What does the future hold for fund management? The question is important not just for fund managers but also for those whose business it is to provide support to them.
“One assumes there will be fewer fund managers around, but the demand for funds will still be there,” says Paul North, head of product management for Europe, the Middle East and Asia at Bank of New York Mellon Securities Services. “It’s an ever-
This may sound as though life will be simpler for the custodians who safeguard the funds, but in fact complexity is likely to increase on the distribution end of the business, as open architecture and globalisation mean those fewer, larger fund manufacturers gain business from more distributors all across the world.
These developments are only viable if every level of the fund value chain can be automated, a long-sought goal in the industry known as straight-through processing (STP). Trade orders and execution still frequently use fax or phone, expensive processes subject to human error at a number of points. Even where STP has been implemented, it uses one of a number of electronic messaging systems, none of which are interoperable.
This can seem a daunting prospect for a fund manufacturer looking at green fields on the other side of the world.
“You’re the manufacturer of a product – what do you want to do? You want to sell the product anywhere,” says Kevin Lee, chief executive of Calastone, a transaction crossing network that is attempting to make the STP gap easier to fill. “Fantastic, but if you implement that and the cost outweighs the benefit, you’re restricted from moving forward.
“You need interoperability to bring the scale you need to make it efficient.”
“It’s an ever-increasingly complex world, the distribution space,” says Mr North. “It’s becoming much more of a global space.” The globalisation of the industry is being driven partly by the search for business expansion by fund manufacturers but also by the near-universal popularity of the Ucits structure, the European fund structure that has also gained significant market share in Asia.
“The Ucits product has been a fantastic platform for growth,” he says. “But there are still a lot of hurdles to get over in getting money into a Luxembourg fund.”
For custodians being asked to provide custody services for example to funds manufactured in Europe and distributed in Asia, on a basic level, this means bridging language and time zone gaps. Then there are local reporting and regulatory issues. All this, plus global STP could seem daunting.
The larger custodians such as BNP Paribas Securities Services and Bank of New York Mellon may already have the infrastructure in-house to manage whatever messaging system a distributor (or a manufacturer) is using, but nevertheless the development of Calastone is of interest to them as it provides opportunities for competition to come into the market from unexpected sources.
“The sub-custodians perhaps could expand their market – would the custodian then retract?” suggests Mr Lee. “Then there is a question of the wrap platforms [which started as fund supermarkets for independent financial advisers]. Can a platform survive just providing domestic services?
“Do the wrap platforms become custodians or do custodians become wrap platforms?” The question is not just whistling in the dark, as Calastone recently signed up Cofunds as a client. The UK-based Cofunds started as a platform offering IFAs access to a broad range of funds, but it now has an institutional offering that uses Calastone to provide the IT interface between itself and the investors.
It is acting as an aggregator, a layer in fund distribution that is growing in significance, and therefore becoming a major consideration for the custodians.
“More and more you have aggregation and the orders are bigger and bigger,” said Frédéric Perard, head of global fund services product at BNP Paribas Securities
“The number of orders has strongly reduced, even if orders are coming in by fax.”
Although fewer but larger orders may reduce the cost of processing funds, it increases the possible loss from input errors.
“There is a strong movement to automate things,” says Mr Perard. “There is a strong incentive on the cost side, but also on the risk side.”
Cofunds, says Mr Perard, has become a fully integrated fund distribution support service. “No one was really in that landscape before. There is a true convergence of business models.”
Cofunds’ innovation has piqued the interest of the larger players whose sandpit it has entered. “We are looking at the same model,” says Mr Perard. “To make it work, you really have to look at the whole value chain.”
The complexity in the value chain typically comes from the distributors, who “like to dream up all sorts of remuneration structures”, says Mr North. Since Cofunds is owned by asset managers, it could change the balance of power between distributors and manufacturers, with implications for the custodians who offer services to both sides.