Fiona Rintoul studies the data in our latest fund administration survey and considers from which geographies third-party fund administrators anticipate growth.
Europe’s fund administration business has been characterised by consolidation over the past couple of years. First, there was the Dexia-Royal Bank of Canada merger, which has created a firm with almost €30bn of assets under administration; then, more recently Bank of New York and Mellon joined forces, bringing into being a fund administration monolith with €755bn in funds under administration.
The days of small specialist players in fund administration, are, it seems receding. A few highly skilled niche firms may survive, but increasingly size matters, with big firms moving into areas traditionally the preserve of small specialists such as hedge fund servicing, whether through acquisitions or organic growth.
In fact, increased demand for hedge fund services is one of the headline trends that emerges from this year’s Funds Europe European Fund Administration Survey. Almost every respondent cites hedge funds as the area where business is expanding fastest. Within that funds of hedge funds feature strongly, while there is also important growth among other classes of alternative investments, such as private equity and real estate.
Of course, it remains to be seen how well the big firms will service these market segments. Mergers can be disruptive. The newly hatched BNY Mellon displays an awareness of this when it cites managing market perception of the merger as a key challenge for the next 12 months: “While our clients and staff have only benefited from the added resources and capabilities, we will continue to battle external perception that the merger will be disruptive to business as usual.”
Another key trend that emerges from the 2007 Survey, is an increased focus on Asia. European asset managers have generally been quicker to capitalise on opportunities in important emerging Asian markets such as China than their US counterparts. It seems that the firms that service European asset managers in Europe are now following them eastwards.
Within Europe, the key markets where growth is expected to be concentrated over the coming year are France and Italy. This is likely to favour firms that emphasise local presence, local knowledge and local language. Francophone firms such as BNP Paribas, SGSS-Euro VL and Fortis are well placed to benefit from growth in the Italian market, being among the few with offices there, as well as from growth in France. Interestingly, however, the French firms generally do not cite France as a growth market.
Two other firms in pole position to capture new business in Italy and France are the recently merged entities BNY Mellon and RBC Dexia. Both firms have offices in France and Italy.
Other markets that are picked as having exceptional growth potential are the Netherlands, Spain and Switzerland, and to a lesser extent, Germany. Some firms also now see potential in Central & Eastern Europe, while Bank of Ireland names Turkey as a key growth market.
In terms of the challenges facing fund administration companies, two key strands emerge. One is coping with new regulation, this year particularly MiFID (the Market in Financial Instruments Directive) and new taxation laws in Germany and Austria, and the other is the increasing complexity of the products that fund administration companies must service.
The increasing complexity of the products serviced leads to more complex IT requirements. The management and integration of increasingly sophisticated IT platforms is also mentioned by respondents as a key challenge for the industry. The investment required in IT is also an issue as it takes place against a backdrop of pressure on fees and demands for greater fee transparency.
Additionally, fund administration companies have to cope with convergence between traditional and alternative strategies, in Europe partly as a result of increased investment freedoms introduced for long-only funds by Ucits 3.
This, and the emergence of more liability-led investment instruments and guaranteed products, has led to an increased used of derivatives. A lack of standardisation in the derivatives marketplace is another key challenge for fund administrators, as is the increased demand for independent pricing of over-the-counter derivatives.
Rationalisation of fund ranges is also leading to increased use of structures such as pooling. Providing the infrastructure to deal with these structures in an environment where cross-border distribution is expanding is another challenge for fund administrators.
Finally, the all important issue of human capital is cited as a key challenge by many companies. All of the foregoing require talented and able staff and these can be difficult to find.
Firms particularly struggle to find and retain people that are skilled in the field of derivatives accounting, which is increasingly important in asset management.
A solution that some firms are adopting is to open service centres in new markets, such as the Central & Eastern European countries, where there are untapped pools of well-educated potential staff.
© fe August 2007