Thu, 27/09/2007 - 14:10
The alternative investment administration industry in Dublin, and increasingly spread across Ireland, has enjoyed more than a decade of breakneck growth and is still expanding at a rate of up to 30 per cent a year. According to the Irish Funds Industry Association, the best estimate is that 4,728 alternative funds and sub-funds with more than EUR700bn in assets - close to USD1trn at current exchange rates - are currently serviced in Ireland.
This represents startling growth over the past four and a half years, even taking into account the effect of the rise in value of the euro against the dollar. An industry survey conducted in March 2003 by the IFIA, then known as the Dublin Funds Industry Association, reported a total of 2,113 funds and sub-funds and USD199bn in assets; by June 2005 the number of fund entities had reached 3,020 and assets more than doubled to USD474bn. Today Ireland administers as much as one-third of total worldwide hedge fund assets and is unquestionably the industry's dominant servicing jurisdiction outside North America.
Ireland's administrators are benefiting today from the country's readiness to accommodate the fledgling hedge fund industry in the 1990s, when few jurisdictions beyond the Caribbean and Bermuda were interested in what at that time seemed a small niche business. The industry has taken advantage of the spotlight shone on alternatives by the 2000-03 stock market slump and the growing convergence in recent years of traditional and alternative investments, spurred in part by the flexibility of Europe's Ucits III directive governing cross-border fund sales.
But it has been evident for several years that Dublin's growth as a centre for fund administration, as in other areas of the financial services industry, has come at a cost. Special tax deals for financial services companies were one of the original attractions of the city's International Financial Services Centre, and Ireland still offers - across the board - more attractive corporate tax rates than most other European Union member states, but the capital could no longer be described, as it was in the early 1990s, as a low-cost centre.
The sheer volume of work flowing into administrators of both traditional and alternative funds - many firms handle both - has prompted a scramble for skills that has led to rising salaries and relatively high staff turnover. Clients who can no longer handle all their questions through a single point of contact at the administrator or find themselves dealing with a succession of account managers have complained that quality of service can be uneven, or worse. Meanwhile, large administrators openly acknowledge that they are no longer competing for business from start-up managers or smaller funds.
Administrators are well aware of the problems, and there is plenty of evidence that they are being addressed. To deal with the shortage of skilled and affordable staff in Dublin, firms are setting up satellite operations both in the hinterland of the capital and in regional centres such as Cork,Galway, Wexford and Kilkenny. Insofar as they are permitted by the rules governing servicing of Irish-domiciled funds, some are examining how far lower value-added administrative functions such as trade input and reconciliation might be carried out in lower-cost jurisdictions overseas like India.The pressure on resources has also given impetus to the drive to automate administrative processes as far as possible, lowering the requirement for expensive staff
time and reducing the risk of errors creeping into accounts during repeated manual input. Although the increasing sophistication of hedge funds and strategies and the complexity of the instruments they invest in continues to raise the bar for administrators - and efforts to bring automation to fund ofhedge funds servicing are still very much a work in progress - many firms report that the industry's holy grail, straight-through processing, is increasingly a reality.
But there is evidence that a number of firms could be doing more. A survey of the administration industry - both traditional and alternative - conducted at the end of last year by Deloitte & Touche suggested that to some extent firms seemed to be dealing with business growth by increasing staffing rather than using technology and business process improvement to boost efficiency. 'The survey highlighted that Dublin is enjoying compounded growth of around 30 per cent,' says Ronan Nolan, the partner in charge of investment management services at Deloitte. 'We used the number of funds and sub-funds as a proxy for volume growth, and found that it was matching growth in headcount. The way administrators have dealt with the value increase has been to ramp up their headcount. They haven't really reaped an efficiency dividend.
'People would say that this conclusion is too simplistic. In reality the complexity of the work administrators are dealing with has increased, which would entail some increase in headcount, but no-one could seriously say there's not scope for greater efficiency. There's a lot of opportunity to advise administrators on the effectiveness of their systems and workflow, making it quite a dynamic market from a provider's point of view.'
However, Nolan is keen to point out that for all the potential for improvement, the administration industry continues to thrive. 'The main underlying theme is one of continuing growth,' he says. 'People do talk about strains and capacity issues, but the bottom line is that the industry is doing extraordinarily well.
'In the vast majority of cases, excellent service continues to be delivered, which is why the jurisdiction continues to be highly successful. Given that the vast majority of hedge funds are not Irish-domiciled and there is no regulatory reason for them to be serviced here, it's clear that the managers are happy with the level of service. People can over-emphasise issues like staff turnover, which are just a fact of life, not just in administration but in other professions like accounting.'
Nevertheless, there is plenty of debate within the industry about the best strategy for providing high-quality service, amid evidence that at least some hedge fund managers are frustrated with the service they are receiving in Dublin. For example, one administrator says, some of its rivals have made life more difficult for their clients by reengineering their operating processes for maximum efficiency by creating separate functional teams.
The downside is that this results in employees no longer having the same level of involvement with - and commitment to - the client's business. Another unsatisfactory model, the administrator says, is where firms put in place client relationship managers who do not have direct knowledge of the fund's operations and cannot answer most of the client's queries without consulting with the operational groups.
One group that stresses its concern about ensuring that servicing models don't lose sight of the client is UBS Global Asset Management's Fund Services business. Although one of the world's biggest hedge fund administrators, UBS is a relative newcomer to Dublin, having set up the business just over three years ago. 'The most important differentiating factor is the single point of contact,' says Donard McClean, head of fund services for Ireland. 'When the client calls, the fund accountant at UBS knows the fund from start to finish, they control the whole process. Clients don't want to be shunted around between different people, and they don't want to talk an intermediary who just passes them on to the right person. They want someone who has the whole picture in front of them.'
However, in common with his colleagues McClean is conscious of the need to use technology to avoid the need for everincreasing staff numbers. 'We're focusing on trying to automate our processes and create scalability,' he says. 'If we double our business next year, we can't simply double the number of staff. That works in an industry up to a certain point, but eventually you have to break that linear relationship, which is what straight-through processing does.'
The dizzying speed of change in hedge fund strategies and the use of exotic derivative instruments is a barrier to automation, but not an insuperable one.'Technology is probably our number one area of investment,' says Gary Enos, executive vice-president and head of hedge fund servicing at State Street. 'To keep pace with all these changing strategies has a direct effect upon your technology spending, so there's significant expenditure in areas like risk reporting and valuation. We have a dedicated group of programmers just for alternatives at IFS, and we leverage State Street's infrastructure for the network support and redistribution of the software.'
That doesn't necessarily mean that smaller administration firms without the backing of a parent with deep pockets are placed at a disadvantage. Dermot Butler, chairman of Custom House Administration, says: 'Although we don't have a huge parent group, we haven't found it a major problem because we have been using PFS-Paxus, a system designed for hedge fund administration that's fully integrated. 'You don't have separate modules for shareholder services, security trading, fees and equalisation - it's all automated within the system, which makes life a lot easier. And it's very scalable. Some things come up all the time, like new processes for automating OTC valuations, which must be addressed as they come along, but so far it's been pretty good.'
Technology can also help to keep staff turnover to a minimum by ensuring that highly-skilled staff do not spend their time doing mundane manual work, according to David Morrissey, head of business development for SEI's Investment Manager Services division in Dublin. 'One of the biggest issues in the industry is that certain firms have analysts and graduates basically working on data input,' he says.
"They come into the industry expecting to work with hedge funds, but when they are given responsibility for a long/short equity fund they are handed 200 trades that that have to be input into the system. That's still an issue for a lot of the industry. At SEI we automate processes and don't rely on manual input - except for funds of funds, because of the nature of that industry.' Morrissey cites the example of a client running a multistrategy fund that SEI took on from a competitor at the end of last year. 'The fund was making on average about 200 trades a day,' he says. 'Four people at the competitor firm were servicing the client, but when the client came to us the weekly valuations were six weeks behind. We told the client we would automate the process so that trades could be loaded and reconciled on a daily basis. Now we have one person spending half their time servicing that client, which is a huge saving for us, and the client is delighted because they are receiving timely valuations.'
As vital as the implementation of state-of-the-art technology is the expertise of the people who use it, according to Mark Sweeney, managing director of Bear Stearns Bank in Dublin. The bank is involved in the hedge fund industry not only as a prime broker but in the fund servicing area as a trustee to Irish-domiciled mutual and hedge funds.
The trustee is responsible for protecting the interests of investors by monitoring the fund's compliance with the regulations, its offering documents, investment and borrowing restrictions and valuation methodology, as well as ensuring subscriptions and redemptions are carried out satisfactorily, and issues an annual report with its opinion on whether the fund is being managed properly.
'Irish service providers have been able to keep up with paying for the best fund administration and transfer agency systems,' Sweeney says. 'But just as important is the huge pool of expertise that's grown up over the past 10 years in hedge funds and is now represented at a senior management level. And in addition to new Irish people coming through, Dublin is increasingly attracting people from other European countries with financial services experience who add to that pool of talent.'
Members of the administration industry point out that while operating costs in Dublin may have risen, this has not been to the detriment of the managers whose funds are serviced in Ireland. 'From a client perspective there's more value now than ever,' says Fearghal Woods, director of business development at Bank of Ireland Securities Services. 'It's a very competitive market, for administration services as well as for law firms and accountants.
'We have 45 competing administration companies. Ten years ago we were charging fee levels of 20 to 25 basis points, but that's probably down in single figures now. It's certainly a challenge for the industry to manage staff turnover and the cost base, and some people manage it better than others.' Woods notes that while staff turnover at junior levels is a little over 20 per cent across the industry, BoISS boasts a level of 12 to 13 per cent.
'We like to attribute this to the fact that there is the opportunity for people to move around within the Bank of Ireland group, which employs 4,000 people,' he says. 'People looking for a change have the option of staying within Bank of Ireland or moving to another group company, an option that very few competitors can offer. The bank is recognised within Ireland as a very good employer, which also helps in attracting and retaining people.'
However, Woods believes that the rate of staff turnover in the administration sector has started to slow. 'The number of acquisitions that have taken place has helped the labour market to cool a bit,' he says. 'There's not so much competition to attract people changing job, and I think we will continue to benefit from that in the short term. There will always be turnover, but the important thing is to keep it at an acceptable level.' McClean believes that UBS's position as a relative newcomer to the market may have spared it the level of staff turnover experienced by other firms, but adds: 'I think there's also a slowdown in staff turnover in the industry, not just here but everywhere. Perhaps the industry is starting to mature a bit.'
PFPC International managing director Mark Mannion believes that to some extent the administration sector is inured to the problems of attracting and retaining staff. 'Things have calmed down a little, but the Dublin environment is still very challenging,' he says. 'The problem is when you've suffered three or four years of significant turnover that you almost begin to accept a certain baseline that might be considered unacceptable elsewhere.
'The Dublin hedge fund market is largely concentrated in one area of the city. Many providers are seeking qualified staff against the backdrop of a relatively limited labour supply, with a modest number of graduates coming on stream every year, and yet there is significant new start-up activity and strong growth in hedge fund administration work coming into the jurisdiction.'
The level of staff turnover in Dublin was one factor that persuaded PFPC to join the growing number of administrators that have set up operations outside the capital - in this case in Navan, a town around an hour's drive north-west of the capital that was pioneered as a financial services centre by the insurance group Generali. 'We've been very happy with our Navan initiative,' Mannion says. 'We're getting a new labour catchment area, reducing turnover levels to negligible, and attracting people from that area who want to avoid the long commute into Dublin they would otherwise face.'
State Street has operations in Kilkenny as well as in Naas, on the outskirts of the Dublin conurbation, and Drogheda to the north of the capital, and Enos says the move to set up new operations in suburban centres follows a pattern already seen in the US. 'It's a process we're familiar with in the US and elsewhere, where the city becomes such a competitive place that these outer centres start to develop on their own,' he says. 'The housing market in Dublin is another factor - people can not only ease their commute but purchase more property. It's all part of the equation, not just salary compensation, to attract the talent you need to advance the business.'
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