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Magazine Issues » April 2009


Uncertainty could lead fund managers to seek the safety of more regulated products, tougher domiciles and quality providers. Nicholas Pratt looks at the results of the Funds Europe 2009 European Third-Party Administration Survey to see what kind of administrators will prove to be a destination of choice...

sunset.jpg Fears of a draconian regulatory response to the financial crisis and its embedded problems like the Madoff scandal, along with the anticipation of a flight to regulated domiciles by fund managers, are chief in the minds of third-party fund administrators. These are two findings in our 2009 Third-Party Fund Administration Survey that are new for this year.

But some things never change. Providers continue to argue about the merits of whether large global administrators with big balance sheets better serve fund managers, or whether smaller specialists have an edge.

However, this debate takes on a new shade this year following sizeable declines in the growth of assets under administration for many providers. Almost all respondents experienced year-on-year growth in assets from 2005 onwards, until the end of 2008 when this figure dropped for the first time in recent times.

Two exceptions are based in Dublin. Custom House held €20bn under administration in December 2007. This grew to €22bn a year later. Surprisingly, this has since grown again to €24bn. The second exception is Quintillion, founded three years ago, which saw assets under administration rise from $2.5bn (€1.89bn) at the end of 2007 to $6.5bn.

Increases at two other administrators between the end of 2007 and 2008 come with caveats. HSBC’s figures are global, not European, assets and Northern Trust’s 2008 figures include committed capital for private equity, real estate and infrastructure data from September 2008.

These four aside, the only administrators not to have recorded a drop in assets under administration are those that could only supply figures up to June 2008, before the events of September 2008 had affected the industry.

Between the 20 administrators in the survey, almost every European destination is covered, but some are more popular than others. As the fortunes of Quintillion and Custom House prove, Ireland continues to be a popular location for administrators, despite the fact that the country has been hit harder than most by the spectre of recession. Six of the 20 respondents named Dublin as one of the three most important markets.

However Luxembourg, Ireland’s rival, polled twice as many nominations suggesting that the relative stability of the region has given it an edge in these times of economic uncertainty.

Ireland’s popularity may be affected because it prohibits the outsourcing of administration of any Ireland-based fund to another domicile. In terms of the locations that administrators see as having the most potential for the next twelve months, the Nordics and Netherlands scored heavily, along with Switzerland.

The regulatory focus on the industry and the flight to regulatory respectability means that the off-shore locations that have not increased the level of regulation have not fared well.

Regulated products
With such a regulatory focus, it is expected that ‘compliance’ products should have seen the greatest demand over the last twelve months and will be the focus of development during the next twelve. Compliance monitoring and independent valuations and pricing, often on a daily basis, are the obvious byproducts of change, as well as risk management.

But fund management firms, which have experienced a sizeable drop in assets and revenues, may look to combine the need for more regular and independent reporting with affordability. For administrators this means investment in web-based reporting and strengthened outsourcing offerings in anticipation of a greater uptake from operationally stretched managers.

The survey results also show that there has been a greater demand for certain fund types as a result of the crisis. The financial markets have been hit harder than the so-called ‘real economy’, so fund managers are looking for asset classes that are more connected to the real economy, such as property and private equity (regardless of a lack of available leverage).

Despite the conservatism that follows a financial crisis, fund managers will be looking to diversify geographically as well as by asset class, administrators believe, which is resulting in the growth of existing cross-border funds and a need for cross-jurisdictional pooling as well as an interest in new funds types such as Sharia-based funds and Ucits IV funds.

Chief executives
The prospect of imminent regulation dominates the opinions of CEOs in third-party administration, who we asked to outline what they saw as the biggest challenge facing the fund management industry. For many it is not just the expectation of more legislation but an almost inevitable acceptance that the measures introduced will be badly considered, rushed through and overly draconian.

Dermot Butler, chairman of Custom House, says: “There have been some rogue hedge funds, but much fewer than rogue banks and their losses were largely due to the failure of the banks to maintain liquidity rather than bad investment judgment. Therefore, the biggest challenge may be surviving what could be draconian, badly thought-out regulation.”

Essentially, says Butler, the industry’s biggest challenge will remain unknown until regulation is confirmed and deadlines.
Of course the need for more regulation has not arisen arbitrarily but has been borne from the largest financial crisis to affect the investment industry for decades. And regardless of whatever new rules the EU introduces, fund managers will still find the industry
has relationships with investors in urgent need of repair.

Nadine Chakar, executive vice-president and head of EMEA at BNY Mellon Asset Servicing, says: “The old trusted paradigms have evaporated. Investors are losing faith in the equity markets. The talk is not about making money but rather about losing it. “
This suggests the size of an administrator will be a key factor in its success in future.

Not all administrators fall into this category, and not surprisingly there is a difference of opinion. While there is broad consensus on the need for administrators to provide greater transparency and demonstrate good repute and risk awareness, there is a clear divide between the larger bank-based players, which combine a range of products and services, and those that specialise as administration-only entities. For example, Joe Hooley, State Street president and chief operating officer, talks of “sophisticated and integrated product offerings that go beyond the movement, settlement and safekeeping of assets”, while other universal banks talk of broad client bases, robust solutions and other phrases that evoke strength.

But others, such as Maitland’s chief executive Veit Schuhen, feel that the demand for transparency is so great among fund managers that they will be looking to appoint only independent administrators at the expense of the universal banks. “These banks will be looking to focus on their core activities over the next twelve months and I think the independents will pick up business as a result because we have no link to a bank or to a fund manager.”

Schuhen also feels that administrators must be wary of over committing, despite the availability of good technology to deal with greater volumes. “Good systems mean you can manage a greater volume of transactions, but the issue is not the volume of assets, it’s the number of clients funds that is important.”

It seems likely that the market will see a clear divide between those administrators that brand themselves as independent specialists and those that embrace the universal-bank tag, with each side settling for those fund managers looking for strength or independence. It is about recognising the most marketable properties. 

Thomas Seale, chief executive of European Fund Administration (EFA), identifies that outsourcing to third-party fund administrators is likely to increase, even by custodians and not just fund managers. But he says that “only a few third-party administrators have the critical mass to offer such a service”.

Fund managers considering the appointment of a new or inaugural third-party fund administrator will doubtless have to navigate their way through the sales patter of the providers out there, but the benefits they offer, be it the large or less large firms, are plain to see.
Right now, fund managers must repair their relationships with investors and reclaim any trust that may have evaporated in the wake of the Madoff scandal or any other examples of lax governance that have yet to be uncovered. But there could be a danger in overreacting to the current climate and overhauling the administration set-up at the expense of some operational stability and the pursuit of long established investment ideals.

As John Alshefski, a senior vice president and managing director at SEI, states: “The big challenge for fund managers is to continue to grow their business smartly and to carry on moving in the established direction of their long-term strategy and not be distracted by short-term issues.”

©2009 funds europe