Outsourcing core administration and management tasks are becoming increasingly common among fund managers. The need for more efficient technology solutions due to the euro and Y2K transition and the demand for better and quicker information is driving managers to use more services from the few big outsourcing providers.
“The growth throughout the industry is being driven by the ageing population, increasing complexity of investment vehicles and the growth in cross- border investing and consolidation,” says Ronald Logue, vice chairman and chief operating officer at State Street in Boston. “We are seeing strong growth in providing a bundled suite of services that include custody, accounting, daily valuation and shareholder record-keeping to investment managers and pension funds,” he says. “In Europe and the US there is a growing demand for total asset servicing which only a few providers can deliver. Those specialists who can bundle unitised accounting, daily pricing and fund administration at scale – and who are committed to further honing these skills and adapting them to new markets as the collective investment fund concept goes global – are at a distinct advantage in this marketplace.”
Management outsourcing seems to be the next step in the process. State Street (SS) has just reached an agreement with Pacific Investment Management (PIMCO) under which State Street will assume virtually all of PIMCO’s investment operations capabilities. “This is a natural extension of our product line, which moves us out of the back office and into the front and middle office of our customer,” says Logue.
For Jeffrey Tessler, head of Bank of New York (BoNY) operations in Europe, the rapid acceleration of this business will generate new opportunities and a transformation of the sector. With the acquisition of Trust Bank, BoNY changed its approach to Europe, making it one of the largest of custody services to pension funds, increasing the opportunities for the bank’s European outsourcing operations. The agreement signed with JP Morgan Investment Management to provide them with full accounting and administration for their back office, showed the bank’s commitment to expand its outsourcing services. “We are now in the position to talk about outsourcing,” says Tessler. “We see many more opportunities for us in this field.”
Regarding the BoNY-JP Morgan agreement, Mark Tennant, at Chase Manhattan in London says: “It will be very interesting to see how that goes. I believe this was a very important move for BoNY.”
Chase was very interested in this outsourcing at the early stages. But JP Morgan’s timeline was the first quarter of this year. “We simply said it couldn’t be done and walked away from it,” he says. “I hope it succeeds because we don’t want to see an outsource failure.”
Outsourcing is changing the role of the global custodian. The ever increasing demands of the managers for tailor-made services from their providers has meant that each such relationship has the potential to become a virtual partnership, says State Street’s Logue. “Investment managers want flexibility and a willingness on the part of the providers to develop a detailed knowledge of the manager’s individual needs and culture.” To improve services it is necessary to improve infrastructures. “The essential value that custodians can provide to investment managers will continue to migrate from traditional port-trade custody and reporting, to market trading tools and pre-trade platforms for analysis and strategic modelling,” Logue says.
For the future, the big firms in the outsourcing arena expect their business to grow throughout the world. “Outsourcing is now a set path,” says Chase’s Tennant. “If you don’t do it you probably ain’t in the game. I think only three groups are going to be able to continue unless they are able to outsource a very large part of the back office, probably right up to the moment of trading.”
However, the business will be controlled by a handful providers, worldwide – those who have the capability to develop and fund the increasingly higher level of technology required. Paula Garrido