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Asset management operational model continuing to undergo an evolution

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There has been a continued evolution of the asset management operating model over the last couple of years. Gradually, both traditional long-only managers and alternative fund managers have been shifting away from a multi-vendor, purpose built system model to more of a single vendor model, outsourcing many of the middle- and back-office functions at the same time. 

This cost-incented approach is, in large part, fuelled by the pressures that fund managers are under to seek alpha in support of their client’s objectives. This has been the case for some time now and can be attributed to a number of factors: fund numbers, increased competition and changing distribution models. 

“What we have been observing across the asset management industry, is that firms are expanding their participation in new asset classes, new geographies, new strategies and truly becoming more global,” says Brian Crowley (pictured), Vice President, Broadridge Investment Management. 

That expansion into new asset classes and markets is resulting in the need to hire more front-office specialist expertise, individuals with knowledge of specific asset classes, strategies or markets (e.g. emerging markets) that firms might not have had to accommodate in the past. At the same time, this increases pressure on the back-office begging the question, is their infrastructure and IT systems up to the task? Should firms continue to invest in expanding legacy infrastructure adding to support complexity or seek alternative solutions?

“Asset management investment approaches and strategies are converging (in the collective search for yield) and organisations are seeking to reduce their technological footprint by increasingly using outsourced software and service providers. They are looking to modify their infrastructure, reduce vendor risk and continue the quest for a true straight-through processing environment. The objective is to create a single platform where the front-office, middle-office and back-office are all seamlessly integrated with a reduction in the amount of manual intervention that multiple systems often times require to stay current and accurate” explains Crowley.

Broadridge Investment Management sees many opportunities in the market, precisely because its platform offers just those capabilities. It currently supports more than 225 global hedge funds, asset managers, family offices, fund administrators and prime brokers, helping service over USD 1 trillion of assets. 

Whether or not the convergence alluded to above results in a new future paradigm is hard to say. 

“What we do see is long-only managers employing strategies that hedge funds have long executed, be it in credit, high yield or relative value strategies: they are developing hedge fund-like products as a way to evolve beyond merely long-only products. In the past, this was most clearly evidenced by long/short equity funds but the strategy mix is becoming much broader,” observes Crowley.

This is no straightforward task, however. If the prevailing paradigm were to persist, it would require asset managers to invest in their front-office capabilities (both systems and personnel), inclusive of middle- and back-office personnel who are familiar with those strategies. 

The new paradigm is likely to be one whereby, in order for that asset manager to operate in a profitable way, they will need to find a way to manage their expenses in other areas. 

“That’s where we are seeing the investment trend: managers reducing their technology footprint by outsourcing middle- and back-office services to those with the experience, governance polices and necessary expertise, at the same time focusing their resources on building out the front-office.” comments Crowley. 

For firms that do not adapt, the result may be a higher cost of having to invest in new people and systems to evolve their business operations. But as more asset managers are realising, by choosing to outsource non-investment functions as part of a managed services arrangement, they can focus purely on generating new sources of alpha. 

Crowley observes that when it comes to the expanding use of managed services, there are a number of opportunities that present themselves. Examples might include reference data management and investment accounting. 

“We have worked hard to ensure our front-office order management and portfolio management applications could support any asset class, in any geography, providing connectivity to an array of brokers and EMS’ that our customers require. As for risk management, we’ve done a good job of integrating our risk management capabilities within our portfolio management application so that portfolio managers can run stress tests and ‘what if…’(historical) scenarios on portfolios, at the pre-trade level, before adjusting positions.”

Post-trade, Broadridge is able to handle all the usual middle- and back-office asset servicing functions: handling all reference and pricing/valuation data, data warehousing, enabling manager to perform required regulatory reporting.

“The point is that we’ve analysed each of the front, middle and back office functions that have roles in trade processing and we’ve built solutions for each of those groups. We solve the issue of vendor risk reduction by providing integrated solutions which is turn allows a manager to reduce the number of vendors they need to manage” states Crowley.

To be clear, though, asset managers are responsible for complying with regulation. But as they turn to outsourcing models, what they will want is to ensure that they partner with someone that has deep experience making sure that data is captured, and stored in such a way that it can be easily accessed and reported on. This will be especially important for transaction reporting under MiFID II next January. 

“Many of the investment managers we speak with are looking to reduce vendor risk, reduce their technology footprint and manage expenses through the use of outsourcing. They see this as a way to invest their investment dollars in front-office staff and new strategies and products, with the hope being that it gives them an ‘edge’ over the rest of the competition,” concludes Crowley.

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