A Funds Europe report, conducted in partnership with Temenos, considered the future of investment operations and found that asset managers will look increasingly to third parties.
Asset servicers and software vendors are likely to play a greater role in asset managers’ operational strategies of the future, according to Funds Europe research.
In a survey of asset managers, conducted in partnership with Temenos, the overwhelming majority (73%) stated that they intend to increase the number of services that they outsource to partners.
However, firms are not looking to increase the number of vendors they use. On the contrary, almost half (42%) intend to reduce the number of service providers they use, meaning that they will become more reliant on a smaller number of third-party partners.
This is a move away from the component-based or modular approach to operational outsourcing that we have seen in recent years where firms pick up a range of different services from different sources. Instead they are looking primarily to a select number of asset servicers.
As many as 83% of survey respondents believe that will extend strategic alliances with asset servicing and technology partners (see fig 1), enabling these partners to connect mid- and back-office services straight through to the asset managers’ front-office tools and investment book of record (IBOR).
And more than three-quarters (79%) said that they expect their service providers to be able to support their global investment activities, across multiple asset classes and from a single technology platform.
In recent years, asset servicers have spent considerable sums to offer some form of front-to-back capability. Some have looked to develop their own in-house front-to-back capability. Others have sought closer alliances with front-office specialists. For example, the 2019 acquisition of order management software provider Charles River by State Street was one of a number of similar deals that year.
We have also seen asset servicers strike strategic alliances with technology firms. For example, a number of asset servicers such as HSBC and BNP Paribas Securities Services have partnered with BlackRock’s Aladdin Provider network, bringing together the former’s back-office and post-trade services with the latter’s front and middle-office technology.
“What this means in practice is that we operate on a shared platform and workflows with our clients, which reduces duplication of data models, communication breaks, operational risk and therefore increases efficiency throughout the process,” says Arnaud Claudon, head of asset owners and managers client lines at BNP Paribas Securities Services.
Aggregate and reconcile
The prime driver for this integration has been data and the need for a single data model.
“As a global business, fund managers wish to avoid receiving data and reports in different formats for different markets and needing to aggregate and reconcile that information,” says Barry Lee, business solutions director at Temenos.
“For the large asset servicers, a dominant theme over the past ten years has been to centralise and standardise their services around a global operating model, delivering consistency in data, reporting and client experience. Asset managers are looking to take advantage of this greater consistency, and potentially to consolidate their outsourced relationships, when they issue an RFP [request for proposal].”
These trends have, in turn, prompted asset servicers to review how they build their global operating model. “For a fund administrator that has built its operating model around Temenos Multifonds, for example, it makes little sense to be offering standalone services on legacy technology just to support one or two clients in certain markets,” adds Lee.
“Increasingly those clients are also being migrated on to the strategic global platform, and asset servicers are decommissioning satellite platforms they have previously maintained to service specific elements of their global client business.”
The greater use of data has forced asset servicers and fund administrators to look differently at data and to view it as a product in its own right rather than just an output, according to Kate Webber, lead product manager, global fund services, Northern Trust, who contributed to the report and also discussed its findings in a recent FundsTech webinar.
“Asset servicers have traditionally sold a combination of human activity intertwined with systems to create outcomes for our clients. Data is one of those outputs but has never been seen as driving force of technology change,” says Webber. “But the world has changed in the last decade and clients and investors, both retail and institutional, expect to be in control of their own data. Asset managers need timely data to make better investment decisions.
“We need to change how we service in the future and legacy infrastructure is not best suited to future data needs. Asset servicers will become data providers in the future and if they cannot do that in a timely manner, they will find themselves out of the game,” says Webber.
Asset managers may also find that the inability to capture and manage their data locks them out of certain sectors and asset classes. For example, the ESG market is increasingly popular with investors but managers are under much greater pressure to prove their ESG credentials through the use of data.
More than half of the survey respondents (56%) said that technology and data infrastructure will be the focus of their investment over the next 12 months, while 47% said their investment will be focused on ensuring ESG compliance across their product range (see fig 2).
“The ESG sector is a very good example of the ways in which external market events can really test a manager’s data strategy,” says John Wallis, global head of relationship management and business development at Brown Brothers Harriman, who also participated in the webinar.
Fund managers have to capture a lot more pre-trade information on the companies in their portfolio, record how they engage with companies through voting records and also meet the reporting requirements of the EU’s Sustainable Finance Disclosure Regulation.
“If there is a weak link anywhere in your data strategy, it will be exposed by this process. You need clear lineage right from the first twinkle in the eye of the fund manager to it appearing in a board report,” says Wallis.
The Funds Europe research also looked at the specific technology being employed by fund managers (see fig 3) and which ones currently play an important role in their IT strategies. The cloud featured prominently (62%), as did Software as a Service (SaaS) and application programming interfaces (APIs).
The study also looked at the use of artificial intelligence (AI) and machine learning and asked where these might be best be applied in firms’ operations. This includes applications in portfolio modelling and investment decision-making, in trade execution and transaction cost analysis, in collateral and liquidity risk management, and across a broad range of functions designed to minimise operational risk and cost.
A priority in applying AI, according to respondents, is the ability to augment human expertise into AI models. Augmented intelligence typically refers to the use of information technology and AI techniques to supplement and deepen human capabilities – to reinforce human intelligence, rather than simulate or replace it.
There is also a demand for more explainable AI. A transparent approach to the use of this technology will help deliver insights, both predictive and ex post analytics, across the investment lifecycle. Crucially, this can deliver business intelligence in a way that can be explained to product teams, customers and financial supervisors.
The Future of Investment Operations report can be found here.
The webinar can be found here.
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