UK – Most fund managers have failed to keep a “sufficient grip” on their operational costs to remain profitable if markets continue to fall, and should look at outsourcing back and middle office operations, agree senior executives surveyed by IT and business service provider Computer Sciences Corporation (CSC).
Says one respondent to the survey: “A chronic lack of focus on cost base during the sustained bull market, and a consequent inability to service multiple defined contribution scheme customers cost-effectively, has left fund management companies with little choice – they must either outsource to efficient providers or face effective disenfranchisement from their core client base.”
The survey revealed that 93% of senior executives interviewed believe outsourcing to be inevitable within the next five years. Controlling costs, says CSC, is becoming the “gospel of the fund management industry” and outsourcing will enable fund managers to concentrate on their core business and benefit from a cost-effective support system that will keep them profitable and compliant with regulations.
In terms of services that should be outsourced, over 50% believed that services of global custody, securities processing, transfer agency, defined contribution measurement, fund accounting and HR/Payroll should be outsourced – and custodian banks are set to be the winners. Half of the respondents believe that custodian banks will win the greatest market share in the provision of outsourcing of back and middle office operations to fund management companies.
Identification and monitoring of costs by fund managers is further deemed to be essential as clients focus more on charges than investment performance. Seventy one percent of respondents agreed that, within the next ten years, clients will make decisions based on charges, which will become a key source of competition.
The survey also revealed that the majority of senior executives believe that the presence of medium-sized players in the UK fund management industry will decline. Fifty-seven percent of respondents predicted a decline in the next five years, as medium-sized fund companies find themselves unable to compete with specialist niche players who command premium fees, or with the global fund management companies who enjoy the benefits of scale.
CSC surveyed 114 fund managers and industry participants.