Fund management
As the funds landscape becomes increasingly complex, fund managers are outsourcing large chunks of their operations to bespoke and specialist fund administrators. But what are the pros and cons of outsourcing? and how do you manage the process to protect your clients and your reputation?
Sharing the burden Words: David Craik
THE PANDEMIC HAS piled the pressure on all global businesses, prompting many to review their operations – from costs to talent, supply chain and technology. Some, particularly in the retail, manufacturing and IT sectors, have taken the decision to ‘in-house’ some or all of these operational elements to save money and improve resilience in an uncertain economic climate. The fund management sector has done its own fair share of soul-searching, but continues to hang its hat steadfastly on outsourcing rather than insourcing its operations. According to a recent survey of 100 alternative investment fund managers, carried out by fund administrator Ocorian, 70% of managers expect to increase the amount of functions they outsource in the next three years, with 72% expecting outsourcing to “play a more central role”. This is primarily down to the need for more oversight in a time of increased regulation and cost efficiencies, as margins and fees come under more pressure. Typical outsourced tasks include investor onboarding, financial reporting, company secretarial services, preparations and review of constitutional documents, trade execution, dividend payments and fund accounting, bookkeeping and valuations. For Anita Weaver, Director of Corporate Services at Stonehage Fleming, the benefits
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are clear. “What fund managers receive from administrators is independent accounting, particularly for fund net asset value (NAV), calculation of performance and carried interest fees,” she says. “They also get experienced staff across the spectrum. It can be quite challenging for smaller fund managers to attract top talent and keep them busy all the year round as some of the activities are cyclical. “It can also be more cost-effective from an office space perspective. Administrators just have more economies of scale.” She adds that administrators also provide key relationships with other service providers, such as banks and regulators. “The sharing of best practice is crucial,” she adds. “The administrators can offer this as they often sit on industry committees.” Aside from these benefits, there are several key structural drivers behind the demand for outsourcing. One sounds simple – letting fund managers get on with their day jobs. “It allows them to do what they do best, which is maximising returns for investors,” says Simon Burgess, Head of Alternative Investments at Ocorian. “If they focus too much on the back office, they may take their eye off the ball from the front-office work.” Jody Newark, Managing Director of Guernsey fund administrator Obsidian, believes that the culture of fund management is well aligned with outsourcing some activities. “A fund manager thinks about your investment portfolio, your clients and the transactions they are going to place,” she says. “Fund managers will outsource
because they don’t want to get bogged down in a high level of technical detail. A portfolio manager has no specific interest in how the financial statements are prepared. In-house administration is just not in a fund manager’s mindset.” Newark adds that most, if not all, fund managers had already outsourced at least part of their operations prior to the pandemic. “Outsourcing meets with a lot of fund managers’ risk appetite. Institutional investors also want to see a certain level of control around the administration process,” she says. “We’ve had the financial crisis and the subsequent need for more regulation and transparency, and we’ve also had scandals such as the Bernie Madoff case, which may not have happened if there had been a third-party administrator involved in the process.”
CAPITAL GAINS Burgess says the rise in investor capital is another driver. “In key markets such as the Channel Islands, the number of funds being launched is not increasing but the assets under management is,” he says. “The levels of sophistication among investors in terms of information, data and reporting are now higher when fund managers look to raise capital from them. Using administrators can make this process easier and if you have happy investors, they are more likely to re-invest.” Newark says she has seen an increase in funds as a result of the pandemic. “There have been a lot of positive investment opportunities arising out of Covid-19
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