46-48 FUND ADMIN jssgmaspnf:Layout 1 8/4/11 16:05 Page 46 FUND ADMINISTRATION Hard work at the coal face There is no denying it, 2010 was a tough year, according to our fund administration survey respondents. Nicholas Pratt finds out what sizeable challenges they faced Fund managers’ demand for product flow According to Catherine Brady, head of the European Union and the United States, placed pressure on custodian banks and fund services Emea (Europe, Middle East such as Ucits IV, Solvency II and the other providers of fund administration and Africa) at Citi, the principal challenge Alternative Investment Fund Management services throughout 2010 as the industry of last year was managing the new flow Directive. grappled with squeezed revenues. of product needs from asset management Fund administrators’ revenues were also Regulation and a general rise in complexity clients in the post-crisis environment, as under threat, says Tim Keaney, chief were also challenges. But at least fund flows well as understanding and interpreting executive officer at BNY Mellon Asset were up, Fund Europe ’s annual survey shows. the wave of new regulations coming from Servicing. “The persistent low interest rate 46 46-48 FUND ADMIN jssgmaspnf:Layout 1 8/4/11 16:05 Page 47 environment globally challenged all services such as FX overlay and FX funds support clients seeking distribution custodians’ net interest revenue. Securities were important. For others there was a opportunities in emerging markets. And in lending and FX revenues remain renewed focus by clients on managed 2011, it is highlighting the continued significantly below historic highs. accounts. Several administrators reported a improvements of these links, between “At the same time our clients continued to great demand for reporting services, whether Europe and emerging markets, in support of be challenged by ever-greater complexity – that be cross-border tax reporting (JP cross-border distribution via Ucits, as an new instruments, investment models, Morgan), online transfer agency reporting area of concentration. As Geoffrey Cook, distribution, and regulatory reform. This in (Northern Trust), Ucits risk reporting (BNY partner at Brown Brothers Harriman, says: turn challenged us to keep building the Mellon) or even environmental, social and “Particular decisions relating to the location flexible and scaleable solutions they need, governance (ESG) reporting (State Street). and use of management company which required significant dollar For those administrators focused more on passporting and a review of the application reinvestment in intellectual capital and new alternative managers, plenty of business was of product bifurcation between Ucits and technology. Meanwhile, margins continued concentrated on the sophisticated Ucits non-Ucits will become critical.” to be squeezed as clients sought to reduce market as well as the redomiciling of funds their own costs.” from offshore to onshore. There was also a Issues and challenges for 2011 Some administrators talk of a growing Net inflows confidence as markets rise again. On the positive side, net inflows were up “Existing clients are starting to look to for the year. The survey shows that the total create more innovative products and net inflow figure was $619.92bn ‘The persistent low services again,” says Andre le Roux, head of (€880.29bn). (This excludes State Street, interest rate business development at Maitland. which did not split out its administration Furthermore, clients want to get their new inflows from its custody inflows. State environment globally products to market as quickly as possible. Street's combined inflows were $2,036bn). challenged all Consequently, administrators will find that All but one of the respondents reported they need to innovate at a pace far greater positive net inflows. custodians’ net than in the past. There were 1,828 mandates won and 1,974 interest revenue’ While there is some optimism in terms of retained in 2010. There was a wide variation prospects for 2011, there is also a recognition in terms of asset size, client type and product among fund administrators that the type. The size of these mandates varied from challenges of 2010 will persist into this year, €0.094bn (Swedbank) to €202bn (Bank of not least the regulatory burden. “We must New York Mellon). And the client types need to provide lines of liquidity for hedge continue to keep pace with the evolving included the traditional (US mutual funds, funds and funds of hedge funds as noted by client complexity and challenges paralleled global fund managers, insurance companies Deutsche Bank AFS. “Raising capital in by regulatory challenges and ensure we and multi-national pension plans) to the 2010 was certainly very difficult for the small capitalise on the opportunities to provide a alternative (hedge funds, funds of funds and to mid-size manager which has in turn private equity). lengthened the launch time of new funds,” But the biggest variation was in the product says Mike Hughes, the managing director. types requested by both the traditional and alternative clients. For example, fund Destinations managers were increasingly looking for In terms of destinations, the most notable multi-asset strategies and exchange-traded development was the focus on funds while the alternative hedge funds were wider international distribution as seeking real estate funds, commodity trading administrators looked beyond the traditional advisers, bank debt and managed accounts. confines of Europe. This included both the established markets such as the Product development United States as well as the With such a wide array of investment popular emerging markets in strategies evident in the new mandates won Asia, the Middle East and by fund administrators, it was no surprise South America. that 2010 saw a large increase in the Developing links to these development of new services and products. markets is going to be a key In fact, so wide-ranging was the list of focus for administrators in 2011. products provided that it is difficult to pick Citi, for example, cited that a key any major trends. focus during 2010 was the establishment of For some administrators, FX-related links between Europe and Asia in order to 47 46-48 FUND ADMIN jssgmaspnf:Layout 1 8/4/11 16:05 Page 48 FUND ADMINISTRATION result, both for our clients and for ourselves,” of outsourcing other non-core aspects of says Marcel Guibout, Emea mutual fund their business [in addition to Ucits IV administration product head at JP Morgan ‘We anticipate an requirements],” says Pierre Cimino, member Worldwide Securities Services. increased demand for of the executive committee at Caceis. The implementation of Ucits IV is likely to The France-based administrator is not produce several such opportunities, says alternative Ucits and alone in this as many asset servicing Guibout, such as the production of the Key for more complex providers look to expand their outsourcing Investor Information Document (Kiid) and services beyond the traditional back- any other operational issues that might arise product types in the office functions, such as traditional in the early years of adoption. regulated environment, fund administration, and more into middle- This view is supported by Rob Wright, office functions such as valuations and global head of product and client segments in particular real estate reporting. This explains the focus on at RBC Dexia Investor Services. “The and private equity’ advanced performance and risk reporting implementation of Ucits IV will bring (Swedbank), as well as the development of significant change and challenges to the support services for securities lending, fund management industry and this collateral management, counterparty risk heightened regulation – particularly in management and also over-the-counter areas such as risk monitoring and derivatives trading and the challenges that compliance – may help protect and greater use of central counterparties, and maintain the reputation of Ucits funds and a greater need for independent valuations, increase their market attractiveness, will bring. fe particularly alternative investment managers looking to further develop fund products that are Ucits-compliant.” Administrators focused on the hedge fund market will continue to see the smaller funds struggle for capital, says Deutsche Bank’s Hughes, despite the fact that hedge fund indices have enjoyed a good start to 2011. “Smaller managers have started to get some traction as well. However, the challenge for them to grow will be significant given capital is flowing in a waterfall from the $5bn funds downwards to the sub-$100m funds.” For those alternative funds that do manage to raise capital, it is likely that the main area of demand will be in the alternative Ucits space, says André Valente, who heads fund services business development, client relationships and marketing at UBS. “We anticipate an increased demand for alternative Ucits and for more complex product types in the regulated environment, in particular real estate and private equity.” Outsourcing Given the pressures facing fund managers in terms of regulation and reporting, allied with market conditions that are still creating relatively little in terms of returns or capital flows, it is no surprise that administrators are looking to promote the benefits of outsourcing to the market. “Another challenge in 2011 is convincing the asset management industry of the benefits 48 50-51 Admin tables jssgmasp:Layout 1 8/4/11 16:06 Page