FT Mandate December 2008
Fund administrators have massively broadened their global reach but no one house can provide all the services required in every corner of the world, and whether they admit it or not, they still require local partners. By Gerry O’Kane.
The idea that Asia and China might be immune to a sneeze in the US economy has been proved incorrect and cross-border asset flows continue to run like a raging torrent.
Paradoxically this fact has strengthened the will of large asset servicing houses to parade themselves as a global one-stop shop for fund managers: the outflow of money from emerging markets in recent months has been more a case of Western institutions bringing money home, than a failure in the local investment economies.
“Our clients want to access the growing wealth in the Middle East and Asia and they see these markets as doing relatively better in the coming years than Europe or the US,” agrees Tim Keaney, head of asset servicing at BNY Mellon.
But can the fund administrators, large or small, be all things to all people globally? While global reach has long been a message of Neeraj Sahai, global head of securities and fund services at Citi, it has little presence in the Middle East, for example, where fund managers are panting to get a look-in.
Lock down any of the major securities servicing houses to answering whether they can provide this all-encompassing global answer for fund administration and you’ll get comments ranging from how blue the sky is to a semantic debate on what fund administration is.
The reality is that no house can provide all the services often demanded as part of an administration package in every jurisdiction in the world. But some are more pragmatic in facing up to limitations.
“You can’t be everywhere but you can position yourself to take advantage of growing trends,” explains Mr Keaney. “The larger business of fund administration involves economies of scale – no-one will make money in Vietnam and the small guys will dominate the market until there is a macro-economic push into the wider market.”
There is no doubt, however, that the industry is getting there. As John Campbell, senior managing director of investor management services at State Street points out, the sector has come a long way since the 1970s and 1980s when fund administration was almost exclusively a domestic-only affair. “By 2001 we were looking at a shake-out, losing fragmentation and inefficiencies and funds were beginning to look for regional players,” he says.
Custody came first
It has also to be remembered that for the players with the larger reach fund administration often came with custody: if there was no custody contract, they didn’t want to know about the administration. And it was custody that took the first global role.
But like custody (and this is where the global one-stop shop model becomes hazy)to compete in these markets, add-on services both became desired by fund managers and offered as incentives by the administration firms. Should the international fund manager want to move from a regional presence to more global, the desire in taking along the global custodian was one of confidence and other services often followed.
“When you’ve got a close client-relationship you go where the client goes, domestic to regional to global,” observes Mr Campbell. He points to Pimco emerging from the Californian marketplace to take a more global position.
In some circumstances these clients may demand services that attach to administration and custody including transfer agency and everything from securities lending to collateral management. Local suppliers can rarely meet these demands.
“You can have a global contract on funds, but in one country or another operate with a local partner,” explains Toby Glaysher, head of global fund services, EMEA for Northern Trust.
This step-by-step approach is one undertaken by all administrators whether they admit it or not. Mr Keaney agrees expansion follows or predicts demand. “Over the last few years we’ve done it organically, through partnerships or takeovers.”
“It’s a series of moves as clients become more open about their own product development and if you’re not there and they have a requirement, they’ll find someone who can fulfil it and that may be a risk to your longer-term business,” adds Mr Keaney.
One way providers have found in playing the global fund administration card is by following the sun, multiple centres each passing on the work that needs to be done, although this is dependent on a single platform.
“Technology is the first pre-requisite of being in business, you need it to support your clients and your costs,” agrees Mr Campbell.
Moving around the world
Offshoring also helps to keep costs low in order to remain competitive (although frequently the fund administration business is seen as a loss-leader to sell other services). GlobeOp, a specialist in hedge fund administration uses an operation in India where they have trained people in OTC administration and argues that with 80 per cent of hedge funds registered in the Cayman Islands and institutional in sales, it too can be a global one-stop shop.
“It’s a global operating model but a single platform based in different centres. Clients of UK funds investing in the Far East can have the net asset value following Asian close and for the UK morning by moving the processing around the world,” says Mr Glaysher at Northern Trust.
What does put the kibosh on both this model and any claim to global presence, is that many markets still demand fund administration, including valuations, be done within the jurisdiction it is registered or sold.
The success of Luxembourg and Dublin in becoming financial centres is not that they have any size of fund management or investment bank business, but in that they prepared for Ucits III and hedge funds, allowing funds to easily domicile while demanding that all administration functions must be done where the fund is domiciled. In other emerging markets these restrictions are even greater.
Ucits global reach
But the Ucits III label has its advantages too, especially in Asia. While Ucits III was originally focused on EU opportunities, it is having knock-on effects elsewhere boosting the need for international reach.
“The reality is that a Ucits III product has a perceived stamp of quality, especially in markets where the local regulatory regime does not always inspire confidence,” observes Toby Glaysher. It is fulfilling that pan-Asian role by default.
The result of that single factor has pushed fund managers to sell their offerings there, broadening the reach and demanding support from the administrators and securities servicing companies they know best.
And once the eye was on Asia, other opportunities emerged. The problem for the fund administrator there is that there can be many idiosyncrasies in Asian markets, from tax legislation to the fact that many processes remain manual. Often the fastest way to hit the ground running is to partner locally, eventually leading to takeover or buyout: again a global model serviced locally when needed.
The new investment landscape of the past few months also impacts administration, presenting growing opportunities. “We’re seeing a lot of activity and a lot of nervousness in the last few months with clients wondering what the shape of the new map might look like and simply wanting consistency and low risk,” observes Mr Campbell.
Indeed for those investment banks whose prime brokerage arms reached into the administration market, customers don’t like all their eggs in one basket. Pricing and validation is separating.
“It’s certainly true in the hedge fund sector,” says Hans Hufschmid, CEO at GlobeOp. “They don’t want their administration exposed to illiquid assets and they’re taking another look at their counterparties.”
“Now funds are looking to rationalise, looking to save costs. There are lots of big RFPs [requests for proposals] out there as they look to move from fixed costs to variable,” adds Mr Glaysher. While it should be no surprise that both the hedge fund and mutual fund landscape is shrinking, a desire to again cut costs and find new markets means the opportunities for new fund administration business is high and not only in traditional markets.
INVESTMENT OPERATIONS OUTSOURCING
Seeking outsourcing solutions is back on the map. The question is what form is it going to take?
Tim Keaney, head of asset servicing at BNY Mellon, admits that while it’s neither his desire to have administration without custody or provide parts of an administration service, it’s a route he’d take if future business was a possibility or maintaining relations with an existing client. “We’re seeing an uptick in in interest in outsourcing the middle office (for those under $10bn (€7.8bn)) from clients who have so far only used us for transfer agency,” he says. He sees the sector going through a similar process of consolidation as did custody years ago.
As the larger securities servicing businesses, especially the trust banks, seek a global position they’re happy to start with component outsourcing and wait for the big contract.
But it seems in the search to become the global all things to all people, one-stop shop, lift-out is not dead, at least in the Asian market. “Lift-outs as a method of transitioning business is not viable…. unless you get something else, expertise or systems and I’m specifically thinking about Asia,” says Mr Glaysher.
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