bi-annual reviews of cost levels was the most common approach to operational benchmarking. However, 20% of respondents said they thought service should be compared annually and a further 20% every six months.

As a key player in the asset management benchmarking market, Alpha are of course delighted that senior industry executives value the benefits of operational benchmarking. However, we also firmly believe that many of clear benefits described above are applicable beyond the traditional areas of operational benchmarking. Whilst inevitably focus and objectives need to be tightly defined in more difficult areas, there are clear reasons why managers should consider reviewing front office, distribution and other functions for potential for external comparisons.

Alpha FMC is the global market leader in asset management benchmarking and run comprehensive studies for all parts of the asset management value chain as well as for the different industry segments (alternatives, property, etc.). If you are interested in further information,  please contact Bo Lantorp, Alpha FMC’s Benchmarking Director, on bo.lantorp@alphafmc.com or +44 (0) 7958 304053.

UCITS IV legislation has spawned a plethora of reports and conferences as well as much debate in the industry.  Much of the comment has been that a variety of issues such as tax constraints will mean that certain parts of UCITS IV will not result in major change for many managers.  However, our recent work with our clients has identified substantial efficiency and effectiveness gains that may exist through selective implementation of some of the key pillars of the new legislation.

“Firms not actively investigating and planning for UCITS IV are likely to be both delaying financial benefit and potentially duplicating product development work ”  

The most widely applicable opportunity for near-term simplification and financial benefit at many managers is the implementation of Master-Feeder structures, particularly where significant fund duplication exists. Duplicated fund structures, defined as funds with similar investment strategies, may exist as a result of earlier cross-border distribution strategies or M&A activity and are probably causing significant cost inefficiencies.

Whilst there can be tax incentives to investors from Master-Feeder structures, our work has tended to focus on the hitherto largely unexplored cost reduction opportunities offered to both asset managers and investors, as well as the knock-on impacts to third party administrators’ strategies, operating models and revenue streams.

“The Alpha Master-Feeder Efficiency Model shows substantial potential savings from Master-Feeder structures: moving from 2 duplicate (clone) funds to 1 Master, 1 Feeder can save 28% of core operations and custody Costs, increasing to 43% cost reduction where 5 duplicates exist” 

We have developed a sophisticated multi-driver model to quantify differences in cost between duplicate funds vs Master Feeder structures by assessing the aggregation of cost drivers into the master fund. TheAlpha Master-Feeder Efficiency Model (‘AMFE Model’) shows that even moving from 2 duplicate funds to 1 master, 1 feeder (the simplest case) results in a reduction in costs per fund of up to 28% of both core operations and custody costs. Clearly, these savings will increase with the degree of duplication, with the AMFE Model showing a distinct savings scale curve as duplication increases: 

Figure 1: The Alpha Master-Feeder Efficiency Model shows increasing savings with higher numbers of duplicate funds

Moving from 5 duplicate funds to 1 Master and 4 Feeders can result in costs reducing by up to 43%, a significant opportunity for asset manager profitability improvement whilst at the same time benefiting the fund holders. The savings are based on increased efficiencies across the structure reflecting the reduction of the drivers of cost (or fees in an outsourced environment).

These savings are significant, particularly if replicated across the whole book of business, although still greater benefits can be identified if Master-Feeder implementation is carried out as part of a wider product and / or capability rationalisation exercise. When combined with underlying pooling structures (which may be a necessary consequence for larger asset managers), the efficiency gains can be even more exciting.
Indeed, we believe those firms not actively investigating and planning for UCITS IV are likely to be both delaying financial benefit and potentially duplicating product development work, as product initiatives undertaken in isolation over the next 12 months are likely to require revisiting post adoption of UCITS IV. The winners are likely to be those organisations that develop a coherent product strategy and roadmap for the next 12 – 24 months, taking advantage of UCITS IV provisions, cost efficiencies, fee alignment and wider rationalisation.

“The COO cost reduction agenda and Product Development agenda can both be served by Master-Feeder implementation. Larger pools of assets will bring distribution benefits, coupled with scale economies and a more efficient operational structure”

Implementation of Master-Feeder structures is therefore not about cost or product development in isolation. Creating larger pools of assets in international vehicles is important from a sales and distribution perspective as well. Firstly many institutional investors, especially multi-manager funds and structured notes, are not permitted by internal or external regulation to own more than a certain percentage (typically 10%) of a fund. Secondly international business is increasingly won on the basis of products structured on flagship funds.  This is not possible where the underlying fund is of insufficient size to cope with the inflow and outflows deriving from the related multi-manager funds and structured notes.

The cost reduction potential of UCITS IV will pose a significant challenge to third party administrator revenue streams. Fees are likely to come under pressure from core operations and custody reductions as a result of tiering (due to larger masters) and lower per fund charges for feeders due to their simpler structure.

The revenue squeeze will partly be offset by a reduction of activity (and hence cost base) at an administrator, but only if there are dedicated efforts to support this cost reduction to defend margins. A degree of price renegotiation will also have to occur to balance these interests.  However third party administrators will benefit from the larger pools of assets that result – particularly in the netting of FX transactions and more effective stock-lending programmes.  Also, TPAs with a strong Luxembourg offering may also benefit from the flow of increased business to this jurisdiction.

Revolution or Evolution?

It is our belief that UCITS IV will bring change to the industry – but will this change be revolution or evolution?

Our view is that there is not a one-size fits all solution;  depending on business mix and legacy structure, asset managers will have to understand and quantify the full benefits of a master feeder structure, potentially combined with a wider rationalisation programme.  
There is a surprising lack of urgency prevalent in some managers, as organisations wait for implementation of the UCITS regulations. Clearly, this carries the risk of delaying potential substantial cost savings and undertaking inefficient or duplicated product development work.

Some managers are likely to find significant savings potential, whilst other players without much duplication will focus on other areas - for example rationalisation of ManCo’s and potentially cross-border mergers should their specific situations allow for capturing benefit in this way. Either way, to act now will position managers to be one of the immediate winners by enhancing profitability and/or gaining a distribution edge in the post UCITS IV world.

If you would like to know more about our UCITS expertise and credentials, please contact Matt Bacon onmatt.bacon@alphafmc.com or +44 (0) 7815 811556 .

The last few years have been an exciting if turbulent time for property (or real estate) investment management.  A much greater focus has been placed on the asset class and in some respects this focus has revealed an uncomfortable situation.  In particular, many long established property managers have suffered from a lack of investment in infrastructure over many years which has compounded the industry-wide issue of poor data quality.

In this context we believe there is much work to be done and benefit that can be achieved within the property investment management world.

One of the interesting issues being tackled by several of the large managers at this time is the appropriate level of integration with the wider asset management businesses.  Historically, many property managers have operated almost entirely independently even to the extent of occupying separate offices from the wider firm.  However, cost and sometimes quality issues have caused this to be increasingly challenged and a greater level of synergy sought.

In our opinion this is not a simple binary issue but a much more complex and subtle question.  Firstly, taking an asset type view we see some opportunities for synergies with the indirect property book and other businesses such as private equity and multi-manager.  For the direct property business the similarities with other areas are much less clear.  However, even for direct property we see potential in areas such as risk management, the support functions and distribution.

A further complication to this situation is the multiplicity sourcing models used throughout the industry.  On the securities side of managers, benchmark data demonstrate that operations outsourced to a third party administrator (TPA) outperform in-house operations for both quality and cost efficiency and this is increasingly recognised as the preferred sourcing model.  However, on the property side managers will disagree over the competitive edge that may be gained by performing various apparently administrative functions better than their competitors.  For example, many would argue that asset management activities such as lease management and renegotiation are important competitive activities that can protect and enhance returns.  There are some who would go further and argue that basic property management, which is outsourced by most managers, can also increase returns through improved tenant satisfaction and lower vacancy levels. 

It is not therefore surprising that a wide variety of sourcing models have developed with a combination of managing agents undertaking many of the administrative tasks. In recent years we have also seen administration outsourced to the TPA banks, often as part of wider outsourcing deals.  Unfortunately some of these deals have been executed without a full understanding of the differences between property and securities operations and have lacked a clear plan for improving the systems and processes.  This has therefore led in some cases to a degradation of service performance, staff demotivation and frustration all round. 

In theory there is no reason why the outsourced model prevalent on the securities side will not ultimately prevail, however, the TPAs have much investment to make in infrastructure and scale to build before we are likely to see this occur.  If the property managers have anything to learn from their securities colleagues in this area it is perhaps in how to manage outsourced services.  The discipline of service management is quite different from managing in-house functions as many firms have learned the hard way.  As our benchmarking data again shows, firms with well constructed service agreements and service management teams get more out of their outsource providers than others.

Add to all this, the complexity arising out of delivering pan-European or even globally integrated services and it is easy to see why some managers are finding it difficult to make rapid progress. Nevertheless, we are very encouraged that a fresh new impetus is palpable in the property world and that a real drive for improved cohesion, quality and efficiency in underway.

If you would like to know more about our Property asset management expertise and credentials, or are interested in participating in our Property Benchmarking study, please contact Duncan Spencer on duncan.spencer@alphafmc.com or +44 (0) 7967 738 913.

We have recently delivered the initial results of the 2010 (8th edition) Alpha FMC Investment Operations and Transfer Agency Benchmarking Studies with participants from Europe, the US, Asia and Australia. 

The Study, which compares cost efficiency, service levels and operational capabilities across all asset management middle and back office functions, has benchmarked more than 40 leading asset managers from across the world and has allowed us to build up a unique database of efficiency and effectiveness metrics.  This database, combined with our extensive consulting expertise, gives us a deep understanding of the strengths and weaknesses of the range of operating models that exist in the industry.

The Study is based on calendar year data, although we can always bring in participants at other times and assess different data time periods.  The 2010 Study predominantly looks at CY09 data, and has therefore shown a fascinating view of the full impact of the credit crunch on asset manager operations. Specific findings and data are only available to Study participants; however a review over a multi-year period uncovers some interesting macro trends. For example:

• Cost levels are stable but service performance is gradually improving.

  • For a number of years we saw a steady increase in cost efficiency, with unit costs for the key operations drives (trades, NAVs calculated, corporate actions, etc.) declining year on year. However, for the past three years this trend appears to have stopped with efficiency levels more or less stable. There are several explanations for this, in particular:

    • Many companies outsourced their operations during the period and are committed to long term contracts

    • Rapid increases in salaries during the years up to the credit crunch compensated for any savings in other areas.

  • While costs have been stable, service levels have continued to improve with performance against key KPIs getting better across the board. This is partly a reflection of the resolution of early issues following the bedding-down of new outsourcing deals being resolved and partly from increase automation of many processes.

• Trade Processing STP levels appear to have reached a plateau.

  • The Alpha FMC Study measure STP levels at four stages in the trade cycle: percentage of allocated trades -

    1. Received electronically by dealers

    2. Submitted to ETC

    3. Matched first time via ETC

    4. Communicated to Custodian electronically.

  • Most companies now achieve close to 100% for the first step.  However the cumulative total, which for a number of years showed a steady increase, has stayed broadly static since 2007 at around 70%. It appears difficult for a typical manager dealing with a number of markets and custodians with varying rates of automation to exceed this overall level of STP.   

• Outsourcing leads to lower costs and better service.

  • Managers who have outsourced operations on average achieve both lower costs and higher service levels than those with in-house operations. This is true for investment operations, fund accounting and transfer agency.

  • The service performance for outsourced operations has improved faster than for those with in-house operations.  The performance gap was particularly stark in the 2009 Study.

• Despite this, the general satisfaction with outsource providers has declined year on year.

  • The Study also tracks how the TPA performance is perceived by the asset managers across a range of dimensions (e.g. level of service, value for money, responsiveness to requests and delivery against commitments). Somewhat surprisingly, these scores have got gradually worse over the years despite lower costs and improving service levels.

  • Paradoxically, the better performance in the core areas might be the key reason why the perception ratings are declining.  As normal operations become “business as usual”, more focus is put on other areas such as delivery of change. This is an area where there is significant scope for improvement: on average one third of all projects and changes are being delivered late.

It is still possible to enter this year’s study. If you are interested in further information, please contact Bo Lantorp, Alpha FMC’s Benchmarking Director, on bo.lantorp@alphafmc.com or +44 (0) 7958 304053.

As tax advantages are ironed out, what do the traditional European fund centres have to offer investors? We investigate the enduring appeal of Luxembourg, Dublin and the Channels Islands.

A golden growth period for European offshore financial centres (OFCs), underpinned by historically favourable tax regimes, has been under threat recently. A two-pronged assault of European tax and regulatory harmonisation and ever-tightening onshore tax regimes has been threatening to erode competitive advantages and undermine the double-digit growth in the funds industry in Luxembourg, Dublin and the Channel Islands. To add to their worries, all three are facing increased competition from new offshore rivals both in Europe (e.g. Malta) and further afield.

Yet the figures belie these threats. In Ireland, the funds industry has grown to service over $1.3 trillion in investment fund assets, having passed the $1 trillion mark in 2005 and the $200 billion mark in 1999. By the end of Q2 2007 over €2 trillion of assets under administration (AUA) were domiciled in Luxembourg – representing annual growth of 24%, compared to a European average of 15%. By Q2 2007 the AUA in Jersey had grown to £195 billion, representing quarterly growth of 8.6% and annual growth of 24.7%. The picture is similar in Guernsey, with AUA at the end of Q2 2007 at £156 billion, up £15.2 billion on the quarter and annual growth exceeding 25%.

However Alpha FMC’s recent Product Development Benchmarking Study re-affirmed the growing industry conclusion that tax status is no longer a primary driver for offshore domiciling – and therefore does not underpin the growth in Europe’s OFCs.

It seems rather that the OFCs have shrewdly moved to consolidate their legacy as investment havens by successfully promoting existing institutionalised advantages such as accumulated scale and expertise, product innovation, regulatory nimbleness and geographic location.

Luxembourg is already the largest investment domicile in Europe, with a market share of 25%, rising to 28% for in-vogue UCITS funds. This already makes it a ‘go-to’ location for any company wishing to establish itself on the radar of the major European, Asian and increasingly global distributors. Many of these look in the first instance to the top of the Luxembourg league table when short-listing managers. This established distributor focus has already led to a number of large international fund managers seeking to consolidate their domestic fund ranges into their Luxembourg ranges in an effort to feature more prominently on the Luxembourg league table, and hence on distributor short lists. In addition, points out Richard Goddard, an independent fund director based in Luxembourg, "it's not just the big players flocking to Luxembourg. Increasingly, specialist investment and wealth managers choose it due to its status as a leading centre for distribution globally".  

Luxembourg also benefits from established scale more than any other European centre. It has built up a concentration of specialist service providers in fund management, administration and distribution, not to mention essential professional services (lawyers, accountants, auditors), which makes it an easy place to do business. Nick Wells, Artemis’ Product and Communication Director, backs up the point when referring to equity funds launched last year: “I was particularly impressed by the wealth of complementary businesses that wanted to help. From RBS, that offered a fully compliant management company, to PWC, who provided a wide breadth of advice covering all European jurisdictions, and to Elvinger, Hoss and Prussen for their carefully considered legal advice. It was clear from an early stage that Luxembourg offered wide choice for Artemis’ fledgling entry on to mainland Europe. We felt secure in the knowledge that we could grow substantially without changing partners.”

With scale, and the importance of the funds industry to the national economy, the country’s legislators and Regulator afford the industry a prestige and priority that creates a virtuous circle of regulatory pragmatism. Luxembourg was the first EU country to fully incorporate the UCITS directive into law and in February of this year swiftly introduced the specialised investment fund (SIF) regime, providing a more flexible framework for lightly regulated and tax efficient SIFs. Under the new regime SIFs can actually be launched prior to authorisation, speeding time to market significantly, which places a far greater burden on the fund managers and supporting professionals themselves to get it right.

Combine these factors with Luxembourg’s highly educated and multi-lingual work-force, as well as its physical location at the centre of Western Europe, and tax advantages form only a minor element in a range of investment advantages.

A combination of tax and regulatory incentives established Dublin as the leading European centre for Hedge Fund and Money Market fund administration. Ireland has sought to capitalise on this position through market-leading product innovation. The 2003 launch of Common Contractual Funds (CCFs) is an example of a vehicle that has enabled pension funds and institutional funds to pool their investments in a tax-efficient manner.

It is, however, arguably head-on competition with Luxembourg in particular that has both threatened Ireland’s position as well as driven its growth and innovation. For example, Ireland’s previous advantages that allowed it to accumulate the lion’s share of European money market funds have been steadily eroded. Luxembourg has steadily reduced its “taxe d’abonnement” (registration tax), making it competitive with Ireland and resulting in some flow of money market funds from Dublin to Luxembourg as managers increasingly seek to consolidate their fund ranges. And whilst Irish funds can be merged into a Luxembourg range, the reverse route remains problematic. With both locations competing as centres for fund rationalisation, this constitutes a non-level playing field for Dublin – a situation which the European Commission is currently examining.

Yet Ireland’s phenomenal growth is no accident and it has responded with characteristic robustness. The Irish Regulator, for example, has been far more willing to accommodate complex fund structures than Luxembourg, even though Luxembourg is attempting to compete in Hedge Funds by opening up listing opportunities. This means that Dublin will almost certainly consolidate its position as the primary centre for the setting up and administration of alternative investment vehicles.

As Alan Dundon, Global Head of Product for Fund Administration at BNP Paribas Securities Services, notes “don’t be surprised to see the Irish regulator responding to the Luxembourg SIF provisions in order to make Ireland even more accommodating”. Already certain types of funds (e.g. QIFs, Ireland’s current equivalent to Luxembourg SIFs) can now be registered much more quickly than previously, with solicitors permitted to certify certain aspects of the fund set-up. But regulatory innovation and responsiveness is only part of the picture. In fact, the Irish regulator is pro-actively seeking to establish Ireland as a more responsible regime than competitors, such as the Caymans, and has responded to the current US sub-prime crisis in a measured but non-prescriptive manner, in the knowledge that Ireland’s reputation as a safe and proper domicile is crucial.  

The Channel Islands, by comparison more niche competitors, have used their regulatory adaptability and accumulated expertise to grow from the base that they established using their historically favourable tax regimes.  Being outside the EU, UCITS has threatened their standing as a retail domicile. The response was the successful promotion and growth of property funds. This sector too has come under threat from UK REITS legislation, which erodes the advantages of domiciling property funds offshore and as a result growth in the sector has slowed. But once again the response has been innovative and successful. Guernsey has established itself at the fore of the private equity sector, with ‘light touch’ regulation producing a rapid cluster effect. And Jersey has made impressive inroads into the Hedge Fund sector after a late start. BNP Security Services’ Alan Gunton, Head of Projects in Jersey, points out that “promoting flexible fund structures has encouraged registration in the Islands even though administration is typically carried out in Dublin. Competitive legislation in domiciles like Gibraltar bears testimony to the success of its models.”
The Islands have a scale where supervisors can know and personally interact with the main industry players, and our Study evidence suggests that the industry appreciates dealing with a regulator that behaves in a flexible and interactive manner more akin to business itself than a government. And the Island Regulators can afford to do this because the business they seek and attract is largely from institutional investors who can look after themselves.

It is clear that scale and the associated cluster effect are strong pluses for Luxembourg, Dublin and the Channel Islands – and one that all three locations are continuing to exploit very successfully. The advantage of being a high-profile domicile for particular investment classes with established infrastructure, expertise and regulatory friendliness appears hard to overstate. And in an environment where domicile rationalisation is a key driver, the offshore centres provide convenient and politically neutral venues, particularly for those large multi-national fund managers who may struggle to choose a single onshore location as their primary centre.  

The role of competition, particularly between the ‘traditional’ offshore centres, as well as with new upstarts, should also not be underestimated. This competition has served to keep authorities and regulators agile and business-friendly, and all three centres have claims to be amongst the most innovative locations for fund development and servicing in the world. And so the question appears to be not whether the three locations can continue to attract business, but how each can cope with increasingly urgent capacity constraints. The Channel Islands are looking to attract more front end business, and outsource administration. In Ireland it no longer makes sense to talk exclusively about Dublin, given the recent and necessary expansion of financial services across regional cities. And Luxembourg too has severe labour market constraints on its hands. Innovative solutions are called for – and the relative strengths of such solutions could well be the next major battleground.

By Nick Fienberg & Nick Baker (Alpha Financial Markets Consulting)