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Research Reports » The Future of Investment Operations Report

NAV oversight

Outsourcing oversightEven when asset managers have taken the decision to outsource NAV calculation to a third-party administrator, they will retain responsibility for oversight through the fiduciary, or stewardship, responsibility they bear to their investors.

More than 70% of survey respondents said there will be stronger demand from asset management companies for independent oversight of fund accounting and related outsourcing services over the coming 12 months. In contrast, only 5% disagreed with this statement (fig 10). Fear of reputational damage (77%) and concerns over possible penalties from financial authorities for poor standards of oversight (63%) were the primary drivers for this trend (fig 11).

Demand_for_oversightWith this in mind, fund managers are taking steps to ensure they have independent oversight in place to review the activities of third-party (or in-house) administrators that they employ, including NAV provision and contingent NAV arrangements. This is becoming integral to the fund governance standards required by financial regulators and demanded by institutional investors for asset managers they employ.

Conclusion
This survey finds that investment in technology and data infrastructure sit at the top of asset managers’ priorities as they position themselves to deliver business growth in the recovery from the Covid-19 pandemic. Funds companies will also prioritise their commitment to high ESG standards across the investment lifecycle – and investments in technology and data engineering (including enhanced ability to manage alternative data sets) will be central to delivering this objective. 

Fig11-Focus on oversightAsset management companies are expected to increase the number of services that they outsource over the coming two years, taking advantage of the investment that large asset servicing companies have made in their global operating models to support asset managers’ investment activities across a full range of asset classes and global locations.

While asset managers will continue to outsource ‘non-core’ services, many will also look to consolidate their vendor relationships to a smaller number of service partners, taking advantage of the benefits this may deliver in simplifying oversight of outsourced relationships and maximising consistency of service.

Alongside this, some asset managers (particularly large global investment houses) are exploring the opportunity to manage their front-to-back investment lifecycle from a centralised data model and common technology platform. This may include strategic alliances with asset servicing and technology partners, enabling these partners to connect mid- and back-office services straight to the asset manager’s front-office investment tools and IBOR.

Against this background, use of public and hybrid cloud computing will increase. Some asset managers and asset servicers will take advantage of the comprehensive tool set and analytics offered by the public hyperscale cloud providers (e.g. AWS, Google Cloud, Microsoft Azure, Alibaba) to build and run applications, and to store data, in the cloud. Other users may source software via a SaaS option that is hosted on public cloud by their service vendor.

However, as regulated financial entities, asset management and asset servicing firms will continue to confront questions around data privacy and data governance and may continue to store some data on private cloud and on-premise data centres.

Covid-19 has pushed firms to review their IT strategies and their transition to public/hybrid cloud. But many work teams are now operating remotely and doing as much as they can in a digital environment. The IT architecture must be efficient, secure and flexible enough to support this. It’s also worth noting that some weeks of the Covid-19 crisis saw high volatility and a surge in trading volumes. Financial services companies must have sufficient elasticity in their IT systems and data architecture to support these spikes in business activity. 

At the same time, firms must think carefully about how to manage the transition to a public or hybrid cloud environment. This will involve adopting new cloud-native applications and reconfiguring existing applications to work securely and efficiently in the cloud. Firms must also assess how to get the best out of consumption-based pricing schedules. One interviewee told Funds Europe that close to 35% of public cloud expenditure by UK companies is currently wasted. This occurs primarily because firms do not know what size of cloud instance to buy when they transition to a public cloud infrastructure. 

Against this background, augmented AI and explainable AI will play a growing role in delivering insights, both predictive and ex post analytics, across the investment lifecycle. Crucially, this can deliver business intelligence in a way that is explainable to product teams, customers and financial supervisors.

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