Focussing on quality
Convention suggests that as the pace of technology quickens and the costs of IT increase so the demand for administration provid-ers will grow. Investment manag-ers want to concentrate on investment management and their cli-ents. They do not want to be constrained by the capital costs and inflexibility of their own back offices.
The evidence suggests Europe is following the US' lead: the sustain-ed growth of Luxembourg as an administration centre specialising in European cross-border investment administration; the continuing trend to outsource custody functions, and the emerging market for pensions member administration.
The opportunities for the specialist administrator are provided by the adoption of the euro and the declining need to administer multi-currency client bases. At the same time there will be growing convergence in the needs of the investment manager as the DC pensions market develops across Europe. Mutual funds and cross-border pensions member administration will become a major growth area.
It is anticipated that the trend towards outsourcing will become more pronounced with the increasing integration of the European market. Not only are fund managers looking to their outsource suppliers to help control costs and provide best practice", they are now also looking to them to offer the necessary IT and economies of scale needed to launch a profitable cross-border product.
The initial response has been the formation of "one-stop" shops. Yet it can be clearly demonstrated that the industry still has some way to go before the much sought after economies of scale can be achiev-ed. Instead the focus should be on quality of service.
Size appears not to be the immediate solution. In a recent survey of Luxembourg administrators by KMPG conventional wisdom is stood on its head. One of the key findings was that economies of scale did not appear to apply to Luxembourg administrators. There was a linear relationship between costs and assets!
One conclusion could be that IT is not delivering. How many ad-ministrators have an integrated service platform? Without this double or even triple entry of data is necessary. Industry-wide protocols are needed to enable STP. Otherwise the marriage of IT and the administrative process will re-main a dream and there will continue to be the need for manual intervention, double input and all the inherent risks that such inefficient operations carry with them. These inefficiencies outweigh any benefits from economies of scale.
Developing an integrated platform does not necessarily suggest a need to apply radical IT solutions - rather a more evolutionary ap-proach. There is no point looking to develop systems that compete with Bloomberg for analytics or Intersec or Frank Russell for performance measurement. The em-phasis is to create a systems environment that opens up the relevant data held by the administrator so that it can be manipulated for the specific needs of the client, by the client.
As Coopers & Lybrand has noted "systems suppliers are going in the right direction. Some packages now include relational databases and modern tools to allow you easier development and remote will soon exist". These are the very initiatives that Henderson is undertaking with its own systems. These already provide real-time front-end systems to investment managers around the world as an integral element of their service and are now looking to further open up the relevant databases so investment managers can analyse the portfolio data as they want.
If not economies of scale what does the administrator offer? A distinction needs to be made between outsourcing administration and identifying an IT solution. Administration is a service, IT a tool to deliver the service.
As a service not an IT solution, administration will become in-creasingly specialised with a focus on service delivery.
There is a clear need to provide pro-active service management by the administrator. Quality has become the key differentiator in the selection of service provider.
Those best suited to deliver this type of service are the specialist administrators. Even the senior management of EFA acknowledge the benefit of this. "There is a lot to be gained from having a dedicated company which spends all the time looking at this fund area fund_administration," says EFA's president Michael Waringo. This dedication provides a clear focus of expertise where clients needs are addressed. Rather than being offered a standard service, pension fund and other institutions are provided with a crafted solution based upon a detailed knowledge of investment management.
Anthony Wolfe is director at Henderson Investment Services in London"