Far from slowing down, fund administration is becoming a 24/7 business. Nick Fitzpatrick analyses the Funds Europe 2008 Third-Party Fund Administration Survey and finds the drivers for this trend
The good news for the third-party fund administration (TPA) industry is that the future looks highly encouraging, says Wilson Leech, head of global fund services at Northern Trust, who says that despite the credit crunch in the summer of 2007, there is no overall shortage of new business in the investment management world.
In fact, far from slowing down, Leech expects the fund industry business to become a 24-hours-a-day, seven-days-a-week activity.
“As the market has evolved and the socio-economic imperative has changed, so client demands for speedier processing of high volumes of increasingly complex instruments will increase. Fund administration will therefore become a 24/7 business, with processing hubs and client spokes spread across the globe.”
Central Eastern Europe
Those European hubs that appear to be of most interest for respondents to the Funds Europe Third-Party Administration Survey 2008 are Switzerland and Central & Eastern Europe (see chart: Markets with most potential). In this section providers were asked to rate their top two or three markets where they expect to do more business in the near future but where they do not currently have a large amount of business.
The top three largest providers also elected for these markets, with the exception of BNY Mellon Asset Servicing, which elected for France and Italy.
Germany also scored highly, with three votes. Perhaps changes to the German Investment Act late last year, which were designed to modernise Germany as an asset management base, were behind this.
CACEIS, the fifth largest provider in our survey, is one of the TPAs poised for Germany. “We acquired the custody business of HVB in Germany, a strategic European country in which we were lacking a presence until now,” said a spokesperson. The firm also said it is looking at acquisitions in Italy and Asia.
Citi, the seventh largest in the survey, also regards Germany, along with Central & Eastern Europe and Scandinavia, as a place with great potential.
Assets under administration
The top five players in our survey by assets under administration are: State Street; BNY Mellon; JPMorgan Chase; HSBC Securities Services; and CACEIS. BNP Paribas Securities Services falls just outside of these with €834bn. Citi comes next with €617.3bn.
State Street saw most of its growth in 2007 from 130/30 funds, exchange-traded funds (ETFs) and Sharia-compliant funds.
BNY Mellon reports most of its growth from ETFs too, along with money market funds, enhanced-derivative Ucits III products, and funds of funds.
Citi said it had seen most of its growth in derivatives administration for alternative investments, along with real estate trusts and private equity.Of course, derivatives are still high on everybody’s agenda, either as a present or future business driver. But so-called life-settlement funds were only flagged by one provider.
Although still rare in Europe, in November CACEIS became the administrator to the first fund of this type to be launched in Ireland. The life-settlement fund market is worth US$13bn in the US. A CACEIS spokesperson said: “We are currently noticing a great interest from clients and prospects to set up such funds and plan to specialise this service, capitalising on our experience.”
Hedge funds and alternatives
TPAs who were not already established in the hedge fund world have scrambled to build capability. HSBC’s acquisition of the Bank of Bermuda in 2004 was just one early sign of this.
More recently, TPAs have been expanding their offering in the private equity market. JPMorgan launched its service into the UK last year, for example.
But the industry seems surprisingly reticent – or at least unable – to give details about its success in the alternatives world.JPMorgan gave no figures for its assets under administration in these areas, although the firm said growth in its hedge fund business last year was higher than in any other category.BNP Paribas Securities Services was more forthcoming, saying that 1% of its business is in hedge funds and 7% in fund of hedge funds. It’s total European third-party assets under administration was €693bn.
BNP Paribas saw the greatest growth in percentage terms in real estate and private equity last year, it added.
Bank of Ireland Securities Services said hedge funds accounted for 10% of its overall European business, which totals €122bn of assets under administration. Perhaps it is for this reason that the bank cites Spain as a country with much potential, following changes to regulations that affect hedge funds there.
Northern Trust revealed that it administered €13.8bn worth of hedge fund assets along with €12.2bn of fund of hedge funds and €18.7bn of private equity.
CACEIS did not give a detailed split of its hedge fund, property or private equity businesses but said that 50% of its third-party fund administration centred on alternatives.
A CACEIS spokesperson said: “In early 2007 we fully revamped our dedicated offering for private equity funds, supported by heavy investments in experienced staff and powerful IT systems, implemented in a secure and highly controlled environment. Throughout the year we have seen a solid demand for servicing private equity funds.”
ETFs move up
The profile of ETFs seems to grow more with every month that goes by. The products have also become more notable in this survey, with a few respondents flagging ETFs as drivers of their business. Bank of Ireland, for example, said it had seen more ETF business in the last twelve months.
Meanwhile, a spokesperson for BNY Mellon said: “We have been fortunate to benefit from the increased activity in the ETF space over the past twelve to 18 months and continue to see this area as a key strategic area of growth. We consider this partly due to the investment made in bespoke systems and operating models that the bank has made globally in this area.”
A spokesperson at BBH said: “Specific to ETF servicing over the past two years, BBH has extended our services to include domestic and international equity, fixed income and commodity ETFs. As each ETF asset type is unique, BBH has identified some unique service characteristics.”
So, as Wilson Peech at Northern Trust indicated, there is much to keep fund administrators busy. Keeping pace with front office developments is exactly what keeps fund administrators occupied, and in terms of challenges, many respondents noted this.
The key issue for them still centres on recruiting and retaining people with the right qualifications to make sense of all those complex derivatives, as José-Benjamin Longrée, managing director, CACEIS Bank Luxembourg, reminds us: “Recruitment and retention of qualified staff is a key issue in the funds business. Competition leads fund houses to focus on hiring star talent, managers, traders and analysts, and they overlook the back-office.
“This can lead to high staff turnover which impacts service quality.”
He adds: “However, for fund administrators, the back office is the core function and considerable resources are dedicated to hiring and retaining back-office talent.”
And if the back office is shifting to round-the-clock working as Peech implies, this talent will be there well after the fund managers have gone home.
© fe March 2008