The global fund industry – A future in flux: Part 1

20 Feb 2013

It’s been a tumultuous few years for everyone within the financial sector.  A whole raft of pressures continue to bear down on a sector already somewhat beleaguered by economic uncertainty and with each new year, new clients and new technologies bring new demands to work smarter and achieve more for less. 

At Calastone, we’re realistic about these challenges but we’re optimists, too.  Optimistic about the role that technology can serve in creating a profitable, stable future for fund management and for those who work within in, be they fund managers, distributors, transfer agents or financial advisers and wealth managers.

The next two blog posts will take a brief look at some of the key game changers that will drive the future of our industry.  We’ll return to most of them in more depth going forward but first, let us introduce four important themes that are influencing fund management today.

Margin squeeze creates a larger role for service providers

Between 2000 and 2009, 79% of net new monies flowed to funds which ranked within the lowest quartile for expense ratio.  As economic turmoil has made things tougher for everyone, the competition to attract and retain investors assets has grown fiercer than ever before.  Increasingly, investors are choosing to invest in funds which have the lowest expense ratios.

That leaves fund companies having to somehow ‘do more with less’ by finding smarter, cheaper and more efficient ways to do business. 

Reducing expense ratios relies on identifying new ways to drive productivity.  For many firms, that increasingly means taking advantage of external knowledge and consultancy. 

Whereas historically, internal investment in infrastructure may have made sense, or delivered IP that was worth the development costs, these days, many mutual fund companies are choosing to find service providers who can help them address market challenges in the most efficient way. 

At Calastone, we’re used to dealing with the UK’s largest fund managers each and every day.  We have a huge wealth of experience and expertise on which to call.  Furthermore, our relationships with the industry’s key platers means that it’s easier, and cheaper, for us to facilitate electronic processing than it would be for any single fund manager to reinvent its processes.

Our whole approach is based on removing the need for our customers to invest in new technology.  Rather than convince clients to adopt the latest message format or move to a new way of working that might well be soon surpassed, we work on the assumption that it’s better to simply let everyone communicate using the systems they’ve got. 

We want to remove all of the technical barriers to the automation of mutual fund order processing.

That will mean that anyone, anywhere can process electronic transactions and that anyone can benefit from what technology can offer, without having to transfer to new systems or invest capital expenditure.

Global expansion 

Few people can have escaped the fact that we’re living in a global world where everything and everyone is becoming connected.

Emerging global markets represent a great opportunity for new relationships and new business growth, but there’s a downside, too.  As new markets start to embrace new asset classes, each step forward can mean a step back when it comes to automation. 

Despite the progress that’s been made recently towards automating fund order processing, every time that new markets come on stream, the proportion of orders that are dealt with efficiently actually reduces.

That’s why, while most of the world has outgrown fax machines, there were still over six million faxes processed by transfer agents in Luxembourg and Dublin during the first half of 2011.

As cross border distribution expands, that number is actually increasing year on year.

New markets also bring new ways of doing business, new message formats and new IT infrastructures.

It’s unrealistic to envisage every single market adopting a common message format or using exactly the same processes so the priority has switched to technology that can help everyone exchange information using their chosen formats.

Calastone’s MD, Sebastien Chaker likens it to using a travel adaptor. Speaking to Asset Servicing Times, he explained:

“What Calastone is doing can be compared to what a travel adaptor does for the international traveller – it provides a simple, reliable and cost-effective way of electronically connecting fund distributors and fund managers irrespective of the chosen standard used by other parties.” 

Automation can save up to 60%

So, using an adapter rather than re-wiring – that’s the future for automation.  It’s the quickest route and it’s also the route guaranteed to do the most to relieve margin squeeze.

After all, cost is a major driver of automation.  Clients report saving up to 60% when they make the jump to automated messaging so, in a world where working smarter can help you acquire more clients and service them more cheaply the rewards for the entire industry are plain to see.....