The theory behind Moore’s Law is that computer processing power doubles every two years. And whilst technology advancements are benefiting global industry at large, within asset management it is beginning to blur the lines with respect to data and the myriad reports that regulators have required within recent years.
Pushing the rockIn short, it has become a Sisyphus-like challenge for asset managers—and will continue to be—as they bring on board new IT systems, and more reporting staff, in response to the reporting demands being placed on them. This is both a time and capital-intensive exercise. However, this is not what asset managers are paid to do by their end investors. Like any market sector, those who stick to their core competencies are compensated the most: in this case asset raising, portfolio management and risk management. Being bogged down in regulatory reporting…well, it’s just not cricket. When Airbus builds the A320, they outsource across the supply chain; they use Pratt & Whitney engines. They don’t try and build them themselves.
Trying to do it allRecently, a prominent law firm partner remarked anecdotally that one of their hedge fund clients had four staff whose sole responsibility was to do EMIR transaction reporting. That’s a significant cost centre. And does nothing to differentiate the manager from his peers. One has to wonder what benefit this brings to managers who seek to take on the reporting challenge internally. Going back to Moore’s Law, as technology advances, so too does the nature of reporting. Indeed, whereas five years’ ago fund managers had relatively few reporting commitments, today a combination of regulatory and investor pressures has created an environment where not only the complexity of reports is rising, so too is the frequency; some investors, for instance, are beginning to ask for intraday risk reports.
Let them have itThis is where outsourcing becomes advantageous. Managers get to benefit from economies of scale that would be impossible to achieve internally. That’s what happens when you work with specialists in their field; you get to leverage the depth and breadth of experience that comes from their supporting multiple clients. This has, of course, long been true of fund administration. Why spend resources on the back office striking your NAVs internally when the fund administrator has all the necessary systems and processes in place to handle fund accounting on an industrial scale?
The next evolutionary stageReporting is the next stage of this evolutionary process. Rather than handle the complexities of this ongoing task, asset managers have the opportunity to make their lives easier by working with specialists just as Airbus (or any other global organisation) does. Because the reality of Moore’s Law is that as technology improves, the nature of reporting will become ever more complex. To underscore the fact, last December the Luxembourg regulator, the Commission de Surveillance du Secteur Financier (CSSF) announced it was implementing a new monthly reporting requirement. Whereas previously the O1.1 report applied to all Luxembourg UCITS funds, Part II UCIs and SIFs, the renamed U1.1 report now extends to SICARs. Moreover, whereas previously the O1.1 report could be filed in Excel, the new U1.1 report needs to be filed in XML. Established asset managers with deep pockets might have large enough IT teams to cope with these technical adjustments but for the vast majority of fund managers, the prospect of having to constantly keep on top of reporting is becoming increasingly daunting. Not only that, but it introduces ‘key man’ risk to the organisation i.e. if the head of IT suddenly resigns or joins a competitor, who picks up the mantle? Where’s the brains trust in terms of understanding system configurations and workflow processes?
Removing risk, with a cherry on topWorking with specialized firms removes that risk. The onus lies with those whose role is to provide reporting solutions. The shift from Excel to XML is just one example of how, moving forward, the technical requirements and expertise needed to produce reports will increase. Rather than worry about having to constantly adapt their systems and processes, asset managers can use outsourcing to demonstrate to investors that they are enhancing their business efficiency. And at the same time spend more time running and improving their investment strategy. And the cherry on top of the cake, is that handing over those specialized functions, asset managers get better service with cost efficiencies impossible otherwise. As the global investment fund industry matures, outsourcing is becoming a business reality. Under Moore’s Law, those who adapt to change the quickest will fare the best.
By Lee Godfrey