February 2011

US ASSET SERVICING: New York roundtable (part 1)

The New York Roundtable: we meet with leading US asset service providers in New York at a time when the most sophisticated market in the world is seeing a secular shift from equities to fixed income.  AS_NewYork
Biff Bowman (Northern Trust), Phil Masterson (SEI), Bob Wallace (Citi)
Bill Salus (BNY Mellon), Nick Rudenstine (JP Morgan) Part 1: the state of the US fund management industry, including what US clients are focusing on. Funds Europe: What is the product development focus of your US clients and what does this tell you about the state of the asset management industry? Nick Rudenstein, JP Morgan: A good amount of focus is on commodities and there is a continued interest, for some of the funds at least, in ETFs and similar kinds of products. We still see a continued push into alternatives beyond just commodities as well  – that’s a big focus for a lot of our clients.

Many of our US-based asset managers with global businesses also continue to place a heavy emphasis internationally, so it’s not only about US fund development for them. Biff Bowman, Northern Trust: Yes, global investing, ETFs and alternatives – I agree with that. Another area is what I call the retirement segment.

If you think about the migration of defined benefit schemes to defined contribution, this has an impact on plan sponsors and asset servicers alike, as things move from monthly to daily valuations and then to intra-daily and real-time valuations to meet the needs of participants. I would say those are all macro trends that are also hitting US asset managers. Bill Salus, BNY Mellon: In addition, there’s also a move to redeploy current products into other sorts of instruments, such as ETFs, or wrapping a short strategy around an existing and proven long-only strategy.

I would also say that our clients are looking to be a little more prudent regarding their product development spend and they are looking to enter new markets with offerings that they know have been fundamentally proven and tested in other markets.

Of course, adapting these products to those markets and channels requires the same level of infrastructure, servicing, and transparency as would be expected here in the US. Bob Wallace, Citi: ETFs is a significant area, I agree. We’re starting to see a lot more interest from a lot more asset managers in active ETFs – even active managers themselves.

There is activity around target-date funds. These funds had their problems during the economic crisis when everyone seemed to have a different definition of what a fund like this is. I think there’s going to be more consensus in future.
And recently we’ve seen developments within emerging market equity funds regarding “The Next 11” – that is Goldman Sachs’ next eleven beyond Brics. Bowman: I think we should add that there is development within the sovereign wealth fund sector, too. There is tremendous growth in these pools of assets and in the product sets that are necessary to support the funds. Probably most impacting on the custodian is the reporting required.

Demand for information from both the asset managers and the funds themselves is quite high and it can be complicated by political sensitivities. Salus: Speaking of reporting, those dealing with reform in the US money market are struggling to understand and address the technical servicing issues and are coming to us for innovative solutions due to our capabilities. Phil Masterson, SEI: I think fundamentally there’s a real secular shift in the asset allocation here in the US as allocations move away from equities into fixed income and international strategies.

From a broader perspective, consolidation and concentration is increasing in US fund management, both from an assets-under-management perspective, and from a flow perspective.

In addition, intermediary consolidation is very significant. We’re starting to see some of our clients getting hit by the increased leverage from distributors that is placed upon asset managers. It shrinks their revenues.

And, finally, as mentioned, there is the de-accumulation phase, where baby boomers transition from accumulation to de-accumulation, so there is a lot of product development in that area. Funds Europe: Nearly everybody has mentioned ETFs. Is this down to less appetite for risk, or to the frugality of the end investor that was mentioned, as these funds are lower cost? Salus: I think frugality is one factor, but I think there is an appetite for less risk from the consumer. However, managers are bringing more active ETFs into countries you never would have thought about recently. But underpinning all of that is the ability to manage that risk. Rudenstine: I think demand for commodity ETFs certainly wouldn’t indicate a low-risk appetite on the part of individual investors and even institutional investors. Funds Europe: Is product complexity creeping back into the industry at this part of the cycle? Rudenstine: Putting aside what part of the cycle we’re in, we are being asked now to provide custody for many more instruments than we have historically.

We are in a mode where custodians and asset servicers are starting to look at providing custody for leveraged loans and other products that never would have been on the books before. These are complicated and require a certain degree of sophistication on the provider’s part. Salus: Yes, I agree. I’d say this pushes custody services upstream into the area of investment operations platforms. You find  yourself grabbing more data in order to integrate it and deliver it via risk management tools. Bowman: And it’s not just the complexity of the instruments – we could all provide a value for a complex asset, after all. But it’s the pace required of our clients – whether an endowment or an asset manager – to get those values. Masterson: More esoteric strategies are moving into products that require daily valuations, which is challenging and I think also counsels caution. Not every strategy fits within a certain package and I think there’s a governance issue that’s yet to be worked out. I know regulators are concerned about that in Europe with Ucits. Salus: In Europe, regulations are pushing towards a convergence of Ucits and alternative products. Wallace: But sometimes these strategies just cannot be fitted together. If they look the same and act the same in the retail investor’s eyes, then they must be the same. This means the inherent risks within those funds can be lost to the retail investor. Everything’s daily, everything’s real-time, and investors will assume securities are liquid, too. ©2011 funds europe

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