The fund administration market has taken a new turn which may mean cheaper funds for institutional investors.
As competition hots up in Luxembourg with specialist providers setting up against the custodians, the banks who traditionally have offered this service as an add-on are running the risk of being overtaken in the price stakes, and in particular, by the European Fund Administration company (EFA).
EFA's main selling point to fund promoters is primarily its economies of scale. A larger beast altogether compared to other specialist pro-viders cropping up in the market, it brings with it not only the 700 funds, worth approximately $50bn in assets, but immense financial backing of four of the leading banks in Luxembourg - Banque Generale de Luxembourg, Kredietbank, Banque de Luxembourg and Banque et Caisse d'Ep-argne de l'Etat. And while the sheer scale of the operation is no guarantee of a flawless service, the simple fact of four times the know-how and four times the resources invested in an area which to date has been regarded as an 'extra', at least signifies a realistic alternative to the custodians in terms of cost.
Custodians providing fund administration as sidelines for their institutional clients have recently found they are having to plough resources into an area which they don't understand as well. The banks are finding themselves in a position where they are having to invest more and more in an area which is not a direct, core business." says Tom Seale, EFA's managing director. "So EFA was created to solve two problems - one is to provide a higher level of service to the fund promoters and meet their increasingly higher demands. And on the other hand to help banks minimise their costs."
From an institutional standpoint, EFA will be comparatively new in the area once all the funds are migrated. The exact percentage of retail funds under adminstration is unknown, but to say that they take up a "vast majority" of the total number. But the number of institutional business looks set to grow.
"We are not limiting ourselves to retail funds and if we have clients that want us to provide services for institutional funds we would certainly do so" Seale says. "We will handle all types of funds: retail, institutional fund and eventually pension funds. It's going to provide the same core service, so there's no reason why we would limit our market" Indeed, if the 'European pension fund', to be based in Luxembourg, works out, then there will be a vast amount of potential institutional business on EFA's doorstep.
EFA is investing a significant amount of the banks' resources in designing new software including a "super-database", which says Seale will provide greater reporting accuracy. "A key success factor for fund administration is having an accurate database of security prices, corporate actions and so on." he says, pinpointing this as one of the differentiating features of EFA and adding that this has been "a problem for many banks."
Notably, EFA is including those banks in Luxembourg in one of its possible gameplans which could potentially secure a monopoly on the fund administration business. After the funds have been migrated, EFA are considering approaching the other banks and offering them the opportunity of becoming shareholders. Following that, the next logical step would be to expand into Europe, a move, thinks Seale which could preempt the organisation's internal expansion. EFA are not ruling the likes of Dublin or in fact any other European country out of the question, but are waiting to see how the market progresses.
Custodians will still insist, though, that a one-stop service is the most efficient and hassle-free route to take, yet the trend developing in the market would suggest otherwise. To date, Banque Internationale á Luxembourg have realised the need for cross-border specialisation by spreading their wings into Singapore, Cayman and Dublin, the latter being a popular base for institutional funds and Banque Indosuez Luxembourg has just set up a fund administration business in Belgium with Generale de Banque."