A new way of thinking
16 Sep 2020
As the selection of funds continues to grow, the fund services space is continuing to evolve as client expectations change, especially given the current pandemic
Image: 3d_kot/adobe.stock.com
Like a child in a candy shop with lots of sweets, an investor has a wide selection of funds to choose from. There is a wide range of funds in the market including hedge, private equity, real estate, venture capital, and digital assets. Once an investor has chosen an investment fund and listed its goals, risk, and fees, a fund servicer oversees the fund and decides which securities it should hold, in what quantities, and when the securities should be bought and sold. While trends in fund servicing are very much business as usual (BAU), according to experts, the future of fund servicing will be based around reimagining the way fund service providers work in light of the ongoing pandemic. This comes as the lockdown at the start of the year forced a lot of people into working from home.
In terms of clients, experts say their expectations are changing. In addition to this, the ongoing pandemic has shifted their way of thinking; with new factors stepping in influencing their decision for selecting fund and asset services providers. Indeed, resilience has become a key factor in this sense.
Rob Lowe, head of business development UK at Pictet Asset Services, says: “In terms of investments, we are seeing a continued shift towards other asset classes: clients are moving away from plain vanilla securities towards private assets, typically illiquid, which offer a longer investment time horizon and decorrelation with traditional indices.”
“Low or negative interest rates on cash and fixed income also favour private asset allocation for cash?rich investors, and now private equity or real estate have become part of a standard asset allocation for institutional who are more relaxed about lock?up clauses, reduced redemption frequency and gating,” Lowe says.
However, Lowe points out that small size or first-time funds are struggling to raise money. In times of uncertainty, investors feel more comfortable with well-established brand names and the safety of large assets under management (AUMs).
Christina McCarthy, regional head of fund services, Europe, Maples Group, observes that in general, established managers are able to continue to attract new capital as investors seek proven players, and as investors have greater limitations in performing diligence on new managers as a result of the COVID-19 pandemic.
McCarthy explains that a continued influx of new or amended regulations — including the Cayman Islands Private Funds Law, the multi-jurisdictional expansion of anti-money laundering/know-your-customer requirements, and the evolution of Alternative Investment Fund Managers Directive, UCITS and Markets in Financial Instruments Directive regulations, among others — have created a challenging environment for managers.
“Given these dynamics, it is clear that fund servicing is expanding even more beyond traditional administration as managers review their operations and seek providers with operational, compliance and technology capabilities that are on-par with or exceed the capabilities of their existing in-house solutions,” McCarthy says.
An administrator with a commoditised service offering won’t be successful in this type of environment, according to McCarthy.
She says: “Good administrators will provide the operational backbone that enables an investment manager to succeed, adding value as they integrate with and play a pivotal role in the manager’s overall operational function. This approach, however, can often be difficult to find and managers are becoming more discerning; they are now more prepared than ever to engage with new providers who are willing to tailor their solutions to their needs.”
With this backdrop in fund servicing, industry experts explain more about client trends and how the pandemic is impacting this space.
Consolidation
One prominent trend is the consolidation of fund service providers, which relates to the merger and acquisition of many smaller companies into a few much larger ones. While some experts say there is a pattern of consolidation across the market, others say this is happening less frequently.
Patric Foley-Brickley, managing director, fund services, Maitland, stipulates that consolidation will most likely happen around the edges, potentially where the larger providers want access to a particular market sector, and they can either buy it or build it.
He explains: “Often it will be much easier to buy into a smaller operation with established critical mass and associated profitability, than it is for them to build it themselves. There is likely to be some consolidation on the periphery involving mergers and takeovers of the smaller providers. Smaller providers will either grow to the point where they are substantial enough to acquire, or not so successful in which case they may get acquired.” It has been observed that consolidation has been driven by the influx of private capital, as record amounts of dry powder seek investments.
While an acquisition or merger may create synergies or economies of scale, one potential consequence may be a drop off in service standards, cautions Mark Weir, regional head of fund services, Americas, Maples Group.
Weir says: “In these scenarios, staff — typically at a reduced number — are tasked with trying to effectively transition all functional and operational areas of the business in addition to continuing to service clients.”
Generally speaking, this is not an environment that is conducive to success and takes significant time and resources to achieve, according to Weir.
“In other cases, some providers don’t even bother trying to homogenize services and systems, instead keeping them very siloed. Either way, it can result in inefficiencies for the client,” he adds.
Also weighing in on this, Srikumar Te, global head of fund solutions, Apex comments: “Over the last six to eight years the industry has witnessed steady stream corporate consolidation and divestment activity and even in this environment we see pockets of activity though the volume of such activities has slowed down this year. However, we continue to see new entrants into the market who seek to carve out a single market niche for themselves.”
More for less?
Evolving client expectations is another prominent trend in this area, with some clients wanting more for less.
Clients will always expect more for less, according to Foley-Brickley because of the constant build-out of features, functions and capabilities. He explains: “Rarely are we able to monetise these developments directly.”
Foley-Brickley notes that the majority of enhanced functionality and the related technology development necessary to support this enables providers to keep fees broadly the same.
He adds: “As in any industry, as products become more commoditised, providers are able to command less of a premium and prices will fall. Therefore, you must keep developing your product to continuously add value to maintain competitiveness and revenue margins.”
Pictet’s Lowe says clients expect providers to offer solid digital capabilities, improved data analytics (especially for fund distribution), to provide or enable regulatory assistance and to offer support on new products and services, for example, environmental, social, and corporate governance (ESG).
The market has evolved to a point where managers see asset servicers as an extension of their business that covers trading, middle office etc.
Lowe suggests clients also expect more tailored options to fit their needs, and in some cases unbundled services.
He says: “As per the general trend between clients and providers, transparency continues to be important; for example, regulatory costs on the provider should be openly discussed with the manager as this impacts investors.”
Weighing in on this, James Ferguson, head of Americas at Intertrust, notes that clients have more time to think at the moment and that while there’s more communication, not necessarily more demands.
Ferguson observes that the services business is seeing requests for new products. He says: “It’s as if the pandemic has allowed for more creative thinking, and Intertrust is working on new services and new ideas.”
Similarly, Srikumar Te, global head of fund solutions, Apex, also says that he has not seen a major change in client expectations.
“While clients have been very understanding given this pandemic has impacted everyone alike – we have not seen a major change in their expectations.”
However, Te explains in some instances, clients have requested an increased level of support and reporting especially around business continuity planning/disaster recovery plan, controls framework as they themselves build confidence with their investor base.
He comments: “As we have a presence in Asia, we were able to learn from their early experience of the pandemic and implement business continuity planning for clients in the rest of t he world.”
“We created support centres covering various time zones across the globe to effectively support our client service offices which have worked to our advantage.”
Effects from the pandemic
The pandemic has caused clients to place more trust in their fund services providers.
Lionel Nicolas, partner PwC Luxembourg, explains that PwC engaged in a ‘conversation with the industry’ in April and May this year, to assess that very question, told through the eyes of those CEO’s at the ‘front line’ of the crisis.
Nicolas notes: “The report identified that the service provider/client relationship is a partnership in a crisis, and a ‘master/slave’ relationship just does not work. That can become a permanent realisation, with clients more trusting and respectful of what their service providers delivered in such a difficult circumstance.”
For people, it was observed that productivity levels remained at similar levels to office-based working, but perhaps more because of adrenaline and confinement allowing people to work more hours.
Regarding technology, the PwC report identifies that much of the technology supporting a rapid shift to home-based working already existed within the firms but was under-utilised. Nicolas comments: “Fund service providers learned an important lesson around procurement and deployment of technology is in its adoption rate, not deployment success.”
In addition, many reflected on how they may rapidly switch to cloud-based platforms, with its computing power, capacity, and variable cost benefits compelling.
Looking at the operating model, key findings from the report indicates the old notion of a business continuity planning recovery site is now redundant and rewritten around home-based working.
Also looking at the pandemic impact, Intertrust’s Ferguson identifies that stability and even extreme trading in utilities, technology and bio sectors increased.
“Funds in these sectors have done well, compared to those in the fixed income space. Resilient companies with the work from home ability, the workflow and the client service mentality have persevered well. Clients will pay for quality if they see it. “
“At Intertrust we’re working hard on global clients’ needs given the volatility in different regions, offering bundling of services, simplified reporting and synergies where possible,”
In terms of clients, experts say their expectations are changing. In addition to this, the ongoing pandemic has shifted their way of thinking; with new factors stepping in influencing their decision for selecting fund and asset services providers. Indeed, resilience has become a key factor in this sense.
Rob Lowe, head of business development UK at Pictet Asset Services, says: “In terms of investments, we are seeing a continued shift towards other asset classes: clients are moving away from plain vanilla securities towards private assets, typically illiquid, which offer a longer investment time horizon and decorrelation with traditional indices.”
“Low or negative interest rates on cash and fixed income also favour private asset allocation for cash?rich investors, and now private equity or real estate have become part of a standard asset allocation for institutional who are more relaxed about lock?up clauses, reduced redemption frequency and gating,” Lowe says.
However, Lowe points out that small size or first-time funds are struggling to raise money. In times of uncertainty, investors feel more comfortable with well-established brand names and the safety of large assets under management (AUMs).
Christina McCarthy, regional head of fund services, Europe, Maples Group, observes that in general, established managers are able to continue to attract new capital as investors seek proven players, and as investors have greater limitations in performing diligence on new managers as a result of the COVID-19 pandemic.
McCarthy explains that a continued influx of new or amended regulations — including the Cayman Islands Private Funds Law, the multi-jurisdictional expansion of anti-money laundering/know-your-customer requirements, and the evolution of Alternative Investment Fund Managers Directive, UCITS and Markets in Financial Instruments Directive regulations, among others — have created a challenging environment for managers.
“Given these dynamics, it is clear that fund servicing is expanding even more beyond traditional administration as managers review their operations and seek providers with operational, compliance and technology capabilities that are on-par with or exceed the capabilities of their existing in-house solutions,” McCarthy says.
An administrator with a commoditised service offering won’t be successful in this type of environment, according to McCarthy.
She says: “Good administrators will provide the operational backbone that enables an investment manager to succeed, adding value as they integrate with and play a pivotal role in the manager’s overall operational function. This approach, however, can often be difficult to find and managers are becoming more discerning; they are now more prepared than ever to engage with new providers who are willing to tailor their solutions to their needs.”
With this backdrop in fund servicing, industry experts explain more about client trends and how the pandemic is impacting this space.
Consolidation
One prominent trend is the consolidation of fund service providers, which relates to the merger and acquisition of many smaller companies into a few much larger ones. While some experts say there is a pattern of consolidation across the market, others say this is happening less frequently.
Patric Foley-Brickley, managing director, fund services, Maitland, stipulates that consolidation will most likely happen around the edges, potentially where the larger providers want access to a particular market sector, and they can either buy it or build it.
He explains: “Often it will be much easier to buy into a smaller operation with established critical mass and associated profitability, than it is for them to build it themselves. There is likely to be some consolidation on the periphery involving mergers and takeovers of the smaller providers. Smaller providers will either grow to the point where they are substantial enough to acquire, or not so successful in which case they may get acquired.” It has been observed that consolidation has been driven by the influx of private capital, as record amounts of dry powder seek investments.
While an acquisition or merger may create synergies or economies of scale, one potential consequence may be a drop off in service standards, cautions Mark Weir, regional head of fund services, Americas, Maples Group.
Weir says: “In these scenarios, staff — typically at a reduced number — are tasked with trying to effectively transition all functional and operational areas of the business in addition to continuing to service clients.”
Generally speaking, this is not an environment that is conducive to success and takes significant time and resources to achieve, according to Weir.
“In other cases, some providers don’t even bother trying to homogenize services and systems, instead keeping them very siloed. Either way, it can result in inefficiencies for the client,” he adds.
Also weighing in on this, Srikumar Te, global head of fund solutions, Apex comments: “Over the last six to eight years the industry has witnessed steady stream corporate consolidation and divestment activity and even in this environment we see pockets of activity though the volume of such activities has slowed down this year. However, we continue to see new entrants into the market who seek to carve out a single market niche for themselves.”
More for less?
Evolving client expectations is another prominent trend in this area, with some clients wanting more for less.
Clients will always expect more for less, according to Foley-Brickley because of the constant build-out of features, functions and capabilities. He explains: “Rarely are we able to monetise these developments directly.”
Foley-Brickley notes that the majority of enhanced functionality and the related technology development necessary to support this enables providers to keep fees broadly the same.
He adds: “As in any industry, as products become more commoditised, providers are able to command less of a premium and prices will fall. Therefore, you must keep developing your product to continuously add value to maintain competitiveness and revenue margins.”
Pictet’s Lowe says clients expect providers to offer solid digital capabilities, improved data analytics (especially for fund distribution), to provide or enable regulatory assistance and to offer support on new products and services, for example, environmental, social, and corporate governance (ESG).
The market has evolved to a point where managers see asset servicers as an extension of their business that covers trading, middle office etc.
Lowe suggests clients also expect more tailored options to fit their needs, and in some cases unbundled services.
He says: “As per the general trend between clients and providers, transparency continues to be important; for example, regulatory costs on the provider should be openly discussed with the manager as this impacts investors.”
Weighing in on this, James Ferguson, head of Americas at Intertrust, notes that clients have more time to think at the moment and that while there’s more communication, not necessarily more demands.
Ferguson observes that the services business is seeing requests for new products. He says: “It’s as if the pandemic has allowed for more creative thinking, and Intertrust is working on new services and new ideas.”
Similarly, Srikumar Te, global head of fund solutions, Apex, also says that he has not seen a major change in client expectations.
“While clients have been very understanding given this pandemic has impacted everyone alike – we have not seen a major change in their expectations.”
However, Te explains in some instances, clients have requested an increased level of support and reporting especially around business continuity planning/disaster recovery plan, controls framework as they themselves build confidence with their investor base.
He comments: “As we have a presence in Asia, we were able to learn from their early experience of the pandemic and implement business continuity planning for clients in the rest of t he world.”
“We created support centres covering various time zones across the globe to effectively support our client service offices which have worked to our advantage.”
Effects from the pandemic
The pandemic has caused clients to place more trust in their fund services providers.
Lionel Nicolas, partner PwC Luxembourg, explains that PwC engaged in a ‘conversation with the industry’ in April and May this year, to assess that very question, told through the eyes of those CEO’s at the ‘front line’ of the crisis.
Nicolas notes: “The report identified that the service provider/client relationship is a partnership in a crisis, and a ‘master/slave’ relationship just does not work. That can become a permanent realisation, with clients more trusting and respectful of what their service providers delivered in such a difficult circumstance.”
For people, it was observed that productivity levels remained at similar levels to office-based working, but perhaps more because of adrenaline and confinement allowing people to work more hours.
Regarding technology, the PwC report identifies that much of the technology supporting a rapid shift to home-based working already existed within the firms but was under-utilised. Nicolas comments: “Fund service providers learned an important lesson around procurement and deployment of technology is in its adoption rate, not deployment success.”
In addition, many reflected on how they may rapidly switch to cloud-based platforms, with its computing power, capacity, and variable cost benefits compelling.
Looking at the operating model, key findings from the report indicates the old notion of a business continuity planning recovery site is now redundant and rewritten around home-based working.
Also looking at the pandemic impact, Intertrust’s Ferguson identifies that stability and even extreme trading in utilities, technology and bio sectors increased.
“Funds in these sectors have done well, compared to those in the fixed income space. Resilient companies with the work from home ability, the workflow and the client service mentality have persevered well. Clients will pay for quality if they see it. “
“At Intertrust we’re working hard on global clients’ needs given the volatility in different regions, offering bundling of services, simplified reporting and synergies where possible,”
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