A thriving market
05 August 2020
In the US funds space, industry experts predict continued growth as well as interest from advisors looking to increase distribution within the US while technological innovation remains key
Image: shaun_jeffers/shutterstock.com
The fund administration industry has continued its growth momentum in the US. Although there is a lot of competition in fundraising, higher expectations from investors, and challenges related to the ongoing pandemic, there are opportunities to be captured in this space, particularly around utilising technology into processes. Industry experts suggest that there is continued strong interest from advisors based outside of the US looking to launch fund products to increase their distribution within the US.
According to Ryan Burns, head of global fund services, Americas, for Northern Trust, this has picked up considerably following the initial months of the pandemic and covers a number of different fund vehicles. Burns explains that in the US fund administration industry, unregistered funds and partnership structures continue to offer a faster speed-to-market for advisors at a lower cost to launch.
Meanwhile, there is continued interest in US mutual funds. Burns notes that the breadth of different investors that can be supported led Northern Trust to launch the Datum One Series Trust, their second platform vehicle which is a turn-key solution to launch ’40 Act mutual funds in the US.
Additionally, collective investment trusts (CITs) continue to be seen as a viable and attractive vehicle for pension investments, with a number of firms looking to leverage this structure to support distribution into this space.
Burns comments: “So while the pandemic slowed a number of initiatives for firms, we are excited to see our clients returning to strategies that address their US distribution goals via new vehicles.”
Trending in America
Looking at the US fund space, Fred Steinberg, managing director, North America, SANNE, observes various trends, including a proliferation of new asset managers trying to raise first-time funds, leading to more competition in fundraising.
He explains that this competition is also leading to existing fund managers looking to expand their product offerings to entice new investors.
Another significant trend has been the greater use of technology within the US fund administration industry.
Jay Peller, managing director, Citco Fund Services, says it has been key to ensuring that administrators have the wherewithal to support the ever increasing level of complexity of a hedge fund’s operations and takes many forms.
He says: “It includes tools to capture and price the portfolio in response to increased complexity and trading volumes within the portfolio; data services to meet increasing data requirements from the manager to support their reporting needs; risk, treasury and collateral tools to support additional middle office and back office services; and tools to automate communication with investors and to improve the investor experience.”
Meanwhile, front-end reporting has also moved forward and alignment to front-end technology is now essential as managers and investors alike need access to real time data on the go, Peller observes.
Another trend emerging is automation, particularly in the areas of analytics and investor communications.
The pace at which automation is happening continues to accelerate, according to Peller, in terms of data capture, the core engines used for processing and the front-end tools used for reporting.
He says: “Managers and investors expect straight-through reporting solutions and front-end reporting excellence, with real time mobile data on the go.”
Automation has been a prominent theme in recent years, Peller explains, and is seen as a trend that will continue to evolve.
Burns also weighs in suggesting that while not a growing trend, Northern Trust continues to hear questions from clients about the potential of accepting US investors into European funds.
He explains that it could be more efficient for some asset managers to utilise a single fund structure for both European and US investors.
However, Burns notes that the execution would be “quite complex and requires a significant amount of advance review and understanding, particularly from a tax perspective”.
Burns highlights that, alternatively, Northern Trust continues to see European asset managers looking to expand in the US distribution more broadly.
He says: “This investment into a US-domiciled product may allow firms to bring their investment strategies directly to US investors in a way that supports a strong business case to launch a new fund.”
Taking the bitter with the sweet
In terms of the challenges for asset managers in the US, Steinberg says there is still a lot of dry powder from existing funds chasing the same population of investments, leading to more challenges around pricing, although it should help with potential sales.
There are also higher expectations from investors, especially institutional partners, which is coming up in upfront due diligence requests and ongoing reporting needs, according to Steinberg.
Elsewhere, Peller notes that a key challenge for Citco’s clients is how to manage the increased flow of investor communications in a remote working environment.
Both investment managers and investors want to continue receiving the information they need to help them make the right decisions, which Peller explains is even more crucial during this period of uncertainty.
COVID-19 has forced many people to work from home, with this theme still ongoing. Peller explains that the move to remote working also revealed that some managers were seeing issues with cash management due to expired usernames, passwords and tokens to banking portals.
He says: “We had previously recognised the need amongst clients to replace slow and inefficient manual processing with immediate assurance that important payments have correctly occurred. We have also seen managers facing some heightened difficulties around managing increased trading volumes, reconciliations, collateral management and over the counter settlement.”
Additionally, Steinberg stipulates that the COVID-19 pandemic has led to greater challenges around liquidity (distributing cash to investors) as asset managers do not want to sell their investments into a down market.
“Portfolio companies may be having their own liquidity challenges that work their way back to the asset managers, potentially increasing the need for leverage at the fund level. Depending on the asset type, there may be more challenges to determining proper valuations in the current environment,” Steinberg comments.
Meanwhile, Burns also notes that increasing costs and shrinking fee margins are some of the challenges asset managers in the US are facing.
As the associated costs increase, so does the pressure to be more efficient and focused on their spending on technology, data, and staff, according to Burns.
He continues: “The firms that are finding success are able to balance their growth while also reducing costs by leveraging new technology and outsourcing solutions to enhance operational efficiencies. This may allow asset managers to focus on core functions such as idea generation and portfolio construction while realising benefits of digitisation and scalability.”
“However, by utilising a combination of new technology, and outsourcing non-core activities like trade execution or middle-office, firms are better positioned to improve their investment process and scale their operating models to greater efficiency,” Burns comments.
Despite challenges such as increasing costs, change to regulation, and the turmoil of the unprecedented ongoing pandemic, the US also has some opportunities on the horizon that can position it for further growth. Technological innovation is an area where the US can hope to capture further opportunities.
Peller expects the future to continue to be about automation, data and more streamlined communications. He also explains that providing golden copy data to an investment manager, when and how they need it in a form that is reconciled and sufficiently enriched with other third-party data will continue to be “the holy grail”.
Meanwhile, further reducing the manual element of the subscription and redemption process is also in the near future, according to Peller, “this is as we continue to build on the exciting technologies that are in place today”.
“There is no reason that an alternative fund manager cannot have an online application form covering their entire fund product suite, which an investor can complete at the outset of a client relationship and then all other transactions can be straightforward. Excellence in technology will continue to be a non-negotiable requirement both now and into the future,” he adds.
All hands on deck
So with the opportunities nestled in among various challenges, how can we expect this space to develop over the next 12 months?
At Northern Trust, Burns says they expect to see continued growth in the US funds market, with clients focused on having the right product lineup and the right operating models in place to meet the continuing cost pressures, regulatory changes and investor demands.
Burns outlines: “We do not expect the market and operating model for our clients to remain static, rather we expect the demands for data and transparency from both regulators and investors to continue to increase.”
Elsewhere, he predicts the trend of outsourcing non-core activities will continue with asset managers looking to partner with service providers like Northern Trust to operate more efficiently and to better utilise their resources to focus on core activities of the investment process.
Burns adds: “Outsourcing of middle-office services continues to generate high levels of interest and the next wave of outsourcing, trade execution, is on the radar for a number of asset management firms. The ability to reduce direct costs of staff and technology through these outsourcing services to a firm like Northern Trust will allow asset managers to continue to focus their spend on the activities that provide the most return and increased distribution into the US fund lineup will benefit.”
According to Ryan Burns, head of global fund services, Americas, for Northern Trust, this has picked up considerably following the initial months of the pandemic and covers a number of different fund vehicles. Burns explains that in the US fund administration industry, unregistered funds and partnership structures continue to offer a faster speed-to-market for advisors at a lower cost to launch.
Meanwhile, there is continued interest in US mutual funds. Burns notes that the breadth of different investors that can be supported led Northern Trust to launch the Datum One Series Trust, their second platform vehicle which is a turn-key solution to launch ’40 Act mutual funds in the US.
Additionally, collective investment trusts (CITs) continue to be seen as a viable and attractive vehicle for pension investments, with a number of firms looking to leverage this structure to support distribution into this space.
Burns comments: “So while the pandemic slowed a number of initiatives for firms, we are excited to see our clients returning to strategies that address their US distribution goals via new vehicles.”
Trending in America
Looking at the US fund space, Fred Steinberg, managing director, North America, SANNE, observes various trends, including a proliferation of new asset managers trying to raise first-time funds, leading to more competition in fundraising.
He explains that this competition is also leading to existing fund managers looking to expand their product offerings to entice new investors.
Another significant trend has been the greater use of technology within the US fund administration industry.
Jay Peller, managing director, Citco Fund Services, says it has been key to ensuring that administrators have the wherewithal to support the ever increasing level of complexity of a hedge fund’s operations and takes many forms.
He says: “It includes tools to capture and price the portfolio in response to increased complexity and trading volumes within the portfolio; data services to meet increasing data requirements from the manager to support their reporting needs; risk, treasury and collateral tools to support additional middle office and back office services; and tools to automate communication with investors and to improve the investor experience.”
Meanwhile, front-end reporting has also moved forward and alignment to front-end technology is now essential as managers and investors alike need access to real time data on the go, Peller observes.
Another trend emerging is automation, particularly in the areas of analytics and investor communications.
The pace at which automation is happening continues to accelerate, according to Peller, in terms of data capture, the core engines used for processing and the front-end tools used for reporting.
He says: “Managers and investors expect straight-through reporting solutions and front-end reporting excellence, with real time mobile data on the go.”
Automation has been a prominent theme in recent years, Peller explains, and is seen as a trend that will continue to evolve.
Burns also weighs in suggesting that while not a growing trend, Northern Trust continues to hear questions from clients about the potential of accepting US investors into European funds.
He explains that it could be more efficient for some asset managers to utilise a single fund structure for both European and US investors.
However, Burns notes that the execution would be “quite complex and requires a significant amount of advance review and understanding, particularly from a tax perspective”.
Burns highlights that, alternatively, Northern Trust continues to see European asset managers looking to expand in the US distribution more broadly.
He says: “This investment into a US-domiciled product may allow firms to bring their investment strategies directly to US investors in a way that supports a strong business case to launch a new fund.”
Taking the bitter with the sweet
In terms of the challenges for asset managers in the US, Steinberg says there is still a lot of dry powder from existing funds chasing the same population of investments, leading to more challenges around pricing, although it should help with potential sales.
There are also higher expectations from investors, especially institutional partners, which is coming up in upfront due diligence requests and ongoing reporting needs, according to Steinberg.
Elsewhere, Peller notes that a key challenge for Citco’s clients is how to manage the increased flow of investor communications in a remote working environment.
Both investment managers and investors want to continue receiving the information they need to help them make the right decisions, which Peller explains is even more crucial during this period of uncertainty.
COVID-19 has forced many people to work from home, with this theme still ongoing. Peller explains that the move to remote working also revealed that some managers were seeing issues with cash management due to expired usernames, passwords and tokens to banking portals.
He says: “We had previously recognised the need amongst clients to replace slow and inefficient manual processing with immediate assurance that important payments have correctly occurred. We have also seen managers facing some heightened difficulties around managing increased trading volumes, reconciliations, collateral management and over the counter settlement.”
Additionally, Steinberg stipulates that the COVID-19 pandemic has led to greater challenges around liquidity (distributing cash to investors) as asset managers do not want to sell their investments into a down market.
“Portfolio companies may be having their own liquidity challenges that work their way back to the asset managers, potentially increasing the need for leverage at the fund level. Depending on the asset type, there may be more challenges to determining proper valuations in the current environment,” Steinberg comments.
Meanwhile, Burns also notes that increasing costs and shrinking fee margins are some of the challenges asset managers in the US are facing.
As the associated costs increase, so does the pressure to be more efficient and focused on their spending on technology, data, and staff, according to Burns.
He continues: “The firms that are finding success are able to balance their growth while also reducing costs by leveraging new technology and outsourcing solutions to enhance operational efficiencies. This may allow asset managers to focus on core functions such as idea generation and portfolio construction while realising benefits of digitisation and scalability.”
“However, by utilising a combination of new technology, and outsourcing non-core activities like trade execution or middle-office, firms are better positioned to improve their investment process and scale their operating models to greater efficiency,” Burns comments.
Despite challenges such as increasing costs, change to regulation, and the turmoil of the unprecedented ongoing pandemic, the US also has some opportunities on the horizon that can position it for further growth. Technological innovation is an area where the US can hope to capture further opportunities.
Peller expects the future to continue to be about automation, data and more streamlined communications. He also explains that providing golden copy data to an investment manager, when and how they need it in a form that is reconciled and sufficiently enriched with other third-party data will continue to be “the holy grail”.
Meanwhile, further reducing the manual element of the subscription and redemption process is also in the near future, according to Peller, “this is as we continue to build on the exciting technologies that are in place today”.
“There is no reason that an alternative fund manager cannot have an online application form covering their entire fund product suite, which an investor can complete at the outset of a client relationship and then all other transactions can be straightforward. Excellence in technology will continue to be a non-negotiable requirement both now and into the future,” he adds.
All hands on deck
So with the opportunities nestled in among various challenges, how can we expect this space to develop over the next 12 months?
At Northern Trust, Burns says they expect to see continued growth in the US funds market, with clients focused on having the right product lineup and the right operating models in place to meet the continuing cost pressures, regulatory changes and investor demands.
Burns outlines: “We do not expect the market and operating model for our clients to remain static, rather we expect the demands for data and transparency from both regulators and investors to continue to increase.”
Elsewhere, he predicts the trend of outsourcing non-core activities will continue with asset managers looking to partner with service providers like Northern Trust to operate more efficiently and to better utilise their resources to focus on core activities of the investment process.
Burns adds: “Outsourcing of middle-office services continues to generate high levels of interest and the next wave of outsourcing, trade execution, is on the radar for a number of asset management firms. The ability to reduce direct costs of staff and technology through these outsourcing services to a firm like Northern Trust will allow asset managers to continue to focus their spend on the activities that provide the most return and increased distribution into the US fund lineup will benefit.”
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