There is good news for Latin American fund managers casting covetous glances at the lucrative possibilities of worldwide distribution. Nick Fienberg, of Alpha FMC, finds that there is an increasingly sophisticated asset servicing infrastructure available to facilitate geographic expansion.
Improved capabilities of global securities services providers provide an ever-clearer route to attractive, flexible and globally distributed fund structures. Enticing opportunities, however, need to be approached with care. For fund managers engaging in any sort of significant operating model expansion, the devil is most certainly in the detail.
The first step for many expanding Latin American firms will probably be establishing a foreign-domiciled fund for global distribution. A range of locations currently compete for this business: Luxembourg, the base for Ucits-compliant Sicavs; Dublin and the Cayman Islands, which remain the most high-profile domiciles for alternatives funds; and numerous other specialised offshore locations such as the Channel Islands or Gibraltar.
All these locations have established themselves as a hub with an area of expertise. Once a fund manager has selected the target fund type, most major global service providers will offer operating models that support these domiciles.
The evolving regulatory framework usually has an impact on the choice of domicile. Luxembourg currently appears to be a winner from Ucits IV provisions. The country was an early implementer of supporting legislation and has seen significant recent growth in fund domiciliation.
Ireland’s treatment at the hands of the Chilean regulator perhaps serves as a cautionary tale for domiciles struggling with sovereign debt issues. Ucits funds domiciled in Ireland have been disapproved for general investment by the Chilean Pensions Regulator, Comisión Clasificadora de Riesgo, because the country’s credit rating no longer meets minimum requirements. Fund inflows, however, remain at record levels.
It has also been suggested, and equally denied, that the Cayman Islands may struggle under the Alternative Investment Fund Managers directive because the domicile may need to attract custodians to the jurisdiction.
Global fund managers, however, need a global operating model to support them. This is particularly important if their intention is to maintain the location of investment and dealing expertise in their home market while running funds domiciled abroad.
Securities services providers have long boasted of their global servicing models. In reality, a great deal of investment in global support platforms has occurred in the past few years, which means there is now a range of genuinely global servicing alternatives.
Keeping down the costs associated with geographic expansion is important. This means most Latin American fund managers are likely to engage with a global securities servicing partner. Many of these firms are beginning to pass on the tariff benefits associated with strategic and scalable platforms. Moreover, tariff competition between major providers remains, perhaps a little unexpectedly, intense.
And all of this may come as a pleasant surprise to some Latin American fund managers dealing with domestic resources and cost bases that are notoriously expensive. Some managers have even found operational costs to be lower in the United States than in Latin America.
Time and place
Markets throughout the world will have their own support and interface requirements, those include Euroclear, FundSettle, Fix, and Swift. Leveraging the expertise and existing infrastructure of a global securities servicing firm avoids the considerable time, cost and effort involved in stretching legacy, in-house operating models to support global ambitions.
Some managers may prefer to create in-house manufacturing centres outside their home markets. This means all the above considerations will still apply, in addition to many more besides from an internal structural and operating perspective.
Global expansion should also provide easy access to global distribution channels. Here again, the ease of global distribution and appeal of Ucits funds, in particular that of Sicavs, means through effective servicing and distribution partnerships, well-marketed, European-domiciled funds are an increasingly light-touch first step on the road to a global presence.
But caution and thorough due diligence are pre-requisites to selecting a global asset servicing partner. A commercial and operational model needs to effectively support, rather than hinder, business expansion.
Global operating models mean different things to different people, and there are several aspects of such models that demand close scrutiny. From which location will the provider service investment records? Does the asset service provider operate a full and effective pass-the-book model globally? And does this mean that the investment business is fully supported for trading hours in your local market? Does this extend to full trade support late into the European night or from the crack of the United States dawn?
And, moreover, does this extend to full access to operational teams for the in-house teams throughout your hours of operation?
The advantage of a westerly time zone should mean that fund managers are able to start their trading day based on fully priced and updated positions. However, this assumption deserves scrutiny and will be subject to the constituents and trading locations of the business.
Most global asset servicers will be able to interact with their clients across a range of languages – certainly in English and the local language of administration location. But Latin American managers may not have staff as fluent in northern European languages as managers in other parts of the world. The experience of many managers setting up in or expanding from Latin America suggests that it is worth ensuring a strong language bridge between fund manager and service suppliers.
Risk must be monitored effectively across global businesses in the post-Lehman world. Increasingly sophisticated risk measurement services are available from the major providers, but this is still a function most commonly maintained in-house by asset managers.
Expanding managers must quickly develop a clear view of how they monitor and manage risk across their business, and how their service provider supports them in doing so. Issues of data consistency and integrity in support of risk measurement will be more complex in a global company with outsourced operations.
Latin American managers will also have specific requirements based on their domestic regulatory and tax environment. For example, the 2% government tax on Brazilian real foreign exchange instructions means that an effective foreign exchange netting capability should be employed across the book of business. All providers are likely to provide netting services of some description but the extent, frequency and hence effectiveness of netting becomes important.
Managers in the region will face the same questions as all other managers seeking to partner with or leverage the capabilities of global suppliers in terms of the scope and complexity of services they wish to purchase.
Global expansion is going to mean more share classes, perhaps also more multicurrency share classes, and assets. Why not let the provider hedge these as long as the service is robust and economically viable? Other factors, such as the Key Investor Information Document, end-client reporting and performance measurement, may leverage existing supplier platforms and expertise. Nevertheless, they will require close due diligence because despite what it may say on the tin, capability, service delivery and cost will vary substantially across the market.
The popularity of emerging market funds has been well documented in recent years. Increasingly, sophisticated and credible Latin American fund managers are keen to tap into the positive sentiment on their region. They are likely to find plenty of willing and capable
asset servicing partners, who in many cases will be major global institutions seeking a partnership beyond the traditional parameters of asset servicing.
Establishing in-house asset servicing capability abroad is an option but may prove restrictive commercially, technically and from a time-to-market perspective. Leveraging the capabilities of existing relationships with third-party administrators may also be possible for some but, commercially, fund managers are likely to find a favourable provider landscape. Technically, they would benefit from global platforms that have seen substantial investment.
Nick Fienberg is a senior manager at Alpha Financial Markets Consulting
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