By funds europe

 There is good news for Latin American fund managers casting covetous glances at the lucrative possibilities of worldwide distribution. Nick Fienberg, of Alpha FMC, finds 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. Enticing opportunities, however, 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 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: Luxembourg, the base for Ucits-compliant Sicavs; Dublin and the Cayman Islands, which remain the most high-profile domiciles for alternatives funds; and numerous other specialised offshore locations such as the Channel Islands or Gibraltar.

All these locations have established themselves as a hub with an area of expertise. 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 framework usually has an impact on the choice of domicile. Luxembourg currently appears to be a winner from Ucits IV provisions. The country 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 struggling with sovereign debt issues. Ucits funds domiciled in Ireland have been disapproved for general investment by the Chilean Pensions Regulator, Comisión Clasificadora de Riesgo, because the country’s credit rating no longer meets minimum requirements. Fund inflows, however, remain at record levels.
It has also been suggested, and equally denied, that the Cayman Islands may struggle under the Alternative Investment Fund Managers directive because the domicile may need to attract custodians to the jurisdiction.

Global fund managers, however, need a global operating model to support them. This is particularly important if their intention is to maintain the location of investment and dealing expertise in their home market while running funds domiciled abroad.

Securities services providers have long boasted of their global servicing models. In reality, a great deal of investment in global support platforms has occurred in the past few years, which means there is now a range of genuinely global servicing alternatives.

Keeping down the costs associated with geographic expansion is important. This means most Latin American fund managers are likely to engage with 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 Latin American fund managers dealing with domestic resources and cost bases that are notoriously expensive. Some managers have even found operational costs to be lower in the United States than in Latin America.

Time and place

Markets throughout the world will have their own support and interface requirements, those include Euroclear, FundSettle, Fix, and 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 prefer to create in-house manufacturing centres outside their home markets. This means all the above considerations will still apply, in addition to many more besides from an internal structural and operating perspective.

Global expansion should also provide easy access to global distribution channels. Here again, the ease of global distribution and appeal of Ucits funds, in particular that of Sicavs, means 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 pre-requisites to selecting a global asset servicing partner. A commercial and operational model needs to effectively support, rather than hinder, business expansion.

Global operating models mean different things to different people, and there are several aspects of such models that demand close scrutiny. From which location will the provider service investment records? Does the asset service provider operate a full and effective pass-the-book model globally? And does this mean that the 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 the crack of the United States dawn?

And, moreover, does this extend to full access to operational teams for the in-house teams throughout your hours of operation?

The advantage of a westerly time zone should mean that fund managers are able to start their trading day based on fully priced and updated positions. However, this assumption deserves scrutiny and will be subject to the constituents and trading locations of the business.

Most global asset servicers will be able to interact with their clients across a range of languages – certainly in English and the local language of administration location. But Latin American managers may not have staff as fluent in northern European languages as managers in other parts of the world. The experience of many managers setting up in or expanding from Latin America suggests that it is worth ensuring a strong language bridge between fund manager and service suppliers.

Risk 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 a global company with outsourced operations.

Latin American managers will also have specific requirements based on their domestic regulatory and tax environment. For example, the 2% government tax on Brazilian real foreign exchange instructions means that an effective foreign exchange 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.

With caution

Managers in the region 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 share classes, perhaps also more multicurrency share classes, and assets. Why not let the provider hedge these as long as the service is robust and economically viable? Other factors, such as the Key Investor Information Document, end-client reporting and performance measurement, may leverage existing supplier platforms and expertise. Nevertheless, they 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. Increasingly, sophisticated and credible Latin American fund managers are keen to tap into the positive sentiment on their region. They are likely to 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 an option but may prove restrictive commercially, technically and from a time-to-market perspective. Leveraging the capabilities of existing relationships with third-party administrators may also be possible for some but, commercially, fund managers are likely to find a favourable provider landscape. Technically, they would benefit from global platforms that have seen substantial investment.

By funds europe

The complexity of fund structures and the demands of investors have made fund accounting a costly process despite the efforts to improve efficiency. Nicholas Pratt asks what can be done to help managers and administrators get ahead of the curve.

Barrington Partners in the United States has regularly surveyed the cost of fund accounting for the last six years, primarily on the US mutual fund market. Results released in September showed very little difference from 2009 with the cost of fund accounting going up by a fraction of a basis point – from 1.34 to 1.35. This small difference, though, has come as a result of a significant effort among both asset managers and asset servicing firms to reduce their costs, in both systems and people, in the wake of the financial crisis.

The survey assesses fund administration, tax, legal, data feeds and net asset value calculation. It is the latter category that comprises the majority of cost (56%) and within that category it is the salary of operations staff that accounts for 60% of the cost, while technology costs 26%. So despite the increase in automation, fund accounting is in many ways still a people business.

“As a whole, the industry has been shedding jobs for a long time and reduced the need for manual intervention on the more straight forward tasks,” says Ellen Pedro, a consultant at Barrington.

Instead, the manual labour has been focused on more complex and analytical tasks, such as managing exceptions or dealing with the accounting of complex derivatives. So as the level of automation increases, the industry finds new ways to create complexity, she says.

Not many companies have been willing to change their core fund accounting systems in order to get ahead of the constant complexity. Pedro says: “The project can take years to complete and the systems are seen as too important to subject to radical change. A single pricing error could cause an enormous loss.”

In the UK and Europe, UK-based Alpha FMC has found costs were increasing. Bo Lantorp, director of benchmarking, says there are some significant factors contributing to the increase in the underlying costs of fund accounting.

First, most asset managers outsource their fund accounting and are tied into medium-term contracts with set pricing parameters, normally based on assets under management. Second, much fund accounting across the industry is performed using established legacy systems, where the scope for increased automation or efficiency is limited. Finally, any small efficiency savings that have been made have been more than offset by the general increase in oversight requirements, increased fund complexity and the demand for more accurate and timely delivery of fund prices.

Fund accounting systems have been subject to incremental change and development rather than radical change, says Lantorp. “Fund accounting is essentially a procedural business. Many service providers deliver a fundamentally sound and stable level of service and we have seen significant investment in enhancing the workflow technology employed around accounting platforms. But, again, this fits the bill of incremental efficiency enhancements rather than wholesale overhaul – for which there does not appear to be a compelling case.”

Fund accounting is largely a volume game, says Lantorp, and the benefits of having large scale and a wide user base are significant for system vendors, enabling them to keep pace with regulatory and business complexity by investing in their large-scale legacy platforms.

Lantorp cites the commitment of large asset servicing firms to SunGard’s InvestOne and also the apparent increase in the use of Multifonds as examples of the benefit of scale and the rarity of fundamental overhaul. “There have been some niche entrants with relatively new and efficient technology. These have tended to operate at the periphery of the industry and focus on new entrants and alternative business but they may yet play a larger role in future.”

According to Geoff Hodge, chief executive of Milestone Group, a UK-based provider of funds processing systems, fund managers have historically organised their systems around simple fund structures and are not able to cope with more complex structures.

Consequently, it is not uncommon for firms to have stand-alone systems for each process in the fund accounting life cycle.

“The industry has done a good job of automating the trade life cycle, but in terms of fund accounting, there is still a lot of work that can be done,” says Hodge.

Hodge suggests that asset managers and asset servicers develop a more open mind when it comes to their operating models. “There tends to be a very entrenched set of views that force firms to stick with a model that has too many moving parts.”

Rather than looking to automate each step with separate systems, firms should look at systems that can store data on a fund-specific basis, can run the calculations and the validation, and can manage the process from end-to-end, says Hodge.

Systems vendor DST has developed its HiPortfolio product to address these investment accounting challenges. According to Geoff Harries, head of asset servicing for DST’s investment management solutions, the development work has focused on processes that have been performed outside the core accounting system and then brought back in. “There has been a whole cottage industry of satellite applications that have developed over the years. By putting those applications into the core processes, we can then decommission them over time,” says Harries.

The opportunities for efficiency can be hard to see when it appears that there is some kind of systemic stalemate. Firms can spend significant sums on new systems to meet the demands of regulation and new product types and investors, only to find that these demands all change once the systems are implemented and another round of catch-up commences.

“That is exactly where the market has been – firms take steps to match their requirements and then the requirements change,” says Hodge. “We’re suggesting a new structure that can cope with future requirements instead of struggling to stand still and creating a more complex web.”

Many Private Equity firms are experiencing significant change across multiple areas of their business. Alpha have identified a number of common themes, and will be hosting an industry forum which pools expertise from within the Alpha business, third-party administrators and leading systems vendors. The forum will provide participants with a panel review and peer insight into:

• Outsourcing and operating model design
• Functional architecture and systems selection / implementation

Participants will include a select number of clients and key industry players, and the event will provide an opportunity to share ideas and expertise as well perspectives on emerging trends and market best practice.

This follows on from a number of successful industry forums previously run by Alpha, which have been a great opportunity for clients and contacts to discuss and debate key industry issues in an informal setting.

We look forward to sharing key themes emerging from the forum in our next newsletter.

Leading asset management consulting firm bolsters front office team

Alpha Financial Markets Consulting Group Ltd (“Alpha FMC”) today announced the hire of Greg Faragher-Thomas as a key step in the strategic development of their front office servicing capability. Greg will join Alpha FMC as a Director in the London office, and brings with him over 10 years of experience selecting and implementing front office solutions for leading asset managers. Prior to joining Alpha Greg worked at Charles River Development, Bluebay and JP Morgan Asset Management.

Nick Kent, CEO at Alpha FMC, said: "The addition of Greg Faragher-Thomas to our director team significantly strengthens Alpha's capability and service offering in the asset management front office space. We’re seeing significant demand from both traditional and alternative managers for support in selecting and implementing front office technology solutions and Greg will help us continue to grow this part of our business.  Alpha now boasts exceptional experience and delivery capability across the entire breadth of the asset management value chain, and Greg's appointment will enhance our position as a pre-eminent partner to the European asset management industry".

Faragher-Thomas said: “I am delighted to have joined Alpha FMC. I’ve known Alpha for several years and have always been impressed with their quality and professionalism. I am very excited to take this leadership role in bringing a new and better service offering to the front offices of asset managers”.

Leading asset management consulting firm acquires CRM, client reporting and distribution specialist 

Alpha Financial Markets Consulting Group Ltd (“Alpha FMC”) today announced the acquisition of Tomtom Consultants Ltd (“Tomtom Consultants”), the specialist asset management CRM, client reporting and distribution consulting firm.

Neil Curham, Managing Consultant at Tomtom Consultants, will join Alpha FMC as a Director in the London office.  London-based Tomtom Consultants provides specialist distribution-related consulting and implementation services, and counts 8 of the top 15 UK asset managers amongst its clients. It has also built a reputation as the leading CRM-advisor in the UK asset management market, having helped implement and/or advised on the majority of the industry’s CRM projects over the last few years.

Nick Kent, Group CEO at Alpha FMC, said: “Alpha FMC is continuing to expand and invest in establishing itself as the leading specialist asset management consulting firm in the world.  We are delighted to welcome Neil Curham and his company to the team.  Tomtom Consultants brings a wealth of specialist knowledge to Alpha FMC in the distribution end of the value chain, and will help significantly enhance our consulting and benchmarking offerings in this space.”

Neil Curham, Managing Consultant at Tomtom Consultants, said: “I am delighted to have found a partner in Alpha FMC that shares my passion for delivering high-value, high quality advice to the asset management sector.  As the markets have recovered, our business has grown significantly as clients are focused on growing their business globally and servicing clients across diverse markets and asset classes.  By combining Alpha FMC’s exceptional talent base and brand strength with Tomtom’s specialist skills, we can significantly enhance the consulting proposition to our existing client base and new prospects and assist them capitalise upon these strategic opportunities.”

By Matt Bacon, Principal, Alpha FMC

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.

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: The first is around 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.

The second theme is around 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.

The third theme is around 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.

And finally around opaque responsibility and 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.

By funds europe

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, argues Jon Benson

The maturing of asset manager outsourcing deals over the past few years has been well documented. Annual benchmarking studies by Alpha FMC have borne out this trend through improving and stablising 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.

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.

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.

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.  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. 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.

By funds europe

The memory of failed lift-outs have been banished to the past and outsourcing is now making inroads into the front and middle offices, discovers Nicholas Pratt It is easy to forget just how successful outsourcing has been in the asset management industry given that 30 years ago many managers used to perform their own custody and 20 years ago administered and accounted for their own funds. Nowadays, custody and fund administration and accounting are almost universally done by third parties and no longer even considered as outsourcing.

The sticky patch came in 2004 and 2005 when a number of high-profile back office lift-outs were abandoned and a number of asset managers suggested that the quality of service provided by outsourcers was being jeopardised by the low prices that intense competition had generated.

In today’s market a more realistic and mature attitude to outsourcing exists and asset managers are beginning to see the benefits in terms of both reduced cost and improved service. The eighth annual Investment Operations and TA Benchmarking Study by consultancy Alpha FMC concluded that asset managers who have outsourced operations have, on average, good or better service levels than those that are kept in-house and also make savings of between 5% and 10% across all operations.

According to Alpha FMC’s director of benchmarking, Bo Lantorp, the study’s results are a confirmation that the initial problems that invariably occurred after a migration or a lift-out have now been resolved and have laid the way for the outsourcing trend to continue. “With many of the first-generation outsourcing deals coming up for renegotiation, there should be further opportunities for asset managers to share the benefits of economies of scale.”

Many of these opportunities lie in the growing trend for asset managers to outsource more middle- and front-office services such as compliance reporting, mandate monitoring and counterparty exposure measurement, as well as the more client-facing tasks such as performance measurement and attribution and client reporting, marking a significant shift from the attitude that outsourcing be restricted to the process-heavy, back-office tasks where the managers’ clients are not directly involved.

“Custody outsourcing was about scale and cost; outsourcing fund administration was about reducing risk; front- and middle-office outsourcing is about reducing fixed costs, which have risen due to the cost of accommodating new instruments and the increase in the volume of trading,” says John Campbell, head of investment manager services, Europe and APAC, for State Street. “Fund managers also want a seamless integrated infrastructure between back, front and middle offices and this is easier to achieve by outsourcing.”

Client reporting

Fund managers are also realising that once they outsource other parts of the business like the record keeping and administration, they no longer hold the accounting record so it makes little sense to attempt the performance measurement or quarterly fund reporting in-house. “Why should a fund manager have a whole team of people doing client reporting when the third party is providing all the data?” says Campbell. Outsourcing client reporting should not necessarily affect the relationship between a manager and their client, he says. “We have some clients, often boutique managers, who are protective of their clients and will take all of the data we provide and then deliver it themselves to the client. But we have other clients, often the larger managers, who are happy to let us do it all, including the delivery of the reports.”

Outsourcing holds an additional attraction for asset managers, particularly in relation to front- and middle-office services like performance measurement and fund valuations, and that is independence. “I believe the independence element is pretty new and is a largely a result of the financial crisis,” says Olivier Laurent, director, of alternative investment product management at RBC Dexia. “Asset managers want to show independence in terms of how they measure the risk that is being taken and to the valuation of their funds, particularly any OTC [over-the-counter] derivatives.”

Maintaining independence from the investment banks that create and sell OTC derivatives can become increasingly challenging, says Laurent. “As the underlying instruments become more complex and less liquid, it is harder to get the relevant market data without having to rely on data provided by the investment banks. We have a team of quantitative analysts in Luxembourg and France that are able to build volatility curves and volatility matrices on data provided by the likes of Bloomberg and then we can run the calculations in-house. I think the fact that we can demonstrate our independence is key for asset managers.”

The importance of independence is a new dynamic in the outsourcing world. Whereas previous outsourcing trends have been fuelled by the fund managers’ desire to either lower their cost base or improve their operational efficiency, the demand for independent valuations is coming from investors and regulators. The financial crisis highlighted the uncertainty within the OTC derivatives market, both in terms of who was exposed to what and also what the exact value of these instruments were. Consequently the old practice of relying on a counterparty’s price to value the instrument is no longer acceptable.

However, despite the demands for independent valuations, the rate of adoption among managers appears to be disappointingly slow. According to findings from the eighth version of the annual Alpha FMC Investment Operations and TA Benchmarking Study, only 50% of participants use independent sources to price OTC derivatives, and only a handful use more than one independent price. In particular there is still a significant reliance on counterparties as the only pricing source for the more complex instruments.

“Given the central role that derivatives played in the recent market turmoil, we would have expected most asset managers to have improved their pricing processes and reduced their reliance on counterparties,” says Stuart McNulty, a manager at Alpha FMC. “While there have been improvements, they have not been of the scale or speed that we would have expected. However, we anticipate that the process towards price source diversification will continue and that next year’s study will show most managers have taken significant steps towards a more robust pricing model.”

Outsourcing providers have generally adopted one of two approaches when delivering independent valuations for OTC derivatives – the first involves taking the clients’ positions and then sending them to a number of valuations specialists before aggregating the results and sending them onto the client. The second approach involves the outsourcing provider creating its own pricing model and combining it with raw data to calculate an independent valuation from first principle.

Reaching agreement

The advantage of the second approach is that it allows asset managers to agree and approve the models and methodologies used by the outsourcing provider, a benefit which might be denied them if the outsourcing provider is relying on the models of a specialist provider keen to protect its own intellectual property. And despite the fact that the second approach will be more costly, the greater transparency is likely to prove alluring for asset managers.

JP Morgan, for example, provides valuations for OTC derivatives that are calculated through its own in-house pricing engine. “We agree the methodology with the client and calculate it ourselves,” says Susan Ebenston, global funds services business executive at JP Morgan Worldwide Securities Services. “These are difficult assets to price and I think you have to be able to create the price and methodology independently and with transparency so that the client can see the working behind it.”

Other providers are keen to stress the lengths they will go to in order to calculate a valuation. “If we can observe market data we can model the values,” says Ron Tannenbaum, managing director of GlobeOp. He talks of building a multi-dimensional matrix of position valuations based on an array of market data inputs such as rating agency spreads, counterparty spreads, market data vendor spreads and a manager’s own spreads.  Then the consistency of any price produced is checked against other prices and in line with the tolerance levels set by the client. Additionally, all of the data used is then made available to the client for auditing purposes and peace of mind. “There is an enormous amount of data and you have to be able to provide access to that data back to the client through clear exception-based reports so that they can see how the valuations have been constructed.”

Extending outsourcing

Given that outsourcing trends take longer than expected to come to fruition but often go further than expected, the question for the future is just what will remain in-house rather than what will be outsourced. “No manager is going to outsource their investment decisions, but outsourcing is about everything that happens after the execution of a trade,” says GlobeOp’s Tannenbaum. “It is our job to take that burden away – from what happens after the buy-sell decision all the way to the investor reporting.”

State Street’s Campbell has similar sentiments. “I think in the future outsourcing can be extended to risk and compliance, collateral management, OTC processing and even trading. Discussions around outsourcing the trading function have been going on for a long time but they are being discussed again right now. Similarly there is a lot of talk around providing front-office applications to support the investment process. Investing is becoming a more complex and expensive operation and many fund managers do not want to carry this burden.”

Investments in increased automation levels and a stronger focus on process quality are paying off, as reductions in error rates early in the process result in fewer issues further down the chain, according to the 2010 annual Alpha FMC Investment Operations and Transfer Agency Benchmarking Studies survey. The study this year saw performance and service quality improvements among the participants for many of the key performance indicators, e.g. corporate action errors, reconciliation breaks and NAV errors. Furthermore, risk control practices in areas such as derivatives administration (in particular collateralisation) have demonstrably matured in the past 18 months

Changes have not been limited to the more complex and evolving areas such as OTC processing. For example, even in the relatively mundane process of stock reconciliation, we have seen a clear increase in frequency with a number of survey participants moving from weekly to daily or from monthly to weekly reconciliations. Levels of initial reconciliation breaks for both cash and stock have fallen, and there has also been a tightening of target times for the resolution of cash and stock breaks. Electronic/SWIFT statements are now the norm and pressure is increasing on custodians that do not support automated reconciliation. Although the appointment of the custodian is typically the responsibility of the end client and not the manager, some asset managers have been proactive in persuading clients to use only custodians that can support automated reconciliation.  

“While our findings do not clearly show that the business case for moving to daily stock reconciliations is compelling from a purely operational perspective - companies with daily reconciliation do not have lower break rates than those who reconcile weekly - it is evident that if front office risk reduction is also factored in, managers consider the benefits to be clear. We foresee most mangers migrating to daily reconciliation cycles for stock over the coming years,” says Bo Lantorp, Alpha’s Director of Benchmarking.  

Derivatives Processing

The focus on control and risk reduction is also clear in the area of derivatives administration where, for the first time, the participants now collateralise very close to 100% of derivative positions. An interesting exception to the collateralisation of positions is currency forwards which only a half of managers collateralise.  

However, the survey suggests there are still areas where more work is required to achieve best practice performance in derivatives processing. For example, the trend towards greater diversification of derivatives pricing sources has been slower than anticipated, with many asset managers still overly dependent on counterparties when pricing OTC derivatives. In particular, only half of the participants used independent sources to price complex OTC instruments, e.g. swaptions, thus being reliant on the counterparties, and only a handful use more than one independent price when valuing OTC derivatives positions.  

Stuart McNulty, a manager at Alpha, says: “Given the central role that derivatives played in the recent market turmoil, we would have expected most Asset Managers to have improved their pricing processes, and reduced their reliance on counterparties. While there have been improvements, they have not been of the scale or speed that we would have expected. However, we anticipate that the process towards price source diversification will continue and that next year’s study will show most managers having taken significant steps towards a more robust pricing model.”

Industry cost efficiency for both Investment Operations and Transfer Agency remained stable since the 2009 study with all functions but one seeing very small changes in cost efficiencies. In particular for Transfer Agency, where most companies are bound by long term outsourcing contracts and tariffs, this is not surprising. The one function where this was not true was fund accounting, where expected cost per NAV cut increased by c.10%. This was probably primarily driven by increased basis point charges from outsourced managers (as a result of recovering AUM being applied to existing rates rather than any changes to rate cards themselves) but also from increased oversight and validation efforts within asset managers driving headcount increases.  

Client Reporting and Performance

Many managers claim to be focusing their attention and investment towards both Client Reporting and Performance & Attribution. However, year on year, we did not see any significant changes in results. Within Client Reporting, we saw no real change in reporting deadlines or achievement rates, no increase in workflow tool usage or production automation, and no significant changes to average content and scope of a client report.

The majority of participants still use in-house built or excel based workflow tools, an indication that there has yet to emerge a strong 3rd party product which brings significant benefits over legacy builds in what is still often a largely manual process driven by Fund Manager requirements rather than a focus on operational efficiency. Where reporting deadlines have decreased it appears to have been driven by competition to win business, either by an asset manager or service provider, rather than by a general upgrade in capabilities or service offerings.

Within the Performance field, despite stating that enhancing performance and attribution capabilities was high on the agenda for most Asset Managers, once again there has been little year-on-year progress. Nina Spencer, a Manager at Alpha says ‘the lack of tangible progress in this area appears primarily to be due to a sense that the right solution is not at the Asset Managers fingertips. Future proofing any investment is also a key concern due to the expectation of growing client and regulatory demands on performance transparency and accuracy. ’

However, as the current developments start to come on-stream and with TPAs investing in client reporting and performance/attribution tools to encourage further outsourcing in this area, Alpha expect to see further developments in next year’s study results.  

Outsourcing

The cost advantage of operational outsourcing is well established, and has historically always been one of the key selling points for an outsourced service proposition. The Alpha study has over a number of years borne out the greater cost efficiency enjoyed by outsourced managers, with average cost levels on average 5%-10% lower than for managers with primarily in-house operations.

These efficiency advantages result from a number of factors; genuine scale efficiencies that Third Party Administrators (TPAs) are increasingly able to leverage, a greater trend in off-shoring, as well as the intense price competition that still exists within the market for outsourced Asset Manager operational services. TPAs have also made significant investments in their platforms, and as they complete the migration of their clients onto common, strategic platforms one might well expect these trends in cost advantage to continue.  

It is interesting to note that the cost advantages of outsourcing appear to come with a notable exception of derivatives processing. While small-scale asset managers achieve greater cost savings from using third party providers the benefits are not as clear for larger managers. However, TPAs argue that that they have had to bear significant investment costs over the past couple of years to meet the new, more stringent, requirements that resulted from the tightening of controls following the credit crunch and that many in-house operations still have to fully face these costs. For example, it is the TPAs who are leading the field with robust and scalable solutions for the daily recollateralisation of derivative positions.  

Although companies with in-house functions also saw better service results this year, improvements have been most noticeable among managers with outsourced operations. Asset managers who have outsourced operations now have on average equal to or better service levels that those who are still in-house.  

This trend is likely to be driven partly by that fact that many of the first generation deals are now maturing, and the initial problems inevitably encountered following a lift-out or a migration have largely been resolved. Also, as clients are migrated onto the TPA’s strategic platform solutions, they are able to benefit from the more robust operational capabilities.  

The survey did, however, highlight that the relationship management practices in a number of areas fell short of what could be considered best practice. The Service Level Agreements that steer the relationships are often unwieldy and sometimes inconsistent and there is often limited clarity in the outsourcing contracts on the commitment on cost and service developments that the managers can expect during the lifetime of the contract. As the relationships parameters, at least in theory, should be easier to formalise between two external parties than if the operations still were in-house, one can argue that the strong performance comes despite, rather than thanks to, good management. There should be further benefits to be had by resolving these issues.  

Lantorp says: “This can be seen as at least a partial validation of the heavily criticised lift-out model – while it might have taken longer than anticipated to achieve a service that is better both from a cost and a service perspective, it appears that the providers are finally getting there. It will be interesting to see if the trend continues when we analyse the results from the 2011 Alpha FMC Investment Operations and Transfer Agency Benchmarking Studies which will be launched in the New Year.”

Similar articles included in Scrip Issue and in Global Investor

Alpha Financial Markets Consulting announces the opening of a US office in New York significantly expanding their consulting practice. This continues Alpha’s global growth in consulting and benchmarking services and follows the opening of the Luxembourg office in 2009 and the French office earlier this year. Alpha has appointed Shibu Nair as Executive Vice President of the US Operations.

Shibu brings with him a wealth of experience in alternative investment management and investment banking operations both from his days with Accenture’s Capital Markets group and his subsequent independent consulting practice.   Shibu commented: "I am delighted to expand Alpha's growing brand and consulting expertise into the US market for alternatives and traditional asset management consulting. Alpha's deep expertise in areas such as operations outsourcing, M&A and UCITS products position us very well in the US market."  

Nick Kent, Alpha's Managing Director, added "Opening our US office represents a very important step for the continuing development of Alpha so that we can serve clients in all their main geographic areas. Discussions with US managers suggest that they have not been served well by the large generic consulting firms and Alpha's proposition of providing more specialist expertise at lower rates will be as successful in the US as it has in Europe."

Alpha FMC are proud to announce the successful launch of the first edition of its Fund of Hedge Funds (FoHFs) Benchmarking Study. The study, which targets one of the most rapidly changing sectors of the alternative asset management industry, is the first of its kind. It adds to Alpha’s broad range of studies covering all parts of the asset management value chain that have been used by more than 50 leading asset managers over the past 8 years.  

This, the first edition of what will be an annual study, compares cost efficiency, service performance and capabilities for the Investment Operations and Client Operations functions and contrasts the relative effectiveness of different back office operating models. The study also assesses attitudes to and adoption of ever-increasing ‘Best Practice’ standards all the way through the fund life-cycle.  

The participants group, which is confidential, together controls close to 10% of Global FoHF AUM and includes a number of the leading UK and Continental European players.  

Bo Lantorp, Alpha’s Director of Benchmarking Services, says: “We are very excited to launch the first in-depth study for the alternatives industry and are delighted to work with so many of the leading industry players. We hope that the findings will allow the participants to get a better understanding of their operational performance, an area where the alternative industry is lagging behind the traditional long-only players.”  

Sunil Chadda, an Alpha Associate who has been working with the Alpha Team to develop the study, says “We believe that a new operating model is required for the FoHFs industry to allow it to continue to prosper in an increasingly competitive and uncertain marketplace. This study will assist management in identifying and making critical business decisions. The success of this first fund of hedge funds benchmarking study is a credit to the industry clearly showing that it is listening to investor demands for increased transparency and disclosure and improved overall business management”

By Consulting Magazine

For the second year in a row, London-based Alpha Financial Market Consulting finds itself on our Best Small Firms to Work For list. For Alpha, which was founded in 2003 and has offices in New York, Luxembourg and Paris, and its employees, “this is a very exciting endorsement of the culture we have built, and the people we have recruited,” says Nick Kent, managing director.

“Achieving this accolade two years running demonstrates that we continue to offer a highly attractive environment for our employees. It also reinforces to our clients that Alpha has a strong team ethic and highly-motivated people—something that comes through in every project we undertake.”

Kent says the firm managed to perform “exceptionally well” during the downturn and that’s one of the reasons for Alpha’s strong culture scores on the survey—a 4.73 out of a possible 5.0. “Morale is extremely high. During the market downturn we continued to provide interesting and challenging consulting assignments for our team,” Kent says. 

“Having emerged successfully from those market challenges we are looking forward to a period of exciting growth.”  Culture has always been a key focus for Alpha, Kent says. The firm goes to great lengths to maintain that unique aspect of the business by continuing to recruit exceptional individuals who share a similar mindset and approach. “We also strive to achieve a very open culture, where everyone feels involved in determining the business strategy and in making the key business decisions.”

That last point may help explain the firm’s above average score—a 4.66 out of 5.0—in the survey’s Leadership category. Company-wide meetings and a regular anonymous 360-degree feedback process are just a few of methods  endorsed by firm leadership.

By Richard Greensted, Scrip Issue
By globalcustody.net

Alpha Financial Markets Consulting, which provides consulting, benchmarking and implementation services to asset and wealth managers and their service partners, has opened a Paris office. Luc Baqué will be managing director of the French business, joining from UBS Wealth Management. Alpha FMC has offices in the UK, Luxembourg, France and the USA.

By Steve Johnson

Europe’s fund industry could reap savings of €2bn (£1.7bn, $2.6bn) to €3bn a year by making full use of the master-feeder fund structure arrangements allowable under the UCITS IV regime, according to a consultancy.

The UCITS IV rules, which come into force in June 2011, will allow asset managers to create a “master” fund in one domicile which will hold all the assets, and then create a series of “feeder” funds in each European Union member state, which can be sold to local investors.

At present, houses looking to sell cross-border either have to set up a cloned fund in every country – often meaning they build up a series of smaller pots of assets that lack critical mass and credibility with multi-manager and structured note investors.

Or they have to have a “passport” – a parent fund across borders, a process that has been handicapped by the differences in domestic fund structures across the 27-nation bloc.

The advent of master-feeder structures would allow a typical pan-European manager to make savings equivalent to 10 per cent of its operational cost base, according to modelling by London-based Alpha Financial Markets Consulting, which said operations typically account for 20-25 per cent of an asset manager’s total cost base.

Additional savings could be generated via lower distribution, marketing and fund management costs.

Converting two duplicate or clone funds to a one master and one feeder fund would typically save 28 per cent of core operations and custody costs, Alpha FMC found.

Where there are five duplicates, the saving would be about 43 per cent.

“Very few people seem to be really focused on UCITS IV, but if they get it right they can generate a lot of cost savings,” said Nick Baker, executive director of Alpha FMC.

At least some of the cost savings should be passed on to investors, the consultancy said, given that custody costs tend to be paid directly by the fund and administrative costs are typically split between the fund and the asset manager.

Alpha Financial Markets Consulting is pleased to announce the opening of the Paris office of its consulting practice. This follows the opening of the Luxembourg office in Spring 2008 and continues its expansion of consulting and benchmarking services within Continental Europe.  Alpha FMC has appointed Luc Baqué as Managing Director of the French business.  Luc joins Alpha FMC from UBS Wealth Management and brings extensive prior experience consulting to the asset and wealth management industries.  

Luc commented: "I am delighted to have the opportunity to continue Alpha FMC's expansion within Europe and in particular France where Alpha FMC is already engaged on a number of significant long-term consulting engagements. We intend to hire the best consulting talent in France to address the exciting opportunity created by leveraging Alpha FMC's substantial consulting experience and proprietary benchmarking studies."  

Nick Kent, Alpha FMC's Group Managing Director, added "The opening of our French office constitutes another important step in our on-going expansion in Continental Europe, and will help to consolidate our position as the leading provider of benchmarking and consulting services to the European Asset Management sector."

By Fiona Rintoul

The flood of M&A deals predicted for the asset management sector in the wake of the global financial crisis didn’t really happen. There have, of course, been some big deals – BlackRock/BGI, Aberdeen/Credit Suisse, Henderson/New Star, BNP Paribas/Fortis – but there have also been plenty of potential deals that did not materialise.

“Six months ago most potential acquirers were worried about their own business and not that interested in acquiring,” says Nigel Wightman, CEO of Titanium Asset Management. 

There were perhaps 40 to 50 asset management firms up for sale around Europe, but the number of transactions that went through was limited, agrees Nick Baker, chief executive of Alpha Financial Markets Consulting (Alpha FMC). Lots of people would have liked to sell if they could, but the old adage applied: too early to buy, too late to sell.” 

Baker adds: “People needed more realism about the price they could expect. 2009 was quiet in terms of the number of deals. There weren’t that many people with cash.”

Certainly, consolidation did not happen. Numbers from the fund industry research firm, Lipper FMI, show that in Europe the number of ‘master groups’ (a term that effectively groups asset management companies with the same parent under one heading) actually went up in 2009 to 1,622 currently, from 1,541 last year. 

“Consolidation in terms of numbers of active players is unlikely,” says Diana Mackay, managing director of Lipper FMI. “As groups merge at the top end, new players emerge at the bottom.”

With the market upturn, however, interest in acquiring has returned. Phones are ringing, says Wightman, although that doesn’t mean that deals are necessarily being done.

“Most of the sales we’ve seen to date have been involuntary,” he says. “When it comes to voluntary sales – people who would be happy to become part of a bigger business at a price – the price has changed. The position of the seller has also changed. Going it alone is now much more plausible.”

So, what happens now?

The two most recent deals in the European fund industry – BNY Mellon’s acquisition of Insight and RBS’s proposed disposal of its asset management division – both have more than an element of the involuntary to them. They both have a similar price tag too.

Insight went for £235m (€258m) and boosted BNY Mellon’s assets by £83bn. RBS’s asset management arm is expected to fetch between £250m and £300m and will bring its acquirer assets of around £30bn. 

Is this expensive compared with the £250m Aberdeen AM paid in shares for Credit Suisse’s SFr62.8bn (€41.2bn) of long-only assets at the tail end of last year when the crisis was in full flight?

“The problem with pricing fund management deals is that markets don’t stay static,” says Wightman. “Were fund management companies cheap in March? No, because in a P&L sense they were in poor shape. Are they now expensive? Not necessarily because in a P&L sense they are better.”

The BNY Mellon/Insight deal was, of course, a completely different type of deal from, say, BlackRock/BGI or Aberdeen/Credit Suisse in that it wasn’t a game-changer either for the acquirer or for the industry. Ron O’Hanley, CEO of BNY Mellon Asset Management, assesses the deal, which took the firm’s AUM past the $1 trillion (€6.8bn) mark , soberly.

“We have a broad set of investment capabilities and we wanted to supplement it by building a solutions capability,” he says. “Insight brought us a set of skills that brings us to scale in a particular area [liability-driven investment]. It fits right into our multi-boutique model.”

In line with the BNY Mellon multi-boutique model, Insight will keep its own brand name and investment process. There will be “moderate cuts in staff”, the bulk of staff cuts having already been made when the business was broken up coming out of Lloyds Banking Group. 

Asked if the magnitude of the BlackRock/BGI deal – described by Wightman as “a stunning deal” – has thrown down a gauntlet to firms like his own that play in the major league but are now dwarfed by the $3 trillion market leader, O’Hanley is sanguine. “BlackRock/BGI is in a class of its own in terms of size, but the rationale [for the merger] was not dissimilar to what it was for us. What BlackRock bought was complementary skills.”

Isn’t BNY Mellon tempted to play catch-up by looking for more acquisitions?

“We certainly get shown everything but we don’t need to acquire,” says O’Hanley. “Our organic growth record speaks for itself. I would say our growth going forward will be as much organic as M&A.”

Right now a key target for organic growth is the new Insight division within BNY Mellon. With the challenges facing pension funds worldwide, O’Hanley believes BNY Mellon can grow Insight’s business significantly. 

Competition

But what of BNY Mellon’s competitors? What’s their next move? Opinion varies. Alpha FMC’s Baker expects the M&A floodgates to open next year, while Titanium AM’s Wightman forecasts that “not much of anything will happen”.

“2010 will be back to business as usual,” says Wightman. “There will not be a great deal of M&A.”

Baker and Wightman are perhaps not as far apart as it at first appears. If a buyer were to turn up at banks around Europe offering a reasonable price for the asset management arm, those banks would bite the buyer’s arm off, says Baker.

That’s almost certainly true. The deficiencies of the universal bank-owned asset management model at the present time are well known.

“Financial institutions that own asset managers in Europe will be rethinking whether that makes sense, particularly bank-owned firms that were in the past relying on bank distribution,” says O’Hanley. “They need the bank branches now to secure funding for their own banking activities. I see several of those bank-owned asset managers coming on the block.”

Wightman probably wouldn’t disagree with any of that. He just can’t see any buyers coming forward to pick up these bank-owned asset managers.

Lipper FMI’s Mackay is also sceptical about the bank-owned asset managers’ attractiveness to potential suitors.

“There’s not much appetite to buy because the asset management skills in those companies are tied to distribution,” she says. “If you don’t have the distribution the company doesn’t have much value. It doesn’t give you access to new markets, it doesn’t give you access to products you don’t have already and it doesn’t give you cost savings.”

Bank-owned asset managers may therefore seek other solutions, suggests Mackay.

They might team up à la merger between Crédit Agricole Asset Management (Caam) and Société Générale Asset Management (Sgam). Their owners might wind them down to a position where they are simply running proprietary money and not doing much else. Or the parent bank might go the opposite route of severing the umbilical cord and making the asset manager more reliant on external distribution – a route that might also make the asset manager more attractive to a potential purchaser further down the line.

Meanwhile, in the difficult-to-occupy middle ground a dynamic rather opposed to this is at play, suggests Wightman. There are buyers but no sellers. 

“It’s difficult to survive in the mid-ground in the medium to long term. The problem for medium-sized players is: How do you become a mega-player? If you are Schroders, how do you become three times as big?”

The difficulty of occupying the middle ground is exacerbated, says Wightman, by the fact that the business has been gravitating towards index strategies for the past 20 years. The likes of Crédit Agricole can respond to this development by launching its own exchange-traded fund (ETF) management division, but that’s not an option open to most mid-size companies.

“ETFs are a low-fee business,” says Wightman. “You need to play in considerable scale, and you need considerable infrastructure and marketing spend.”

Next steps

What, then, are the options for mid-size companies? They can stay where they are. They can merge. They can go for an IPO. 

Some may find themselves slipping into the hands of buyers from the private equity or hedge fund side of the business, as Gartmore did. However, the chances of this are reduced by the “fair amount of terminal damage” that’s taken place in the hedge fund world, says Wightman.

Another option is to find a new home, like Insight has done in the multi-boutique environment.

“This gives mid-size players a home but also autonomy, though how much autonomy you get depends on the firm you’re going into,” says Baker.

Baker also points out that the mantra that the middle ground is a hard place to be doesn’t necessarily hold true. “We have data that show you can be a mid-size player and do well,” he says.

Something more than a year after the global financial crisis began, we have an industry that is altered, but perhaps not as altered as it would have been if the dip had lasted longer.

The BlackRock/BGI deal has undoubtedly raised the bar, creating a mega-firm with its own self-branded market leader in the ETF sector. In Europe, the BNP Paribas/Fortis merger has created a  new regional leader. The French group is now the largest asset manager in Europe, though Lipper FMI’s Mackay suggests that Amundi – the new name for the merged Caam/Sgam unit – might steal that mantle in short order. 

The route forward is uncertain, however. O’Hanley suggests we are moving towards a classic barbell model, with a small number of multi-capable providers on one side and many small, single-strategy boutiques on the other – although this future was also routinely predicted before the crisis.

“Change will be in the middle,” says O’Hanley.

No doubt he’s right. However, it’s far from clear how that change will be achieved.

By Fiona Rintoul

Some years back, during a period of ‘negative economic growth’, the following joke was doing the rounds: middle-class people don’t become unemployed any more; they become consultants. The pretty clear implication was that consultants were pretty useless and that the US businessman Norman Ralph Augustine had been right when he said, “All too many consultants, when asked, ‘What is 2+2?’ respond,

‘What do you have in mind?’” The asset management industry is lavishly appointed with consultants. There are the Big Four (Deloitte, PwC, Ernst & Young, KPMG), all the management consultancies available to any other industry, and, increasingly, a battery of specialist consultants that cater exclusively to the needs of the asset management industry.

So, what is the point of all these consultancies? What exactly do they do?

It has to be said that consultants sometimes don’t help themselves. Who doesn’t cringe when they read about ‘blue sky thinking’ or – yawn – ‘sustainable long-term value creation’ in yet another wordy report that doesn’t really say very much. The more squillions of euros you’ve paid for the report, the bigger the cringe – or so I imagine.

This brings us nicely to what can be a key selling point for the smaller, specialist consultancies focused on the asset management industry – a group that is, one senses, something of a breed apart.

“The Big Four are expensive,” explains Nick Baker, executive director at London-based Alpha Financial Markets Consulting,  candidly. “We are quite a lot cheaper.”

However, cost is of course not the only factor that influences asset management firms to use these smaller specialists. In fact, the clients themselves don’t emphasise cost at all.

“Cost should be a factor for the asset manager but in practice it usually isn’t,” says Stephen Turner, BNP Paribas Securities Services. “If an asset manager is going to make a radical change to its operation, then paying a million or so to a consultant sounds like a lot, but they tend to do it.” 

BNP Paribas Securities Services itself recently shared a bill from Alpha with a client for a large seven-figure sum for managing the transfer of funds after the client acquired a large long-only business.

“Both ourselves and the customer were happy with the value we got,” says Turner, who emphasises that the benefit of using an outside consultant for this type of transition, where duties run to managing internal and external teams and making sure people attend meetings, can be quite subtle.

“The fact that they’re neutral is a huge advantage,” says Turner. “They can be like a golden thread running through the project making sure that the three companies are aligned.”

But what of the choice of a smaller, specialist consultant for the project rather than a larger firm? As a firm, BNP Paribas Securities Services uses both larger and smaller consultants. Larger consultants tend to be brought in for projects involving process reengineering or in-house projects.

Expert knowledge

For Turner, a key advantage of the smaller, specialist firms is their industry expertise. “The connection into asset managers and COOs is better,” he says.

This tallies with what the smaller consultants themselves see as one of their key selling points, particularly when compared with the Big Four. 

“We can’t compete with the Big Four in terms of scale and size but we know the investment management business inside out,” says Peter Ellis, managing director of the investment management consultancy Investit. “The Big Four sometimes draft in consultants from other parts of the business who are not asset management specialists.”

Raymond O’Neil, a founding member of Kinetic Partners, emphasises the fact that his firm has drawn people from all areas of the asset management business on to its team. “We have a broad expertise from across the industry,” he says. “If there’s difficult situation we understand what it is.”

And there are, of course, advantages to being small.

Turner emphasises flexibility.  “A firm such as Alpha FMC is quite lean,” he says. “With a firm of that size the team is very professional. Once a firm starts getting larger, the quality dissipates.”

Some say this is what happened to CSTIM, formerly Morse and now part of Navigant Consulting.

Another potential advantage of smaller firms is that they might be more willing to roll up their sleeves and get their hands dirty. 

Fred Ponzo, who recently left the technology consultancy NET2S after it was acquired by BT to set up his own consultancy, GreySpark, says that about half of what his firm does is advisory services with the rest being hands-on delivery.

“When we work for a client we have the ability to deliver what we are advising them to do. That’s why they come to us: we offer advice and implementation.”

Another advantage of using a specialist consultancy – and one that for some asset management firms can be crucial – is that using a smaller consultancy can make it easier for the asset manager to retain ownership of the project. 

“If you bring in Ernst & Young or KPMG, 50 people will come and they will own the project,” says Ken Fry, global head of IT & operations at Aberdeen Asset Management.

That’s why, although Aberdeen works with the Big Four on tax and auditing projects, it preferred the likes of Alpha FMC both for the Credit Suisse transition and for the earlier transition when it bought Deutsche Bank’s UK asset management arm. 

“That way you retain control,” says Fry. “If you don’t contain control that’s a problem.”

Of course, all of these consultancies are configured differently and offer a different spectrum of services. Investit and GreySpark are rather focused on IT issues, whereas Kinetic Partners offers what the Big Four offer and more, and aims to be a “one-stop shop boutique”. 

All about IT

However, the service offering of all of them has been affected by two key factors: the downturn and the increasing emphasis on IT. 

A firm such as Kinetic Partners, for example, which one does not perhaps immediately associate with IT solutions, recently launched the Kinetic Partners’ Risk and Valuation Services (RVS), which aims to provide fund managers with a total outsourced risk management solution. 

“A growing amount of what we do has an IT base,” says O’Neil. “We now have several offerings that are products rather than services.”

O’Neil sees valuation as a key area for the future and one where asset managers will look for more assistance. Accordingly, Kinetic Partners plans to expand its offering in this area.

“We are looking at acquiring businesses and expanding the risk service offering,” says O’Neil.

Meanwhile, at the more IT-focused Investit, Ellis has seen a rising interest in an outsourced IT management function since markets started to pick up in the third and fourth quarter of 2009 after the worst of the downturn was perceived to be over. Interest has come from specialist managers and hedge fund firms that aren’t big enough to have their own dedicated IT department. 

“Their world has become more complex,” says Ellis. “In hedge fund firms you have people who are IT literate but who don’t want to have anything to do with IT. It helps them if someone can take away the complete management of their IT needs.”

Another expanding area is benchmarking of both outsourced and in-house services. Alpha FMC offers a range of benchmarking services covering areas such as investment operations and IT, transfer agency, distribution, client service, product development and outsourcing. Benchmarking of outsourcers has been a key area this year.

��Benchmarking gives a very useful insight into the asset management business and how a company compares with competitors,” says Baker. “Companies use it on an annual basis to validate outsourcing deals.”

Ellis, whose firm Investit is also increasingly asked to evaluate existing outsourcing deals although it hasn’t traditionally done this in the past, agrees that it’s often a matter of validation. “Clients want benchmarking almost as confirmation that the service they are getting is in line with market practice,” he says. “They don’t necessarily want to move to another supplier. Sometimes they are looking for a reason to stay with their current supplier.”

In the future, Ellis sees outsourcing increasing further – no doubt with a concomitant increase in benchmarking.

“There will be a new wave of outsourcing in 18-24 months time but not for the same reasons as the last wave which was cost reduction,” he says. “The main reason people will outsource in the future will be cost avoidance. As people get rid of legacy systems they can avoid cost by outsourcing rather than upgrading.”

This is all part of a future asset management landscape that, depending on who you talk to, may also include a new wave of M&A, relocation to the likes of Switzerland and Ireland in search of a better work/life balance for employees and more focus on dealing with regulatory hurdles. 

Whatever the final shape of things to come, it seems these small, specialist consultancies will play an important role in Europe’s asset management industry of the future. Alpha FMC says there aren’t many big firms that it has not worked for. If you’re thinking, ‘They would say that, wouldn’t they?’ hear it instead from the horse’s mouth: “There are few companies that would look at outsourcing without using a consultant,” says BNPP Securities Services’ Turner.