Unparalleled growth in the German Spezialfonds market is not an isolated phenomenon. It clearly lends itself to a larger analysis of the market drivers.
Today, the investment management industry is experiencing the combined effects of unprecedented trade volumes, steadily rising cross-border investments, a boom in collective investment vehicles and ongoing structural changes in the marketplace, not the least of which is the record-setting mega-merger rate of investment giants, especially in western Europe.
Certainly technology is the catalyst for an explosion in information networking and the globalisation of business and finance. Witness Ford, Daimler-Chrysler and General Motors using the Internet together to create a virtual marketplace for upwards of $250bn (e290bn) a year in parts procurement and inventory management. Surely, the Internet is on its way to serving as switching station for vast flows of business-to-business commerce.
Global ageing is another market phenomena driving demand for retirement assets; moving governments to reform their pension systems, and spurring hundreds of millions of people to invest in capital markets. Forecasts of dramatic population declines in Germany and other highly industrialised countries will continue to pressure governments to seek alternatives to traditional pay-as-you-go government retirement systems. Tapping the higher investment returns that today’s securities markets can produce is the single best hope for meeting the global retirement challenge without resorting to massive tax hikes or benefit cuts. While governments continue to build support for pre-funded pensions and implement reforms, individuals and businesses continue to vote their asset preferences. Germany, for example, is adding about 500,000 new stock investors a year.
In response to global trends, European asset managers are increasingly moving to core/satellite strategies incorporating a wider range of investment products, including index funds and exchange-traded products. To both provide and service the more complex portfolios, asset managers in Germany are supplementing in-house structures with outsourcing. A recent German Institutional Management Survey reported that 42% of its 34 respondents outsource and use from three to five managers for the Spezialfonds. A recent estimate by a leading outsourcing and information services research firm projects that worldwide demand for the outsourcing of investment accounting services alone will swell from $37bn in 1998 to $89bn in 2003.
As firms in continental Europe and the UK continue to absorb the costs of integrating mega-firms, full-service investment houses can serve as an outsourcing resource, both in the provision and servicing of new products, including fund accounting, daily valuation and shareholder record-keeping. Such global providers afford not only scale, but also absorb the inherent risk in these more complex services as well as the ongoing cost of technology to support them. Spezialfonds providers who cover the full array of asset classes are able to develop scores of finely tuned, sharply focused strategies to meet a staggering array of investment objectives. Choosing the right partner means securing the best team to meet the investment management industry’s challenges described below.

Corporate combinations
Last year Europe surpassed the US in the total value of M&A activity ($1.4trn). The pace of these deals has not slowed. As the resulting global investment giants concentrate on funding core services, many are looking for a provider with a bundled set of reliable asset services to integrate newly inherited and diverse investment operations. A provider with dedicated senior-level global service officers will work extensively with clients to calculate how outsourcing could effectively add value.

Competition and capital allocation
In the European markets, collective investments are rising – 25% in 1999– with the UK ($400bn) and continental Europe ($3trn) now holding about one third of the total collective investment schemes market ($9trn). Competition among fund managers is fueling a desire for fewer distractions. Capital is dear and many investment managers are choosing to deploy it towards improving performance, distribution and marketing rather than fund accounting and administration.

Expertise in a variety of disciplines, such as fund accounting and daily valuation, risk management, securities lending and derivatives is necessary to manage diversified global trading and investment strategies. Exchange traded funds, OEICs, and pooled products are just a few of the vehicles requiring customised and complex servicing across different time zones with unique regulatory reporting requirements.

In the expanding global marketplace, the provider’s experience and detailed knowledge of business practices, strengths and culture can help launch new products and establish managers in new markets. Only a few providers are capable of such organisational challenges involving project management or change management in addition to the more routine expertise involved in offering a full and flexible range of administrative services.
Providers at that level have a global depth and breadth of experience. Knowledge of internal controls, securities settlement, accounting, and transaction processing is vital. Service is provided not only through the design and implementation of processes at the operations level, but also at the strategic level through information sharing, types of investment vehicles available, which are most popular and what upcoming regulatory changes could mean.

Today’s top service providers should have a significant heritage of consumerism as well – of serving their clients’ customers. It’s hard to pick active managers based on short-term fund performance alone. Good managers get fired because of bad luck. Bad managers are hired because of good luck. You only hear from the ones that have done well. The time to prove skill is longer than the appointment of the average manager. Active managers need to improve their information ratios and lower risk through “enhanced” strategies with both long/short implementations.
Outsourcing can be a wise partnership in the long run when the widest range of expertise can be had in one shop. Providers who can deliver consistently accurate and reliable services to investors—existing or emerging—offer great benefits from raised returns and reduced risk to expert help in balancing portfolios with products and services geared towards enhanced strategies that serve clients particular investment goals.