Journal of Applied IT & Investment Management - Vol.2, No.3 by SimCorp

# JOURNAL of Applied IT and Investment Management

360 OUTLOOK

2 011

Challenges or opportunities? Top industry professionals assess upcoming year for investment management Data management

MASTERING DATA MAKES THE DIFFERENCE Edmond de Rothschild Asset Management

EXCELLENCE IN GROWTH MANAGEMENT Nordea Savings & Asset Management

BEST PRACTICE IN COST MANAGEMENT Actively managed funds

THE NEW COST PARADIGM

Volume 2 路 No. 3 路December 2010

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

CEO COMMENT:

Moving up the value chain by CEO Peter L. Ravn The new financial landscape emerging from the crisis of 2008-09 has forced the investment industry to reappraise the business outlook in many ways. Today more than ever, industry players are focusing attention on their IT infrastructures in their constant undertaking to mitigate operational risk, identify long-term cost savings and position themselves for sustainable future growth. The top business drivers, strategic responses and IT initiatives all embrace an increasing demand for operational efficiency, greater transparency and improved corporate governance. This reflects the need to be agile and adaptable to change, not least to accommodate new and often challenging regulatory and client demands, as the cover article on pp. 3–11 also shows. This equally applies to SimCorp. As a leading supplier of highly specialised software and expertise for the investment management industry, we must and do make every effort to ensure that our value proposition is fully aligned with the industry’s agenda. Through the SimCorp Dimension platform, the focus must remain on delivering a continually upgraded, seamless and integrated software solution to support changing market, regulatory and client requirements. Supporting new and existing clients requires that SimCorp steadily grows its business as well as the value it brings to clients. Promoting our aim of globally delivering a best-practice modular solution that can support investment management from front- to back-office, across multiple asset classes and company divisions was the opening of a Canadian office in Toronto in October. The office will further our expansion in North America and underscores our deep commitment to the Canadian market. With the Toronto office, and following the establishment of a Luxembourg presence in September, SimCorp now has 21 international offices. Demonstrating SimCorp’s unswerving priority to client support and commitment to interaction was the SimCorp Dimension International User Community Meeting (IUCM) in Berlin on 9-10 September. Theme of the 13th consecutive annual conference was ‘Sharing best practices’. Attended by no less than 281 delegates, which marked a 40% increase on 2009 levels, and showcasing a series of workshops and focus groups, the event was a great success, as presented in greater detail in the feature article on pp. 30–33, and boding well for the next event, to be held in Stockholm, Sweden. The IUCM10 conference programme included sharing best practices in growth and excellence, and this was underlined with the announcement of the SimCorp StrategyLab Growth Management and Cost Management Excellence Awards, this year going to Edmond de Rothschild Asset Management and Nordea Savings & Asset Management, respectively. Both are featured in separate articles in this issue. Looking forward with anticipation to a new year full of challenges and opportunities alike gives me the pleasure to send our readers my best seasonal greetings and to wish all a promising and prosperous 2011 on behalf of everyone at SimCorp. Peter L. Ravn, Ph.D., is CEO at SimCorp.

SimCorp

CONTENTS # C HALLENGES OR OPPORTUNITIES? TOP INDUSTRY PROFESSIONALS ASSESS UPCOMING YEAR FOR INVESTMENT MANAGEMENT

# D ATA MANAGEMENT: MASTERING DATA MAKES THE DIFFERENCE

# S IMCORP STRATEGYLAB AWARDS EXCELLENCE IN GROWTH AND COST MANAGEMENT

# E XCELLENCE IN GROWTH MANAGEMENT: EDMOND DE ROTHSCHILD ASSET MANAGEMENT

# B EST PRACTICE IN COST MANAGEMENT: NORDEA SAVINGS & ASSET MANAGEMENT

# A CTIVELY MANAGED FUNDS: THE NEW COST PARADIGM

# S HARING BEST PRACTICES IN INVEST- MENT MANAGEMENT: SIMCORP HOSTS TOP INDUSTRY CONFERENCE

# BOOK REVIEWS

# REGULATORY UPDATE

# RECENT RESEARCH AND WHITE PAPERS

SUBSCRIPTION Subscription to the journal is free of charge for members of the industry, associated institutions and academics. To subscribe, please visit www.simcorp.com/journal. Change of address should be e-mailed to journal@simcorp.com. EDITOR-IN-CHIEF Lars Bjørn Falkenberg, Senior Vice President, SimCorp A/S larsbjorn.falkenberg@simcorp.com CO-EDITORS Michael Metcalfe, financial journalist, michael.metcalfe@gmx.de Mette Trier, Copy & Translations Manager, SimCorp A/S, mette.trier@simcorp.com PUBLISHER SimCorp A/S, Weidekampsgade 16, 2300 Copenhagen S, Denmark, Phone: +45 35 44 88 00. Journal of Applied IT and Investment Management is a quarterly publication, published and distributed globally by SimCorp A/S. Print run: 13,500. SUBMISSION GUIDELINES Articles, book reviews, new reports and information on recent research can be submitted for review to Co-Editor Mette Trier, mette.trier@simcorp.com. For submission guidelines, please visit www.simcorp.com/journal. LEGAL NOTICE The contents of this publication are for general information and illustrative purposes only and are used at the reader’s own risk. SimCorp uses all reasonable endeavours to ensure the accuracy of the information. However, SimCorp does not guarantee or warrant the accuracy or completeness, factual correctness or reliability of any information in this publication and does not accept liability for errors, omissions, inaccuracies or typographical errors. The views and opinions expressed in this publication are not necessarily those of SimCorp. © 2010 SimCorp A/S. All rights reserved. Without limiting rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form, by any means (electronic, mechanical, photocopying, recording or otherwise) or for any purpose without the express written permission of SimCorp A/S. SimCorp, the SimCorp logo, SimCorp Dimension and SimCorp Services are either registered trademarks or trademarks of SimCorp A/S in Denmark and/or other countries. Refer to www.simcorp.com/trademarks for a full list of SimCorp A/S trademarks. Other trademarks referred to in this document are the property of their respective owners. ISSN 1903-6914

Read the journal online at www.simcorp.com/journal

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

360 OUTLOOK

2 011

December 2010

# Challenges or opportunities?

Top industry professionals assess upcoming year for investment management In the aftermath of the financial crisis, the investment management industry today stands on a threshold. As 2010 draws to a close and thoughts begin to turn to a new year, top industry professionals assess the daunting challenges as well as the promising opportunities that will characterise the near-term future for the industry.

Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management.

n the wake of the financial crisis of 2008 and market turmoil of 2008-09, the investment management industry has had to contend with a seismic shift in the financial landscape. Declining investor confidence, reduced transaction volumes, falling asset values, greater risk sensitivity and sharper regulatory scrutiny are just some of the heightened pressures weighing heavily on the industry. It comes as no surprise therefore that many industry players have been obliged to reappraise their business strategies, operating models and supporting technology. Some of the motivating considerations here are curbing costs, making risk more transparent, and adding more flexibility to infrastructure and technology. The immediate financial crisis has abated, equity and credit markets have recovered, and most major economies came out of recession in the last quarter of 2009. But this recovery was possible only as a direct result of the public policy response – quantitative easing, bank recapitalisations, exceptional central bank liquidity support, and so on. And yet despite these measures, most developed economies suffered a severe recession in 2009. Recovery is still fragile and many weaknesses and uncertainties remain as a result of the leverage built up during the boom years. Against this background, a number of challenges as well as opportunities await the investment management industry in 2011. “Investors are becoming ever more

discerning and delivering value is going to entail more than just the right investment strategies,” comments Gareth Quinn, Director of Alternative Investments, Accenture Capital Markets, part of the management consulting, technology services and outsourcing company Accenture. Whatever the state of the wider financial markets, excellence in execution, flexibility to respond to a changing environment and efficient operations are crucial for everything from effective risk assessment to competitive fees. Adds Mr. Quinn: “The difficulty is that what is seen as a challenge today will become expected practice in years to come, a situation which will favour those who are prepared.”

• • • •

restructuring how IT is managed; enhancing valuation capabilities; improving data management; enhancing front office capabilities.

“To achieve the goal of improving operational efficiency and better managing costs, companies are consolidating their systems, evaluating and implementing outsourcing solutions as well as workflow systems, developing global IT and operational strategies that leverage local expertise while consolidating investment processing, and enhancing data management programmes,” argues Mr. Clark.

STRATEGIC INITIATIVES Whereas during the recession, investment companies implemented tight cost controls, especially in IT, and only took on programmes to reduce cost or better manage operational and investment risk, starting in 2010, companies began to take on the backlog of strategic initiatives as well as to begin new projects. To meet the upcoming challenges facing the industry, in the opinion of John M. Clark, President and CEO of benchmarking research and consultancy group Cutter Associates, companies are undertaking the following initiatives to improve their systems and operations:

In addition to improving client reporting by upgrading or replacing performance measurement and risk analysis systems, as well as improving workflows and data management processes to ensure timely and accurate data is delivered to clients, companies will have to restructure how their IT is managed. According to Mr. Clark, to realise this aim, companies are: “organising so that IT works more closely with the business; assessing a wider range of sourcing strategies; enhancing the role of the Project Management Office (PMO) to improve and better control projects; and implementing metrics and benchmarks to measure the value and performance of IT”.

• •

Best practices in IT solutions and applications will only be sustainable with a strategic match between business strategy and operational platform strategy, argues Jacob Elsborg, Head of Technol-

improving operational efficiencies and better managing costs; improving client reporting to include more information and analysis about performance and risk;

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

360 OUTLOOK

2 011

SimCorp

# Challenges or opportunities?

Top industry professionals assess upcoming year for investment management ogy at Danish pension fund ATP’s investment department. “We will see an increased focus on developing and aligning the operational platform with business strategy, as a strategic approach to management of the operational platform is beneficial in terms of development, stability and cost,” adds Mr. Elsborg. No matter what the future direction in the investment management industry, there is a clear and absolute need to focus on efficient operations and controlling costs. The benefits are not to be achieved through simply slashing headcount or technology budgets without heeding the effect on capabilities. “What is required is smart, nimble cost reduction that boosts agility and transparency, while simultaneously positioning the business for renewed strong growth as the commercial environment continues to recover,” observes Mr. Quinn.

1 SimCorp StrategyLab (2010), ‘Report on Global Investment Management Growth Survey 2010’. Download the full report at www.simcorp.com/ enablegrowth.

(87%) see IT infrastructure as important in supporting growth. SOPHISTICATED CONTROLS In this climate of reappraisal and reassessment, certain trends in the industry continue, such as the expansion in the use of derivatives in investment strategies and the increasing complexity of products offered to investors. These, in turn, require companies to have more sophisticated controls over investment risk and internal operations. Here, enhanced valuation capabilities come into play. To achieve this, companies are focusing on improving the independence and transparency of valuations, especially for derivatives; evaluating and implementing analytics tools as well as solutions from pricing and service providers.

addition, they can be risky investments for the managers who do not have substantial experience with them. What makes alternative assets so unique is the manner in which they are discovered, researched, selected, and then accounted for. To support this, a fully functional investment system must contain strong front-, middle- and back-office capabilities. In Mr. Clark’s view, front office functionality should include components such as deal pipeline management, due diligence workflow support, Contact Management (CRM) and extensive document management. “It will also provide robust cash-flow forecasting, ‘what if?’ analysis, and flexible reporting dashboards with drill-down capabilities,” he adds.

He adds: “Those that doubt streamlining of operational efficiency is possible on a scale necessary to make any meaningful difference need to consider the wide variations in efficiency and productivity ratios within the asset management industry. There is no doubt that top performers are going to realise the potential for significant operational efficiency gains.”

One trend expected to continue for the foreseeable future is the expansion of alternative investments. By alternative investments is meant private equity, real estate, timber, agriculture and other tangible assets (i.e. fine art, wines, etc.). “Of course, derivatives are also expected to continue to grow in use; however, at present many companies have adopted a ‘wait-and-see’ attitude. They are waiting to see how financial regulations will be crafted, and how that will affect derivatives as an investment,” foresees Mr. Clark.

For the middle office, the system should provide valuation functionality, data governance, deal support and performance measurement. Finally, for the back office, the platform should provide a robust general ledger with a flexible chart of accounts and sub-ledger support, operating level support, drill-down capability from asset to holding to operating level, and support multi-country GAAP and IFRS requirements. The system should also provide deal oversight/compliance to assist in managing risk.

Realising this potential will call for an appropriate growth strategy. According to the ‘Global Investment Management Growth Survey 2010’1 by SimCorp StrategyLab, the independent research arm of SimCorp, most (84%) of the businesses surveyed indicate that they have a growth strategy and that this strategy is reviewed at least once a year. More than half see growth as having increased strategic importance, while almost all

The expansion in the use of alternative investments and their increasing complexity require companies to have more sophisticated controls over investment risk and internal operations. Alternative assets have a very different lifecycle than cash instruments, and traditional investment systems are not equipped to handle the nuances of their lifecycle. Like derivatives, the valuation of alternative assets is challenging, and there are no standards that can be applied. In

RISK MANAGEMENT The protection of client money and assets must be considered fundamental in sustaining or indeed rebuilding investor confidence in investment management companies. This means ensuring that clients’ money and assets are safe, and remain safe. However, there are nagging concerns that company controls over client money and assets do not always achieve the appropriate level of protection. Failure to comply with basic

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

regulatory requirements may result in clients losing money. Companies must be able to (and to be seen to) demonstrate that they understand and are in compliance with their obligations regarding the protection of client money and assets.

nature of emerging or potential risks. Moreover, regulators will also demand these same capabilities.

In the view of Bob McDowall, Research Director, Europe, at research and consultancy company TowerGroup, the ability to manage risk is assuming far greater focus in addition to technology and people resources for investment management companies in the post- financial crisis environment. “After 2012, the nature of and needs for risk management will be dramatically altered by changes in the financial services marketplace, the business models of financial services institutions, and a raft of new regulations,” he foresees. Mr. McDowall argues that the challenge for financial institutions is to demonstrate the will and ability to provide leadership and the management acumen to follow through in making risk management the responsibility of every business unit and internal function. However, he foresees some potential backsliding in companies giving risk management the prominence it deserves. “In short, even with spending on risk management forecast to grow faster than overall IT spending through 2012, the future role of risk management within the organisational structure of enterprises in the financial services industry remains uncertain,” he adds. Mr. Elsborg argues that breaking down risk in the right classes and ensuring the accurate calculation of accumulated risk will be key considerations in risk management as the product risk and regulatory environment becomes more complex. However, he stresses that complex software to calculate complex risk on complex products is no remedy in itself: “The software has to be clearly understood before being used, or else the value added equals zero.” “The uncertainties of the future will drive leading industry players to continuously re-evaluate their risk positions and risk appetite to realign risk with the institution‘s goals and objectives,” adds Mads Gosvig, Chief Risk Officer at Danish pension fund ATP. Vendors will need to continuously improve their tools and techniques, especially for visualisation to serve a broader, less technical business-user base, enabling users to quickly understand the

In addition to restoring investor confidence with the help of a greater emphasis on risk management, Mr. McDowall rates asset valuation as a key consideration for investment management companies to consider in the post-financial crisis environment. How assets in a fund are valued impacts the investment performance calculation, the setting of prices at which investors buy and sell units in funds, and the fees of the investment management companies. “A robust, reliable and consistent approach to valuation of assets is an essential part of the management of clients’ portfolios and collective investment schemes,” observes Mr. McDowall. Failure to value assets correctly could result ultimately in litigation or reputational damage to companies and impair investor confidence at a time when it is in dire need of being rebuilt. As a consequence, investment management companies will continue to increase their spending on risk management through 2012. This spending will correlate with the unfolding of new global regulatory regimes and requirements, which will be more closely aligned with actual risk management and yet not completely devoid of less effective regulatory oversight approaches that will demand multiple reporting capabilities.

December 2010

“Fund managers have a particularly important role to play here. Many investors close to retirement have been particularly impacted by the current downturn. Many are facing the prospect of much lower retirement incomes than they expected a few years ago. Their pension pots are typically smaller than they were and pension annuity rates have fallen steadily to an all-time low.” In responding to these and other pressing consumer needs, it is to be anticipated that innovation in fund management products will come about both as a result of product development at the more established and traditional companies, as well as through the arrival of new and regulated product providers, including those from other parts of the market. Bernard Delbecque, Director of Research and Economics, at the European Fund and Asset Management Association (EFAMA), the representative association

“... there are nagging concerns that company controls over client money and assets do not always achieve the appropriate level of protection. Failure to comply with basic regulatory requirements may result in clients losing money.”

PRODUCT INNOVATION Investors appeared to recover some of their appetite for financial risk during 2009-10, particularly in the retail sector. On the back of low interest rates and changing perceptions of value, retail investors put more money into the retail funds sector than in any previous year. They favoured corporate bond and absolute return sectors in particular, also with a strong showing by the property sector in the final quarter. Generally speaking though, the resurgence of the fund market has been relatively broadbased and would seem to provide a strong platform on which to build. Sustained growth in the fund industry is likely to come not only from the sale and retention of holdings in existing products, but also through the introduction of new products. States Mr. Quinn:

for the European investment management industry, observes that a key facilitator for product innovation is increasingly proving to be the broad flexibility of regulated fund forms available to managers. In Europe, and indeed globally, UCITS III is providing fertile ground to new entrants in the funds market. This flexibility means, for example, that access for a significant proportion of actively managed funds to the broader spectrum of traditional fund management clients is achievable, if not already a done deal. However, compliance with the UCITS framework is likely to require investment in systems and controls to meet the specific requirements of these highly regulated structures. “While asset managers may delegate various functions, they retain ultimate responsibility for compliance with the quite detailed requirements of UCITS III and, soon, UCITS IV,” notes Mr. Delbecque.

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

The Journal of Applied IT and Investment Managem management industry circles to assess the challe

Answer

Whatever the state of the wider financial markets, excellence in execution, flexibility to respond to a changing environment and efficient operations are crucial for everything from effective risk assessment to competitive fees. Gareth Quinn, Director of Alternative Investments, Accenture Capital Markets, London, UK. Accenture is a global management consulting, technology services and outsourcing company. Combining experience, comprehensive capabilities across all industries and business functions, and extensive research on the worldâ&#x20AC;&#x2122;s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 204,000 persons serving clients in more than 120 countries, the company generated net revenues of US$21.6 billion for the fiscal year ended 31 August 2010. More information at www.accenture.com.

Question

Where do you see the

investment management

industry headed and what are its main challenges?

Question

Answer

Companies are consolidating their systems, evaluating and implementing outsourcing solutions as well as workflow systems, developing global IT and operational strategies that leverage local expertise while consolidating investment processing, and enhancing data management programmes. John M. Clark, President & CEO, Cutter Associates, Rockland, Massachusetts, USA. Cutter Associates works exclusively with companies operating in the investment management sphere. Nearly 200 research member firms and 4,500 industry professionals rely on CutterResearch for research on systems and operations. CutterBenchmarking evaluates firms' investment processes by capabilities, risk and effectiveness. CutterConsulting has undertaken over 400 projects to evaluate, select or implement systems and to develop technology and operational strategies for investment managers. More information at www.cutterassociates.com.

What initiatives are companies taking to

improve their systems and operations?

OUTL

Question

How can best practices in IT solutions and applications contribute to ensuring success?

Question

Answer

We will see an increased focus on developing and aligning the operational platform with business strategy, as a strategic approach to management of the operational platform is beneficial in terms of development, stability and cost. Jacob Elsborg, Head of Technology, Investment Area, ATP, Copenhagen, Denmark.

Answer

The uncertainties of the future will drive leading industry players to continuously re-evaluate their risk positions and risk appetite to realign risk with the institution's goals and objectives. Mads Gosvig, Chief Risk Officer, ATP, Copenhagen, Denmark. ATP is Denmarkâ&#x20AC;&#x2122;s largest statutory pension fund, covering 4.6 million members, virtually the entire adult population in Denmark. Together with the tax-financed basic pension, ATP provides basic income security in old age for the Danish population. ATP was established as an independent entity in 1964. ATP group assets amounted to around DKK417 billion at end-2009. More information at www.atp.dk.

What role will assessing and managing risk play in future industry considerations?

2 0 11

Essential considerations fo

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

ent asked top professionals from selected investment nges and opportunities for the upcoming year.

Answer

The challenge for financial institutions is to demonstrate the will and ability to provide leadership and the management acumen to follow through in making risk management the responsibility of every business unit and internal function. Bob McDowall, Research Director, Europe, TowerGroup, London, UK.

Question

How will investor

confidence in investment management companies

TowerGroup is a research and advisory services company focused exclusively on the global financial services industry. For more than a decade, it has provided the world's top financial services, technology, and professional services companies with advice and information. Its team of analysts and specialised advisers covers the business and technological issues impacting the entire financial services sector. More information at www.towergroup.com.

be restored?

Question

To what extent will IT applications play a role

in achieving operational success?

LOOK

Question

What will be the main regulatory and prudential challenges facing the

Answer

Best practice solutions can help institutions keep costs low by automating most of the previously manual and, most of the time, error-prone processes. Martin Buchberger, CEO, AIM Software, Vienna, Austria. AIM Software is one of the leading providers of data management solutions for financial markets, with offices in Switzerland, Austria, Luxembourg, France, US, Hong Kong and Japan. Established in 1999, AIM Software provides internationally established software solutions and services with more than 120 references in 16 countries. Supported by its large client base, AIM Software offers low-risk and low-cost all-in-one software packages, based on its industry-proven data management software platform GAIN. More information at www.aimsoftware.com.

industry in 2011?

Question

To what extent will product innovation play a role in creating opportunities?

Answer

Industry players will have to be far better informed about where the industry is and where it is going next in response to market and regulatory developments, and to assess what risks to consumers may arise from companies’ responses to these factors. Peter De Proft, Director General, European Fund and Asset Management Association (EFAMA), Brussels, Belgium.

Answer

Q&A

r investment management

Innovation is a major source of true competitive advantage in the development of products that meet the true needs of individuals. From this perspective, ageing populations create major opportunities for the industry which has the expertise to offer households specific product solutions to supplement their retirement income. Bernard Delbecque, Director of Research and Economics, European Fund and Asset Management Association (EFAMA), Brussels, Belgium. EFAMA is the representative association for the European investment management industry. It represents through its 27 member associations and 45 corporate members approximately €13 trillion in AUM, of which €7.5 trillion was managed by approximately 52,000 funds at the end of June 2010. More information at www.efama.org.

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

360 OUTLOOK

2 011

SimCorp

# Challenges or opportunities?

Top industry professionals assess upcoming year for investment management With increased momentum in the proliferation of new investment strategies in familiar wrappers, there are inevitable concerns about how to identify whether the retail market operates

VALUE CHAIN As a result of this, the focus will increasingly be on the entire investment value chain including upstream processes – product development and design – as well as downstream activities like marketing, distribution and post-sale handling. “Players will also have to ensure that they have the right incentives at each step in the value chain to produce products that add value and address real client needs,” states Mr. Quinn. Put another way, the days are numbered for products produced with little consideration as to the likely benefits that will accrue to the client, and where much more attention has been paid to the value that will be added for the company by introducing them.

“Put another way, the days are numbered for products produced with little consideration as to the likely benefits that will accrue to the client, and where much more attention has been paid to the value that will be added for the company by introducing them.” in such a way as to deliver products that address real consumer needs and deliver good consumer outcomes. In a retail market where consumers struggle to understand their own needs and to assess value for money in their product purchases, this is a perennial challenge. The altered financial environment will call for a much deeper understanding of company business models, to identify the core strategy and the drivers of income and profitability going forward. According to Peter De Proft, Director General at EFAMA: “Industry players will have to be far better informed about where the industry is and where it is going next in response to market and regulatory developments and assess what risks to consumers may arise from companies’ responses to these factors.”

Mr. Delbecque notes the importance for providers to understand their distributors’ information needs and ensure, as far as possible, that distributors are getting the right messages about what particular products do and how they might reasonably be used. Pushed hard by the European investment management industry, the EU Commission has launched an examination of the effectiveness of regulation of retail investment products across the banking, insurance and fund sectors, with a particular focus on the rules governing selling processes and pre-contractual consumer disclosures. “Essentially, these

proposals aim to introduce a level playing field for all investment products sold in the European retail market, irrespective of their legal form,” states Mr. De Proft. The EU Commission has dubbed these products ‘Packaged Retail Investment Products’ (PRIPs) in order to distinguish them from straight securities. There is still some work to be done here to determine which products are genuinely substitutable. Although the EU Commission’s preparatory work on the dossier is not yet complete, there are likely to be two main strands: a requirement for a simple product disclosure document (which may look similar to the new UCITS Key Information Document); and standardised conduct of business rules (which will be based on relevant MiFID requirements). The investment management industry should be well placed to work under this new regime. In particular changes are to be anticipated in the way companies compete with other types of retail investment products in the pan-European market. “The philosophy of PRIPs is that across Europe all products that offer similar investment goals will become subject to the same standards,” comments Mr. De Proft. From the client’s perspective, clear benefits are to be derived from a more consistent crosssectoral approach. “Globally, the consumer is being championed by the regulators with the distribution changes potentially leading to a major change in the product mix created by the retail investment industry,” states Mr. Clark. Looking at the substance of the reforms themselves, and the potential future effects on the investment management industry, one of the drivers for the reform package was to allow greater exploitation of economies of scale to reduce costs to investors. There has been a mixed reception from industry to the

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

proposals regarding fund mergers; although this is the most obvious way to rationalise fund ranges and increase fund size, there remain genuine unanswered questions about the tax treatment of cross-border fund mergers. REGULATORY CHALLENGES Legislation is clearly to be expected from the EU Commission on UCITS depositaries, following their extensive consultation. There will undoubtedly also be feedback from the final form of the AIFMD, concerning the presence or not of differential standards for retail and professional investor funds. Perhaps there may be a move to extend UCITS-eligible assets to include real estate, and even commodities – the two major asset classes outside UCITS that retail investors can currently access through national retail fund regimes that will now be subject to the AIFMD. Added to all that, there will be a number of areas within UCITS IV where the new European Securities and Markets Authority will be encouraged, or made, to adopt binding technical standards to realise a more harmonised approach to implementation of the directive. Whether UCITS IV, AIFMD or suchlike, the main regulatory and prudential challenges facing the industry in 2011 will require investment management companies to escalate IT spending to conform. The key question here is to what degree. The three basic tenants of all of these regulatory challenges are: • • •

providing protection and proper disclosure to investors; providing insight and controls around systematic risk in the financial markets; providing streamlined procedures to deal with failure.

This regulatory agenda will drive the industry to increase standards in the

December 2010

“Whether UCITS IV, AIFMD or suchlike, the main regulatory and prudential challenges facing the industry in 2011 will require investment management companies to escalate IT spending to conform. The key question here is to what degree.” area of data and high-level metrics. In order for the regulatory bodies to do their part, the industry will have to adopt common data models and nomenclature to properly analyse systematic risk. Additionally, investment companies will have to conform to these changes to continue to do business with the same freedom they have today. Unlike some other industry mandates, most of the proposed changes will succeed in some fashion because the investors are demanding it. Financial reform will spawn cost pressures for many companies and vendors over the next years. Driving this cost is the current lack of data standards for the investment community. Several efforts have been underway for years in the area of industry-specific XML and other protocols. However, these communication standards are often implemented through cumbersome translations leaving the company but are not prevalent inside the companies. States Mr. Clark: “It is to be hoped that the recent regulations and reporting requirements will force more generic representation of data throughout the system. These associated costs, driven by reporting, will vary for firms based on the robustness of their internal data management programmes. It should be also noted that these changes are not static and will continue to evolve as the financial market evolves.” The extent to which IT applications will play a role in achieving operational excellence for investment management industry players will depend on a number of factors. Clearly the role will

be important but perhaps it is more interesting to examine precisely what kind of role they will play. The exigencies of stricter and more complex financial regulation will inevitably mean that buy-side firms will need to develop and/or enhance IT applications and infrastructure to extract operational data from their various systems and repositories and deliver the data in standardised semantics, syntax and formats. The effort incurred by individual companies will depend on how mature and transparent their systems and data platforms are in terms of meeting these requirements. For example, companies with a higher mix of derivatives will be impacted more. DATA MANAGEMENT Another discernible trend is the increased maturity of vendor product offerings, which has allowed buy-side firms to shift more towards the ‘Buy’ option as opposed to the ‘Build’. This would entail reduced IT effort in custom application development and increased effort in vendor product integration. “On a related front, in recent times, we have seen a few vendors with bundled front-to-back offerings, which have the potential to reduce integration efforts as well,” adds Mr. Clark. As companies seek to focus on their core competencies and leverage specialised third-party providers for non-core functions, middle- and back-office outsourcing has been on the rise in the past few years. This again marks a shift in IT expenditure from maintaining systems for middle- and back-office processing to in-

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

360 OUTLOOK

2 011

SimCorp

# Challenges or opportunities?

Top industry professionals assess upcoming year for investment management tegration of the outsourcer’s environment to the companies’ core investment systems. A common feature of requirements for the trends outlined above is the increasing investment in data management. “Needless to say, we will see an increasing focus on data management, process

management and information management in which an integrated process will be essential,” foresees Mr. Elsborg. IT will be required to continue to enhance data management applications and infrastructure. While the emphasis of earlier data management efforts was on facilitating operational processing and reporting, the focus in 2011 and beyond will be on enhancing the quality of data needed to support better investment and operational risk management, meeting regulatory requirements and facilitating data and application integration.

“Best practice solutions can help institutions keep costs low by automating most of the previously manual and, most of the time, error-prone processes.”

In the view of Martin Buchberger, CEO of AIM Software, a leading provider of data management solutions for financial markets, best practices in IT solutions and applications will be key to ensuring that this development remains sustainable. “In addition to the need for sustaining the cost reduction that had to be done during the crisis, investment management companies now have to cope with further regulation and increasing trading volumes with less human resources in many areas. Best practice solutions can help institutions keep costs low by automating most of the previously manual and, most of the time, error-prone processes,” Mr Buchberger argues. In this increasingly vigorous environment, defining the main constituent elements to ensuring operational success and continued expansion will be crucial. What makes operational success and continued expansion so challenging? In the words of Mr. Clark: “There are fun-

damentally two different types of challenge. First, making your routine better, quicker and cheaper and second, being agile and reacting swiftly to demands for change being initiated both internally and externally.” INCREASED AUTOMATION For the first, the challenge is related to process engineering, akin to other highvolume standard processes with the most important key performance indicators (KPIs) relating to efficiency and risk. One important strategy is maximum possible automation of the end-to-end process through IT and exception-based workflows. In addition, scale is a critical element in operational success and many investment management companies have decided that partnering with a large service provider (or providers) is the best way to continually drive down ongoing costs without increasing operational risk. For the second, the most important KPI is simply implementing the change when needed (i.e. supporting a new product launch or complying with new regulations). Initially this needs to be done in a safe way with efficiencies coming later. A variety of strategies can help, but particularly important are: • u sing vendors and service providers that have the widest possible coverage; • decoupling the different aspects of the operating model as much as possible to localise the scope of the change; • strong change management and leadership; • an adaptive corporate culture that recognises that an ever-increasing velocity of change is the norm. Finally, there is often another fundamentally different type of problem: embedding the change that was sometimes implemented very quickly in a very agile fashion into the routine standard oper-

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

ating model. According to Mr. Clark: “For example, to migrate off that spreadsheet that was implemented to quickly support the new process. Here a strong change management function within the firm is the key - otherwise it will simply not happen.”

• • • • •

OPERATIONAL PLATFORM Mr. Elsborg argues that constituting the main components to ensure operational success and continued expansion will be strategic management of the IT operational platform in which an essential part of the process will be the ability to measure effectiveness and the degree of alignment through correctly and appropriately defined KPIs. “Only in this way can you produce a cost-efficient platform that utilises resources in the best manner,” he adds. An efficiently integrated and managed platform reduces demands on flexibility and scalability and thereby costs, thereby ensuring the success of business strategies that are geared to growth. Here the main contributing factors are in Mr. Elsborg’s view:

integration of asset and liability management on a single platform; a well-defined operational platform; process management, not only as an IT solution, but as a fully integrated part of daily business management; enhanced data management; focus on system management based on understanding of processes and calculation of all products.

In the current climate of uncertainty and change, one factor is certain: the investment management industry must be adept in adapting to the new operating environment. The current economic situation requires a strategic approach to cutting IT costs. High-performance businesses must successfully reduce overall costs sharply and for the long term, shifting spend toward IT capability and business growth while stepping up IT performance at the same time. The most successful investment management companies will be those that anticipate or identify industry changes when and as they occur and respond early to be able to meet the considerable operational and technology challenges that arise.

December 2010

Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management. A financial journalist by profession, he has worked for such publications as The Economist, Financial Times and International Herald Tribune. Based in Germany, he also worked in the Luxembourg financial sector for 10 years, including tenures with Nordea Investment Funds S.A. and Lombard International Assurance S.A.

HELP US IMPROVE

the Journal of Applied IT and Investment Management As a valued reader, your opinion about the Journal of Applied IT and Investment Management matters. Please complete a five-minute online survey and help us increase your benefit of the publication.

Fill in the survey today, submit your feedback at www.simcorp.com/journalsurvey

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Data management:

mastering data makes the difference The harsher operating conditions facing the investment management industry in the wake of the financial crisis have given rise to the need to reappraise existing ways of managing data. One solution is to provide consolidated, cleansed data in standardised formats based on client-defined rules.

D Martin Buchberger, CEO, AIM Software, Vienna, Austria.

ata (or information) management systems have become an essential cornerstone for almost all the operations of an investment management organisation by providing quality, timely data for decision support. Systems have progressed to cover a wide variety of investment management areas including asset registration, financial management, process scheduling and control, materials management, maintenance management, condition monitoring, risk management, reliability management, and safety management. Due to the myriad systems and unique combinations of information systems within organisations, past research into data management systems has targeted specific industries or specific systems. Research emphasis within investment management itself has been placed on a few select areas such as control systems, maintenance, condition monitoring, and reliability. This has led to a disparity in the level of research into data management and information systems across the entire spectrum of the investment management industry. The last two decades have also seen an influx of the use of computer-based technology into investment management as breakthroughs significantly increase their functionality and subsequent adoption. Advances in computational power have paved the way for harnessing complex algorithms for the analysis of operation and condition data. Research into database technology has allowed huge volumes of data to be collected and processed, as well as spurring on the advent of the data warehouse. The Internet has brought the benefits of in-

formation-sharing and accessibility to the fore, and corporate system integration and workflow management are now being addressed in current research. Understanding the adoption and use of the aforementioned technologies allows the industry to formulate appropriate strategies on where to focus future research and development effort for investment management systems. However, with the availability of competing technologies compounded with a mixture of organisation technology adoption strategies, it can often be difficult to identify the current state of technological usage in investment management. It is interesting to note that in recent years an entire industry has grown to address related quality issues found in corporate application systems. These technologies provide comprehensive and intelligent algorithms that programmatically mend, consolidate, and attempt to repair the data resident in corporate databases. Further, the realisation that data quality is a major contributor to the overall cost structure of an organisation has led to major system initiatives intended to address this issue. System integration efforts among disparate application systems, databases, and business processes are evaluated and when possible consolidated to minimise poor data quality. All these efforts are critical to the ongoing operational effectiveness and corporate agility of global investment management companies. QUESTIONS TO ADDRESS To understand how data management in investment management can best be applied in the corporate arena, investment

management companies have to ask themselves the following key questions: • W hat is the precise composition of data management and information systems in industry management operations? • W hy are some systems used while others are not, and what improvements can be made to current investment management data systems? • How is the success of an investment management data system measured? • W hat is the level of integration between these data systems? • W hat data are regularly discarded and why? • W hat is the level of investment management data warehousing activities in company organisations? Over the years, users of corporate information have come to recognise the ageold adage “rubbish in, rubbish out.” For these reasons, programmatic steps are taken to ensure data quality. Data entry and field edits are imposed to catch the obvious typographical errors and database triggers and rules are instituted to prevent the entry of duplicate records. While these measures serve an important role in the information capturing activity, many errors, omissions, and duplicates can and do occur. In this context, data quality and data validation are two separate and distinct steps necessary to ensure best practices. If the financial systems applied by investment management companies are examined, for example, they are intended to reflect the current state of a business enterprise. The transaction systems and accounting procedures are intended to interrelate such that an executive can understand the financial

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

2009 80%

73%

December 2010

2010

76% 66%

60%

58%

53%

45% 45%

40%

38% 38%

20% 8% 7% 0%

condition of the enterprise at any moment in time. The reality is that most systems disconnect between the information-gathering phase and the business process. Either the transactional data entry fails to support the level of detail needed to reflect the business process or the business process is not followed. The latter is more common. SOURCE SYSTEMS As data management systems form the source systems to a data warehouse, it is important to understand their composition within a corporate organisation. Data processing and reporting is incidentally the primary focus of data warehousing by providing a platform for integrated data analysis. Most organisations have finance and account management systems, while the adoption of risk and reliability management systems lags behind. The ordering of the two leaders is slightly strange as most finance management systems also include an account management component or module. This is also true with investment management, where it is typically a component within the IT infrastructure. One possibility could be that organisations are not purchasing these modules in their system packages, or that these modules are not being used to their full capacity and are hence discounted. Data management systems are often built around a workflow specified by the system’s developer. Due to the lack of workflow customisability in many data systems, an investment management company will often need to adopt the system workflow model, rather than adapting the system to the current organisational workflow. While this forced adaptation produces both beneficial and detrimental effects, in the case of investment management, the benefits seem to be greater. What tends to be overlooked is the task of identifying best practices in reference data system selection, data warehous-

Reduction of errors

Reduction of costs

Handling large data volumes

ing, systems integration and data retention. Key issues to be addressed here are: a significant adoption of information systems and data warehousing across different business lines; the primary use of information systems to streamline business processes and enhance reporting; and the strong desire for improved system integration for next-generation investment management information systems. Past studies into data management within investment management tended to focus on understanding why specific systems or specific data management processes are implemented in a given company. There was little investigation into the broader picture of such investment management systems, their comparitative scope and their overall data integration strategies. Lacking was an exploratory, cross-sectional and international survey that examined a variety of data management issues directly impacting investment management companies across the board.

Risk management

Regulatory requirements

Other

Figure 1. Driving forces for reference data automation. Source: AIM Reference Data Survey 2010.

from 51 countries, aims to provide insights into the driving forces, challenges and planned investments for reference data automation in financial institutions. A special objective of the study, undertaken in the period from April to October 2010, is to take a close look at reference data management procedures and observe the developments over the years in order to help institutions obtain a better picture of their business in a constantly changing environment. By comparing their own data management strategy with the regional or global results, enterprises are able to assess their future steps in reference data management. The survey results for 2010 indicate that in the wake of the financial crisis, enterprises consider the reduction of errors (76% of all responses) and costs (66%) as well as the management of risk (53%) as the main driving factors for reference data management (see Figure 1). Compared to the results of previous years,

“As data management systems form the source systems to a data warehouse, it is important to understand their composition within a corporate organisation.” AIM REFERENCE DATA SURVEY 2010 The AIM Reference Data and Risk Management Survey is designed to address some of these issues. Published every consecutive year since 2004, the seventh global survey published in November 2010, and drawing on the responses of 380 financial institutions

these figures show a steady increase of institutions’ awareness in these areas. A major finding of the latest survey reveals that managing corporate action is gaining increased importance as companies recognise the need for the efficient processing of corporate actions in a timely and reliable manner. More

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

“In addition to the further automation of corporate actions, enterprises continue to focus on security master files (i.e. golden records or golden copies) to centrally manage their reference data.” While the primary reasons for using investment management data systems are to improve business procedures and data reporting, Martin Buchberger, CEO at AIM Software, explains how data analysis and reporting can help companies in detecting process inefficiencies and provide a platform for continuous improvement.

than one-third of all participating institutions stated that they want to invest in the management of corporate actions in the near future, a number that has been growing steadily over the last few years. In addition to the further automation of corporate actions, enterprises continue to focus on security master files (i.e. golden records or golden copies) to centrally manage their reference data. Figures in this area demonstrate that the demand in this area is still on the rise. Whereas three years ago, only 38% of all respondents stated that they had a golden copy in place, the 2010 survey shows that 52% of all respondents currently feed reference data into a centrally managed repository. This confirms that companies are aware of their need to further enhance operational efficiency and to support growing risk management and compliance requirements.

The survey results also indicate that in the new challenging business environment, enterprises are continuing to take urgent measures to extend their reference data management solution. More than one-third of all respondents are currently working on improvements in this area, whereas 16% state that they have already implemented a reference data management solution. In the growing realisation among financial institutions that not enough is being done to prepare IT platforms for the demands of an increasingly competitive and regulated industry, a big push is seen this year and in the coming two years towards additional investments in IT systems. A high 37% of all survey participants declare that they are currently working on extending their data management IT facilities.

WAYS TO PROCEED In the post-financial crisis environment, investment management companies that want to succeed will have to consider several key ways to proceed. Among these are: • f ocusing more on best-practice solutions that are capable of producing a fast return on investment (ROI, while still ensuring that solutions can be upgraded once the recovery gathers traction; • coping with more regulations and increasing trading volumes with less human resources by applying bestpractice solutions to help keep costs low with increased use of automation; • responding to the increasing complexity of financial products and additional regulations will require more flexible solutions that can grow along with the needs of the company.

SimCorp

adopting modular and add-on solutions that can be easily deployed for standardising reference data systems and that subsequently can be extended for universal application. • understanding IT investments not only as a necessary spend item but also to reap benefits in both a quantitative and qualitative way i.e. by cutting the costs of data deliveries and improving the quality of the data that is being used by other core systems. To ensure operational success and continued expansion in this increasingly hostile climate, the main consideration will be to select and implement lowrisk, best-practice solutions that can provide an immediate set of functionalities at the start of the implementation. It seems that customers tend to choose providers with a strong track record to ensure that this provider will not simply disappear. Data quality (or the lack of it) has been identified as a major contributor to enormous cost overruns and ineffectiveness. Lack of data quality is a significant deterrent for reducing operational profitability and effective financial management, leading to inaccurate decision-based information and other key operational inefficiencies. An entire industry has developed in an attempt to deliver a systematic data scrubbing capability to address this issue. However, data quality systems cannot always validate the data. This requires human intervention and a data validation process. Data quality in conjunction with data validation is the best practice for ensuring the maximum achievable benefits in investment management. Through data validation, a company can confidently reduce operational inefficiencies and costly errors. A wall-to-wall modular data management system achieves verifiable results while cleansing data. It provides the following advantages: • i t eliminates the duplication issue that often arises from partial and aggregate data recording; • it ensures the quality of data in corporate investment management information systems; • It validates asset data required for compliance; • it simplifies system deployments where information falls short of accuracy and validity; • it provides a single point of entry for

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

incoming data to be validated and processed. CLEANSED DATA Since the financial crisis, the investment management industry has become more risk-aware and its increased interest in ensuring cleansed, quality-assured data is a reflection of this. To gain traction in this sphere and deliver a more integrated and systematic approach to data validation, AIM Software has linked up with SimCorp in a global collaborative agreement. The agreement enables SimCorp to provide AIM Software’s GAIN Data Management software to its clients, in conjunction with SimCorp Dimension, SimCorp’s investment management solution. The data management software provides consolidated, cleansed data in standardised formats, based on clientdefined rules for use by downstream systems. As a result of the agreement, clients will be able to use the software to process securities prices, static and reference data and corporate actions notifications, with the resulting cleansed data being uploaded via a standardised interface. Consequently, clients can mitigate risks of costly errors and avoid waste of resources associated with use of inaccurate data. They can also reduce cost and improve the accuracy of their data management processes through streamlined, automated workflows. Introducing an integrated data management module in their IT systems allows investment management companies to streamline and overhaul their data processing capabilities. As a result, and directly due to the resulting improvement in data quality, companies can benefit from far more efficient processes and lower operational risk. Further, they can reduce complexity of data vendor connections, as only one, mutual integration point for these vendors is required. Finally, companies have the flexibility to choose from among a wide range of data providers. In practice, this means that data can flow in from many different sources, collected in one single point of entry or repository, where it is scrubbed, cleansed and indexed before it enters the user’s centrally managed security master data file. INTEGRATED ARCHITECTURE The majority of investment management companies use workflow management systems while life-cycle costing

and risk and reliability management systems tend to lag behind in use. However, these systems are becoming more a part of an investment management company’s information system architecture as adoption requirements increase for the business processes they support. The primary justifications for using investment management data systems are both to improve business procedures and data reporting. Streamlining business procedures through workflow automation decreases the overall time and resources required by each procedure, and thus, reducing costs. Data analysis and reporting also provides a method to detect inefficiencies within processes, and provides a platform for continuous improvement. While most investment management companies have already integrated some of their data systems through inhouse development, easier integration is the most desired aspect for next-generation systems. However, there is a lack of knowledge on data integration standards within many investment management companies. As standards-based integration decreases the risk of adoption in long-term usage scenarios (at the expense of an increased initial cost), further awareness about integration standards needs to be disseminated. The need for investment management data warehousing now appears to be firmly established in companies’ business considerations. Naturally, adoption has increased over the past decade and the primary reason for adoption is, again, the need for enhanced data analysis and reporting. With the significant uptake of data warehousing for investment management, it appears that this approach is a step in the right direction, although issues still remain on how to integrate data across different investment management areas. Overall, the main conclusion to be drawn is that the use of data management software for investment management in general is yielding favourable results for most users. Technology is being used to automate processes leading to greater efficiencies, and complex data analysis is now becoming mainstream after decades of simple data capture and reporting. There is no clear-cut sector or size of organisation leading the charge; nevertheless, all investment management companies are residually benefiting from the ones that are.

December 2010

Martin Buchberger has been chief executive of AIM Software since 1999. With over 10 years of experience in the data management sphere, Martin has worked as a senior project manager and risk management executive, including stints at Reuters Vienna before becoming CEO of AIM Software. He holds a Master’s degree from the University of Economics and Business Administration Vienna where he majored in Financial Markets, Operations Research and Information Technology.

AIM Software AIM Software is one of the leading providers of data management solutions for financial markets, with offices in Switzerland, Austria, Luxembourg, France, the USA, Hong Kong and Japan. Established in 1999, AIM Software provides internationally established software solutions and services with more than 120 references in 16 countries. Supported by its large client base, AIM Software offers low risk and low cost all-in-one software packages, based on its industry proven data management software platform GAIN. More information at www.aimsoftware. com.

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# SimCorp StrategyLab awards excellence in growth and cost management Promoting and rewarding superior achievements in investment management are embodied in the SimCorp StrategyLab annual awards for excellence in risk, cost and growth management.

Lars Falkenberg, Assistant Director, SimCorp StrategyLab.

SimCorp StrategyLab is the independent research arm of SimCorp, and the institution’s work focuses on identifying, understanding and suggesting ways to meet challenges related to mitigating risk, reducing cost and enabling growth in the global investment management industry. As an example of its activities to meet this goal, SimCorp StrategyLab has established its annual Excellence Awards for the purpose of promoting and singling out superiority within risk, cost and growth management. The SimCorp StrategyLab Excellence Awards 2010 were announced at a major annual investment management industry conference on 9 September in Berlin. Among this year’s strong entries, Edmond de Rothschild Asset Management and Nordea Savings & Asset Management were named the winners of the SimCorp StrategyLab Growth and Cost Management Excellence Awards 2010, respectively. The international jury included Professor and Director of SimCorp StrategyLab Ingo Walter, Professor Paul Verdin of KU Leuven University, Professor Michael Pinedo of Stern School of

Business, NYU, and Chairman of the Board of SimCorp StrategyLab, Peter L. Ravn, CEO of SimCorp. In the case of Edmond de Rothschild Asset Management, the company was awarded in recognition of its outstanding achievements within growth management. Specifically, the award was given for the company’s ability to not only weather the challenging conditions during the recent financial crisis, but also for putting a growth strategy in place that secured it a considerable increase in the number of clients, revenue and earnings. In awarding Nordea Savings & Asset Management for cost management excellence, the assessment was founded on the company’s work with strategic cost management. Singled out was its foresight in seeing the benefits of doing so even before the financial crisis forced the industry in general to take a more structured approach to managing costs. Despite higher volumes and increased complexity in business demands, the company was able to reduce its operational cost base in successive years.

The companies’ individual award-winning growth and cost management achievements are featured in separate articles in this issue, on pp. 18–20 and 21–23. This year, the jury’s careful assessment of contributions demonstrating accomplishments particularly within risk management concluded that none of the entries sufficiently met the stated requirements to be awarded the Risk Management Excellence Award 2010. Last year MEAG, Munich Re‘s global asset manager, was named the winner of the Risk Management Excellence Award 2009 after a thorough evaluation of entries by an international jury consisting of distinguished specialists and academics within finance, governance and risk management. The award was given to MEAG because of the company’s well-conceived and implemented risk policy. Specifically, the jury was impressed by the fact that risk management was regarded as an issue of significant, strategic importance even before the financial crisis broke out and that systems, policies and processes were in place accordingly.

QUALIFY FOR SIMCORP STRATEGYLAB EXCELLENCE AWARDS 2011

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

Ulrik Modigh, Head of Asset Management Operations, Nordea Savings & Asset Management, accepts the Cost Management Excellence Award from Chairman of the Board of SimCorp StrategyLab, Peter L. Ravn, CEO of SimCorp, and SimCorp StrategyLab Director, Professor Ingo Walter, Stern School of Business at NYU.

SimCorp StrategyLab Excellence Award 2010 winners

Already now, SimCorp StrategyLab invites global investment management institutions to join the competition in pursuit of the SimCorp StrategyLab Excellence Awards 2011. An international jury, consisting of renowned specialists and academics within finance, economics and applied IT, will assess the applicants’ abilities to mitigate risk, reduce cost and enable growth in today’s demanding financial environment.

The assessment will be based on an evaluation of the participants’ new developments, best practices and achievements accomplished within a specified time period up to 31 July 2011. SimCorp StrategyLab looks forward to again recognising and celebrating outstanding achievements in investment management by announcing next year’s Excellence Award winners in September 2011, in Stockholm, Sweden.

Recreate PMS(From PDF)

“...SimCorp StrategyLab has established its annual Excellence Awards for the purpose of promoting and singling out superiority within risk, cost and growth management.”

Submit your contributions to qualify for SimCorp StrategyLab Risk, Cost and Growth Management Excellence Awards 2011. Read more about SimCorp StrategyLab, its Excellence Awards and the submission guidelines at www.simcorpstrategylab.com.

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Excellence in growth management: Edmond de Rothschild Asset Management

The investment philosophy at Edmond de Rothschild Asset Management, winner of the SimCorp StrategyLab Growth Management Excellence Award 2010, has always been to deliver quality management and performance that withstands the test of time. Free of benchmarks and passing fashions, the approach aims at identifying companies with the key elements for sustained success. This demands a growth strategy based on long-term vision and bold conviction.

A Philippe Couvrecelle, Chairman of the Executive Board, Edmond de Rothschild Asset Management, Paris, France.

n affiliate of La Compagnie Financière Edmond de Rothschild, the French arm of the Edmond de Rothschild Group, Edmond de Rothschild Asset Management specialises in managing equities, convertible bonds and asset allocation for institutional investors, banking and insurance company partners and distribution platforms throughout the world. Focusing on stock analysis and selection and asset allocation, the company has built up the capacity to deliver sustainable performance within a relatively short timespan. This largely derives from conviction-based management and a systematic strategy of driving innovation in both asset management techniques and geographical approaches in the search for permanent alpha creation. Edmond de Rothschild Asset Management’s growth is entirely dependent on the ability to provide quality investment services and generate sustainable alpha for its clients. The stock-picking process is based on rigorous qualitative analysis of every company selected, meetings with their management comprising the cornerstone of the research process. Investment decisions are orchestrated around the synergies developed between the global asset allocation team and teams of specialised equity fund managers. Two specialties instigate both an indepth analysis of the markets, allowing for optimal, risk-adjusted asset allocation, and to local equity market expertise.

It is here that a strong international presence and experienced teams comprising over 140 professionals with 16 different nationalities provide a valuable asset. Guaranteeing stability as well as capacity to adhere to strategic decision-making and implementing successful growth strategies is the long-term commitment of Edmond de Rothschild Asset Management’s independent and principal shareholder, La Compagnie Financière Edmond de Rothschild, French bank of the Baron Benjamin de Rothschild. Being private allows the asset management affiliate to concentrate on long-term value creation for its shareholder through long-lasting growth and to remain innovative. This is essential since it has no captive distribution network for its funds. GROWTH STRATEGY The company was able to weather tough environments, particularly in 2008-10, and to make counter-cyclical investments when other financial institutions were suffering. Despite the challenging conditions of the recent financial crisis, it succeeded in putting a growth strategy in place that secured the company a considerable increase in the number of clients, revenue and earnings. In the client area, Edmond de Rothschild Asset Management’s clients increased by 34% in the 2008-10 period. This increase in the client base demonstrates that the company ensured existing client loyalty by constantly improving the quality of its investment and

client services but also won new clients, especially outside France. Also in the 2008-10 period to the end of June, the company took in close to €1.1 billion in new money despite a particularly difficult equity market environment in 2008. Adherence to its growth strategy allowed Edmond de Rothschild Asset Management in 2009 to record the third-largest inflows in France in its peer group. As an indication of strong initial growth in the company’s international growth drive, 78% of new inflows over the first half of 2010 derived from international markets compared to 45% in 2009. In only one-and a-half years, Edmond de Rothschild Asset Management has raised €428 million from Chilean pension funds. This positions it among the top 30 global players in the zone and makes it the second French investment management company. In the same manner, Edmond de Rothschild Asset Management Benelux has taken in €207.4 million since being set up, while Edmond de Rothschild Asset Management Hong Kong had €933 million under management at the end of June 2010. Company revenues also rose over the period. As a mainly equity firm, revenue naturally declined over the course of 2008 due to the severe market downfall, with overall assets under management down 41%, of which 31% was due to negative market performance and 10% to outflows. In 2009, total assets under management grew by 52.3%, of

SimCorp

which 29.5% derived from performance and 22.8% through inflows. Earnings were also increased over the period. INTERNATIONAL DRIVE International expansion and product innovation are, and always will be, key to the investment management industry. Edmond de Rothschild Asset Management has a long history of innovation and readily embraces new markets and new investment ideas. The main focus for future development will be to further international development, maintain product innovation to be best adapted to the wishes of clients and market constraints, and to continue improving the quality of service. In the international sphere, expansion has been strongly fostered since the end of 2007. The main steps in the interim expansion have been: • O ctober 2007: Creation of a fully owned subsidiary in Hong Kong responsible for the management of Chinese equity and Asian ex-Japan funds and the marketing of the fund range across Asia. Edmond de Rothschild Asset Management Hong Kong received SFC approval on 26.02.2008. • November 2008: a branch is set up in Brussels and a CBFA licence acquired in the same month. The branch is dedicated to the marketing of the company’s funds in the Benelux region. Edmond de Rothschild Asset Management Benelux joined BEAMA in March 2009. • December 2008: a subsidiary is opened in Santiago de Chile dedicated to business development in Latin America: Edmond de Rothschild Asset Management Chile.

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

“The modular structure of the software system allows the company to very rapidly adapt the tool to new client demands, specific investment issues in product innovation and particular client or regulatory constraints in certain countries.” international and institutional sales team now includes 12 senior sales people, including locally based teams in Hong Kong, Santiago de Chile and Brussels. This is without counting two recently created offices. Two country heads have just been recruited to open offices in Frankfurt, Germany, as well as in Madrid to cover Spain and Portugal. Edmond de Rothschild Asset Management now has 27 funds approved in 15 countries outside France, and has also been granted the freedom to provide investment services by financial authorities in the UK, Ireland, Italy, Germany, Belgium, Luxembourg, Austria, Denmark, Finland, Iceland, Norway, Sweden, the Netherlands, Spain, Chile, Peru and Taiwan. PRODUCT INNOVATION While European equities account for over half of the total assets managed, Edmond de Rothschild Asset Management has become an important player in international high-growth markets such as India, Brazil and China and has strengthened the investment team over the last two to three years.

Corporate investment in human and technological resources has tracked the expansion of the company and the growth of assets under management and will continue to do so. The medium-term goal is to achieve a substantial increase in the assets managed on behalf of international clients in Continental Europe, the UK, the Middle East, Latin America and Asia.

In 2008, a number of innovative funds were launched, including a successful deep-value strategy available as a global fund (Selective Recovery). Convertible bond management is a key area of historical expertise for the company and it chose to leverage its exceptional track record on the European market by launching a global fund in July 2009, Saint-Honoré Global Convertibles, and the innovative Saint-Honoré Emerging Convertibles fund in December 2009. The team was reinforced with the recruitment of two fund managers.

Sales and client service resources have also been strengthened accordingly. The

Attracting new talent is an essential factor in developing the product range. In

Q3 2008, Edmond de Rothschild Asset Management recruited a team of commodity specialists and launched a range of commodity equity funds (Goldsphere and Commosphere World). As a consequence of its ambitious development strategy, the company has made no cutbacks to its investment teams since the start of 2008. On the contrary, it has made long-term investments across the board, in both human and technical resources. IT PLATFORM Edmond de Rothschild Asset Management’s development strategy is focused on an integrated financial software solution, SimCorp Dimension, which features the following functional applications: order transmission, position-keeping, middle office (reconciliation and NAV pre-validation), risk management, performance analysis (attribution/contribution) and client reporting structures. A seamless IT architecture enables the company to ensure improved reliability, efficiency and proper implementation of processes. The software platform allows the enterprise to accompany and structure its international development, safely develop investment management techniques like derivative products and overlay management, run a risk-control system that is among the most sophisticated in the industry and provide clients with an enhanced service offer. This seamless IT platform enables all company affiliates and offices to capitalise on an existing configuration. This facilitates the rapid replication of good investment practice. While ensuring the same reliable methodological base for all corporate entities, the solution nevertheless enables countryspecific regulatory and investment issues to be managed.

For example, the demonstration of Edmond de Rothschild Asset Management’s risk management capacity to a Hong Kong prospect helped its recently established Hong Kong subsidiary to win a large mandate of more than US$100 million. The analysts were convinced the managers could continue to perform as well as they had in their former company, but they wanted to be sure that Edmond de Rothschild Asset Management had the capacity to follow and monitor risk as efficiently as the top 10 European asset management companies. The software solution also enables the company to adjust to the various regulatory constraints of all client types, irrespective of their geographical origins. When a country-or client-specific item is added to the library, for example, it may be re-used or adapted for another country or client type. This enriches best practice in the base and allows the enterprise to improve its investment and service standards and help all clients benefit from these changes. Strictly speaking, there are no deployment costs for each country; it just takes time to configure the system to assist the managers and adapt the platform to local regulations. FLEXIBLE MODULAR TOOL In an industry seeing rapid changes in investment techniques, clients on the lookout for product innovation and therefore constant upgrading in the quality of service, the use of a flexible and modular software solution that can be highly customised is the guarantee of a pro-active and client-oriented business strategy. Edmond de Rothschild Asset Management can turn this into a competitive advantage in prospecting new clients and markets. The company has implemented around 50 modules from those available in the solution. However, to meet any future marketing expansion, it

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Excellence in growth management: Edmond de Rothschild Asset Management may add other modules to the existing platform and reinforce them with specific features if required. OPTIMAL SUPPORT The software system project is steered by a monthly committee composed of members of Edmond de Rothschild Asset Management’s executive committee and the head of IT projects and development, La Compagnie Financière Edmond de Rothschild’s IT division, SimCorp’s executive team, and the people in charge of the project at Edmond de Rothschild Asset Management and SimCorp. The composition of the steering committee is in itself a guarantee that the project is fully coherent with Edmond de Rothschild Asset Management’s strategic choices. The steering committee validates the project’s strategic choices, any major decisions and schedules and oversees issues relating to quality, costs and deadlines. At the end of the project phase, the committee will consider whether new functions should be acquired as a response to new business-line needs or a broader product offer. It will validate the activation of new modules not yet installed or specific developments based on detailed requirements requested by Edmond de Rothschild Asset Management. GROWTH ENABLER The modular structure of the software system allows the company to very rapidly adapt the tool to new client de-

mands, specific investment issues in product innovation and particular client or regulatory constraints in certain countries. The speed of adaptation is a key competitive advantage and allows Edmond de Rothschild Asset Management to quickly roll out a development in a new zone or for a new client type like, for example, Chilean pension funds. Reinforced reliability and controls The software architecture uses a single, reliable and controlled reference tool and a process and client reporting system that is shared by all the company’s business lines. This ensures a transparent environment that guarantees reliable data and precise analysis and client reports. This integrated solution enables Edmond de Rothschild Asset Management to ensure the same quality of investment, services and risk management throughout its various entities. UCITS IV compliant The IT platform enables Edmond de Rothschild Asset Management to be ahead of rivals in complying with the new UCITS IV standard which will come into force in July 2011 to promote a pan-European collective investment market. The formalisation of key investor documents will require mention of risk management indicators like VaR and stress tests, etc. These are available or easily accessible in the software system. This means the company’s risk division is equipped to deal with this new regulatory requirement.

“A seamless IT architecture enables the company to ensure improved reliability, efficiency and proper implementation of processes.”

On-demand reporting The system’s inherent flexibility represents a significant advantage for the end-client as Edmond de Rothschild Asset Management can almost instantaneously produce a client report on demand that takes specific requirements into account. Reports can, as a result, be adapted to various client types and different countries. Once the report model has been configured in the system, it may be programmed for set periods or on demand. With the right, flexible and scalable IT platform in place, the company is able to grow through structured international development and safe development of investment management techniques. Further, it provides a risk control system that is among the most sophisticated in the industry. Edmond de Rothschild Asset Management will ensure that future development is conducted within tight risk management guidelines, especially where clients are concerned. Philippe Couvrecelle has been Chairman of the Executive Board of Edmond de Rothschild Asset Management since May 2007 where he has driven the company’s growing international presence. A graduate of the Institut d’Etudes Politiques de Paris (IEP) with a Master’s degree in economics, Philippe Couvrecelle began his career in 1988 in the Banque Populaire Group, where he served in various operating and functional positions. In 2004 he was appointed Deputy Managing Director with responsibility for business development and new projects for Natexis Asset Management before becoming Deputy Managing Director in charge of business development at Ixis Asset Management.

Edmond de Rothschild Asset Management Edmond de Rothschild Asset Management is an affiliate of La Compagnie Financière Edmond de Rothschild, the French arm of the Edmond de Rothschild Group, specialising in managing equities, convertible bonds and asset allocation for institutional investors, banking and insurance company partners and distribution platforms throughout the world. With 148 employees and 37 portfolio managers/analysts, Edmond de Rothschild Asset Management had €13.2 billion in assets under management as at mid-October 2010. More information at www. edram.fr.

Edmond de Rothschild Asset Management was awarded the SimCorp StrategyLab Growth Management Excellence Award 2010 in Berlin on 9 September 2010.

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

# Best practice in cost management:

Nordea Savings & Asset Management To rely on operating a wall-to-wall IT solution has been a key element in the successful attempt to reduce costs at Nordea Savings & Asset Management, winner of the SimCorp StrategyLab Cost Management Excellence Award 2010.

W Ulrik Modigh, Head of Asset Management Operations, Nordea Savings & Asset Management, Copenhagen, Denmark.

ith around €100 billion in assets under management, Nordea Savings & Asset Management (S&AM) is the leading Nordic asset manager, providing products and competence within equities, fixed-income products, alternative investments and other savings products. With a presence in the Nordic countries, New York, London, Frankfurt and Luxembourg (our European hub for fund distribution), S&AM is one of five business divisions within the business area Shipping, Private Banking & Savings Products. Comprising part of Nordea S&AM is the Global Operations business area. Employing approximately 150 fulltime employees, Global Operations includes all back- and middle-office functions as well as fund accounting, transfer agency, IT and business processes. STRATEGIC TOOL Since 2006, Global Operations has focused work on cost management as a strategic tool to ensure that Nordea S&AM has a favourable cost position compared to its peers. The strategy has been to emphasise centralisation and standardisation of operational processes, implementing operational key performance indicators (KPIs) to increase efficiencies, as well as to establish transparency in operational costs. Despite higher volumes and increased complexity in business demands during this timeframe, Nordea S&AM has succeeded in reducing the operational

cost base as a whole. In doing so, Nordea S&AM has compared its operational costs against other asset management companies in an annual benchmark study and has been able to effectively learn from other companies’ best practices. The entire cost management strategy has relied on the fact that Global Operations operates with SimCorp Dimension’s wall-to-wall system, which provides the ability to implement a global operational strategy. The system as such has been the foundation for rolling out the strategy in relation to centralisation of activities, standardisation of activities and automation. One of the cornerstones of Global Operations’ strategy is cost management. The strategy consists of four building blocks, altogether supporting the objective of enabling growth at lower incremental costs to support S&AM’s overall business strategy. Global Operations has been working to accomplish these strategic goals since 2006 (see Figure 1). STRATEGY REVIEW As the starting point for developing the strategy, an external consultancy company was asked to undertake an independent strategy review of Global Operations’ IT platform and operational processes/strategy. The purpose of the review was to investigate how to optimise the operating model, as well as to exploit the potential for economies of scale and increase efficiencies within operational processes. The outcome of the strategy review produced a clear indication of the relative cost position

compared to peers and recommendations on how to focus in order to maintain and improve the cost position. The review found that to date, Global Operations’ IT and operational strategy had resulted in an attractive and competitive cost position vis-à-vis most of its peers. The very best players provided some inspiration for further improvements, and it was important for Global Operations to build a consolidated and transparent cost view. Second, Global Operations had had more success in moving towards a single IT platform than many other large asset managers. Finally, not that many other asset managers could boast lower IT and operational costs. It was further recommended that Global Operations’ strategy should include the following key initiatives to support the cost-related business strategy going forward: • c entralise and standardise Global Operations’ processes (also covering a central solution for derivatives and risk management); • build transparency into Global Operations’ costs; • establish Luxembourg as strategic domicile to reduce average running costs. INPLEMENTING STANDARDISATION Acting on the findings, Global Operations has focused its efforts in line with the specific recommendations. Significant synergies have been realised through decommissioning old local platforms and centralising into focused competence cen-

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

Enabling growth – at lower incremental costs

Objective

Strategy

SimCorp

Improve efficiency and scalability

Improve ability to manage complexity

Development of human resources

Mitigate risk

tres. Global Operations has established an operating model where Nordea’s entire Investment Management/Investment Funds value chain is covered by the same platform – hence no overlapping routines such as reconciliation, corporate actions, static data, pricing, risk, etc. The centralisation activities have covered: • i mplementing a derivatives strategy. Listed derivatives are now operationally handled from the Copenhagen back office, whereas owing to limited flows all OTC derivatives were operationally partly outsourced to an external partner (in 2007); • rolling out all valuation and risk management processes within the Copenhagen middle office in Copenhagen (2007); • centralising and standardising all Nordic (and partly Luxembourg) back-office processes (i.e. reconciliation, corporate actions and settlement) in the Copenhagen back office (2008); • centralising and standardising Nordic net asset value (NAV) processes in the Helsinki fund accounting unit (2009). The final step in relation to centralisation was taken in 2009 in order to build up a global fund accounting function. Originally, fund accounting was situated locally in Finland, Norway and Sweden, covering each of the respective markets according to the funds’ registered domicile. By creating a critical mass of competencies in the key processes in the form of central hubs, the operational units have been developed into more specialised units. This has created an environment and culture within Global Operations to focus on automating processes, improving efficiencies and dealing with change management in general. Further, the operational units are now much better prepared to handle complex issues, products and processes. The standardisation of processes has been performed partly with Nordea’s internal lean office business process and

partly by Global Operations alone. In order to ensure that the effect of centralisation and standardisation activities actually improved operational efficiencies, a range of 20 different KPIs (in the form of efficiency and delivery targets) was defined and monitored. These included: • s traight-through-processing (STP) rates; • security settlement processes and number of transactions per back-office employee; • number of bank accounts and custody accounts per employee; • number of limit restrictions per middle-office employee; • delivery targets for client reporting; • NAV delivery times. KPIs PROVE THEIR WORTH The definition, introduction and implementation of KPIs have certainly proved their worth in terms of cost efficiencies. Based on different automation and leanbusiness studies, for example, the STP rate for settlement processes has improved from 85% at the start of 2006 to around 99% in 2009. This has reduced the head count where otherwise handling manual trades and/or corrections would have tied up these resources. The latest STP rates received from Global Operations’ custody bank (JPMorgan) clearly reflect Nordea S&AM’s improved STP rate. The JPM benchmark STP rate for settlement processes shows that Global Operations is in the forefront compared with other JPM clients. Another example is seen in the development of transaction flows for securities in the period 2005-2009 and, more importantly, in the number of transactions handled per back-office fulltime employee. The number of trades handled per employee in Global Operations has risen at least by the same pace as the volume, highlighting that efficiency has been significantly improved (from 1,100 trades per month in 2007 to around 1,700 trades per month in 2009). Similar evidence is seen in relation to the

Figure 1. Objective and strategy. Source: Global Operations, Nordea Savings & Asset Management 2010. number of holdings, accounts and custodies, investment restrictions, OTC derivatives, etc., all of which recorded increased volume when measured in terms of a fulltime employee base. COST TRANSPARENCY In order to improve the cost management of operating with different types of investment products, a so-called Product Cost Model has been developed. The model’s methodology is based on an ABC analysis covering Global Operations. The model makes it possible to allocate cost components throughout the entire value chain across functions, to the different types of investment products in our product range. The cost drivers have been transaction volumes, corporate action frequency, holding universe, investment restriction universe, product complexity, etc., and have been combined with time studies of specific operational processes in order to ensure correctness in the cost analysis. With this it is possible to estimate how much a given portfolio within a specific product group will require in terms of running costs. This is extremely valuable when assessing the product profitability across the product portfolio within Nordea S&AM. Furthermore, breakevens on individual mandates/funds can easily be estimated. The calculated product cost can be used for evaluating the profitability of a specific product using the estimated product cost, the size of the mandate and the product margin. Global Operations’ costs have also been broken down on an overall level in order to identify the strategic cost drivers within the operational platform. Here, the costs are specified both in absolute and relative terms (in basis points seen in relation to the asset base). In this way, the relative share of each operational component can be seen and evaluated strategically. Further, it also illustrates how fixed the cost base is viewed in a down- or upscaling scenario. In reality, much of Global

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

“The importance of having an efficient IT platform cannot be stressed enough, also in terms of the organisation using the system.” Operations’ costs are fixed (in the form of IT platform and IT running costs). But it also includes the backbone costs (i.e. middle- and back-office processes) and fund wrapping costs. In a cost-cutting exercise, only around 11% in the form of platform and business development costs of the Global Operations’ cost base can be considered flexible unless the business activity level is scaled back, for example, in cases where funds are closed down or institutional mandates dissolved. The importance of having an efficient IT platform cannot be stressed enough, also in terms of the organisation using the system. IT costs account for almost 43% of the total cost base. Furthermore, it must be emphasised that in cases where the platform is wall-towall, it is difficult to substitute key processes with other systems/platforms or to outsource key processes to external vendors as the operational processes are tied together. ECONOMIES OF SCALE However, the focus on cost during the entire process has made it clear that the operating model is very dependent on scale; this is why processes with limited flows and/or volumes have been outsourced to external vendors. One example of outsourcing decided by Global Operations has been the settlement and collateral management process for OTC derivatives. The cost analysis clearly showed that the OTC flow was – in terms of transaction volume – too limited to build up an inhouse operational infrastructure. In another example of economies of scale in action, Luxembourg was added to the integrated IT systems software and the old fund accounting system closed down. With this action, Nordea S&AM could launch Luxembourg funds for the entire Nordic and European client base, avoiding the situation where sister funds were available in each country. The Luxembourg fund accounting unit has been integrated into the Global Operations’

value chain, eliminating the last elements of dual processing in Global Operations and thereby improving economies of scale even further.

couple of years but also since 2007. This is seen in the development in volume compared to resources spent in terms of the number of fulltime employees.

CORPORATE CULTURE It has become embedded in Nordea S&AM’s corporate culture to think in terms of both efficiency as well as value added. This ranges from already existing processes to new tasks and requests from clients for new products. Applying the principles of a good business case in every task or process we perform is part of our everyday business life.

Both the development in fulltime employees and in cost has decreased in the last couple of years. This should be seen in relation to the fact that the activity level has risen over the entire period; and perhaps even more importantly, the complexity of operational processes has increased significantly.

To manage the product development process (PDP) a product committee has been established within Nordea S&AM. Global Operations is a member of the committee and is highly engaged in the PDP-related phases of feasibility and implementation to ensure that system functionality can support the new initiatives and operational costs do not erode the business case. All new product initiatives are carefully examined and reviewed; if complexity or running costs exceed the expected return on the product initiative, the product is not implemented unless it is considered a purely strategic initiative. All major business projects affecting the operational infrastructure or IT platform are prioritised via a Global Operations project board. Here all projects are scoped, evaluated and prioritised in relation to resource requirements, risk and benefits. The board re-evaluates the project portfolio every sixth month. All projects are reviewed from a high level and business strategic angle before they are approved, ensuring that resources are spent in the right way and also ensuring that Global Operations’ resources and the project portfolio are in line. The project board follows up on a bi-monthly basis to measure progress and evaluate the status of the ongoing project portfolio. TANGIBLE RESULTS The achievements in curtailing costs have been quite tangible, not only in the past

The product offering to clients has been increased in complexity due to the use of derivatives, security lending processes, launch of hedge funds and alternative funds, the use of external managers (white-labelling of funds), external funds, etc. All these initiatives have required a significant amount of resources from Global Operations in relation to new operational processes and risk management. On top of this, the financial crisis of 2008-09 required that more resources were allocated to areas such as liquidity management, risk management and pricing and valuation processes. These new activities have been funded primarily internally within Global Operations via the cost initiatives, as well as the release of resources from all the centralisation, standardisation and efficiency activities. Over the past three to five years, the Nordea S&AM Global Operations business area has been transformed from an average performing unit into a high performing unit by both providing industry cost leadership and creating quality value-added services and in solving complexity for the entire Nordea S&AM platform. In line with this, Nordea S&AM has already been rewarded well for efforts in this area in terms of reduced costs.

Ulrik Modigh has been Head of Asset Management Operations at Nordea Savings & Asset Management since 2004. Graduating with an MBA in Finance from Copenhagen Business School (CBS) in 1992, he has held various senior positions including Risk Manager and Head of Middle Office at Nordea Markets, Consultant and Manager at KPMG Financial Services and Head of Back Office at Danish pension fund ATP.

Nordea Savings & Asset Management With around €100 billion in assets under management, Nordea Savings & Asset Management (S&AM) is the leading Nordic asset manager, providing products and competence within equities, fixed-income products, alternative investments and other savings products. With more than 700 employees across the Nordic countries, New York, London and Frankfurt, Nordea S&AM is one of five business divisions within the business area Shipping, Private Banking & Savings Products. More information at www.nordea.com.

Nordea Savings & Asset Managment was awarded the SimCorp StrategyLab Cost Management Excellence Award 2010 in Berlin on 9 September 2010.

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Actively managed funds: the new cost paradigm

A host of challenges face actively managed funds as they decide on what course of strategic action to take, and seek to establish new business models in the postfinancial crisis environment. One of the key priorities will be the need to make operations more efficient, selecting the best ways to reduce cost and risk while mobilising resources for growth.

A Gareth Quinn is Director of Alternative Investments, Accenture Capital Markets, London, UK. James Sproule is Global Head of Accenture Capital Markets Research, London, UK.

s the investment management industry adapts to pressing investor and regulatory concerns about liquidity and capital protection in a new, competitive landscape emerging from the financial crisis of 2008-09, industry business models are in transition. The existing order is changing with the investment management industry dividing into highly commoditised passive funds and higher fee, higher returning, active fund management. High-performance funds are to be distinguished not just by their ability to manage risk and consequential returns, but by their operational efficiency which should allow for competitive pricing. In this dual-track environment, there will be on the one side a large number of passive or tracker funds, comprising approximately two-thirds of funds under management. On the other will be a more diverse group of actively managed funds. Within this part of the investment management industry, it will be reputation, past performance and perceived potential, which combine to determine the framework and scale of fees. There seems little question that the actively managed fund industry has suffered from some short-term distractions, even if they only have taken the form of fending off over-zealous regulation. In the longer term, however, there are sound reasons for optimism over the outlook for investment management generally and actively managed funds in particular. This is driven by the increasing realisation that:

• t he population of the developed world is aging and most people have made inadequate retirement provisions; • for many in the developed economies, these are peak earning years and the life-cycle savings model points to greater savings being made in the next few years; • higher savings and/or returns are needed to compensate for higher taxes imposed on savings by cash-strapped governments saddled with the ramifications of the financial crash on reduced fiscal revenues; • the number of global high-net-worth individuals has grown by 8% per annum over the last decade, while the wealth of this group has grown by 9% per annum. These high-net-worth individuals have often been pioneers in driving financial markets forward. Actively managed funds are well positioned to pick up more than their fair share of these investment flows. Not only have actively managed funds become steadily less exclusive in recent years, the growing number of moderately well-off investors are seeking to diversify their additional wealth away from the risk and return delivered by commoditised long-only funds. This realisation has come at a fortunate time for actively managed funds as their promise of delivering returns whatever the wider financial market conditions may not have proved to be as impossible as financial theory might suggest. FUTURE IMPLICATIONS If this vision of the future is correct, what are the implications of the neces-

sary and impending structural changes? First of all, the old fee model of 2% of assets under management (AUM) and 20% of any outperformance above a designated benchmark was increasingly illusory, even before the credit crunch. Larger investors had long flexed their muscle to press successfully for discounts. Greater awareness of these discounts is making investors with less leverage unwilling to pay high fees for mediocre returns. At the same time, restrictions designed to help investors have also been falling by the wayside. Restrictions on paying bonuses while a fund is below a designated value (high water marks) and redemption restrictions have both proven in light of experience to be either impossible to implement or damaging to investors. Increasingly the focus is becoming one of trading off fees for long lock-in of funds. For those few funds which have proven track records of success, substantial fees may still be achievable but, even here, the fact that fees are going to be tied to returns is likely to spell the death of the standard fee model. For the rest of the active fund management universe, the reality is that fees are not coming under pressure so much as collapsing. The collapse in fees is exacerbating another concern. Many actively managed funds have found their operational structures are not simply costly; they clearly have not been up to the job. Costs as a proportion of income ratios rose by an average of 75% to 138% during the financial crisis. Clearly these were unsustainable and while cost-cutting must

SimCorp

be part of the solution, blanket cost-cutting would not allow a business to thrive in future and cutting costs to meet precrisis ratios would result in a business so lean that it starved. Investors bruised by the financial crash are now naturally more wary and demanding, while significantly increased regulatory pressures means effective risk management requires clear structures which can identify risks and rewards. Further, issues such as liquidity, which had not previously been fully considered, now must be incorporated into any risk model. Finally, operational models must allow for effective stress testing, including assumptions about how illiquidity might impact upon a portfolio, and how issues such as redemption risk could be effectively ameliorated. Post-crisis opportunity Today, with financial market liquidity recovering and prices at least stabilising, top performing funds are again focused on the future. What they find is that investors increasingly demand more favourable terms than in the pre-crisis world. For the top end of actively managed funds, investors are requiring rigorous hurdle rates (minimum returns before performance fees are paid), and the right to trade their actively managed fund holdings in the secondary markets. For all funds, top end through to commoditised tracker funds, investor demand for transparency is creating pressure for detailed and timely information of their holdings. This pressure will require actively managed funds to do much more than the regulatory minimum in terms of frequency of reporting, key financial metrics, and corporate governance. One outcome is that investors are seeking greater control and clarity through separately managed account platforms, with some funds now seeing 50% of investors opting for this structure. These managed accounts give investors the ability to influence investment decisions, ensure that performance is not hindered

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

by conflicting positions, and help to satisfy investor demand for transparency.

December 2010

“Actively managed funds will increasingly need to build and manage operating and business models that provide more frequent valuations and more transparent assessments of financial risks.”

HIGH PERFORMANCE Among the challenges facing actively managed funds as they choose what business strategies to adopt, is the fact that investors will insist that actively managed funds adopt or build new business and operating models that provide more transparent assessments of financial risks. On a competitive level, investors’ growing focus on cost and transparency will see agile, low-cost funds emerge to challenge underperforming active fund managers. Meeting this competitive challenge, together with the other shifts as described, will demand new approaches. Business models Actively managed funds will increasingly need to build and manage operating and business models that provide more frequent valuations and more transparent assessments of financial risks. They will also have to respond to investor demand for demonstrably robust structures of corporate governance and operational infrastructure. In the past, when cash flows were apparently inexhaustible, actively managed funds typically managed all system and process development in-house on a ‘best-ofbreed’ basis. However, with costs under scrutiny and a looming demand for significant upgrading of risk management and reporting systems, actively managed funds are set to shift towards greater use of outsourcing and collaborative partnerships for operational and administrative activities. This would mirror a similar shift already underway in the mainstream investment management industry. This trend is already manifesting itself in actively managed funds moving away

from bespoke systems towards greater use of (ever more capable) reusable and packaged software, and in actively managed funds’ growing readiness to use industry-wide utilities for back-office activities such as legal, compliance and human resources. The scope for savings becomes apparent when comparing top performers against the wider investment management industry. It has long been the case that asset managers see much greater variation in such areas as cost income and revenue per employee than is seen within investment banks. As asset managers focus upon operational efficiency, there is almost certainly scope to drive asset manager operational efficiencies towards the tighter control and monitoring traditionally seen in the more mature investment banking industry. Industry structure Alongside the changes in the internal operating models of actively managed funds, the wider industry will also undergo a shift in the way that the key players in the value chain work together and interact. Traditionally, the industry has had a tripartite structure consisting of prime brokers, administrators and actively managed funds. However this industry model has proved fallible, not least after the Lehman collapse, when it emerged that investors’ cash had not been segregated by the prime broker. The Madoff affair demonstrated even deeper failings, where a lack of checks and balances with an independent third-party administrator meant that the funds’ lack of actual trading transactions went undetected. Along with administrators, custodians are also playing a greater role in the ac-

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Actively managed funds: the new cost paradigm tively managed fund industry. Administrators hold investors’ underlying assets, while the prime broker holds the incumbent assets when they are pledged for leverage. This structure will give investors greater comfort, reassuring them that the ownership of their assets will be relatively clear-cut in the event of insolvency. Risk management The credit crisis has seen events predicted to happen once in a century occurring on successive days. The result has been that the best talent in the industry is now undertaking a significant reassessment of value-at-risk (VaR) measures and looking for robust successors. While market and corporate risks have long been appreciated and modelled, the extension of risk assessments to areas such as counterparty, liquidity and operational risks all require new approaches and considerations. Among the requirements of any new risk assessment system will be the need for greater data analysis, which in turn is highlighting the priority for effective and integrated systems. While none of this is impossible, what it does point to is a need to have risk assessment work across product groups and internal silos.

“Among the requirements of any new risk assessment system will be the need for greater data analysis, which in turn is highlighting the priority for effective and integrated systems.”

Considerable portions of risk management, and thus high performance, are not about enhancing returns, but avoiding significant losses. To achieve and sustain high performance, actively managed funds need to tackle counterparty risk directly and systematically, and embed it as a critical and integral component of their operations.

expected that actively managed funds will move towards addressing liquidity risks through locking in funds for longer periods of time, allowing them to avoid crystallising losses in a crisis. Moreover, it is likely that many funds will seek, and investors will realise, that accepting illiquidity risk can be a route to long-term outperformance.

Best practices The industry best practices for tackling counterparty risk include making consistent internal portfolio and risk assessments, using prime broker services such as tri-party account methods, as well as using in-house and independent thirdparty valuation technology and services. An important shift in counterparty risk is that it is expanding to include not just banks and prime brokers, but other participants and commercial counterparties in the actively managed fund value chain.

Product regeneration Investors are not so naive as to ask for returns without risk, but they are sensible enough to demand that they know the risks they are undertaking to achieve their hoped-for returns. What this means in practice is that greater transparency will be demanded as a matter of course.

Counterparty risks also link directly to operational risks. For example, the industry has traditionally been served by small and niche software vendors focusing on areas such as portfolio accounting. Many of these suppliers built up their business on the back of a continuing flow of new business from actively managed funds. Today, with the supply of new business constrained, there are concerns over the viability of some niche providers, creating technology risk for their customers. As a result, actively managed funds are turning to larger and more established sell-side technology vendors, on the basis that these providers’ size and investment banking client bases make them more commercially secure. Bespoke systems may well have highly desirable attributes, but these should be balanced against the advantages of standardised systems, which are capable of incorporating greater complexity and tailoring than has been the case historically. Finally, liquidity should be seen as an opportunity as much as a risk. It is to be

Combining these basic observations with expectations for the wider investment management industry, two conclusions can be drawn. First, successful actively managed funds will have to follow a variety of strategies in order to cater for investors’ diverse demands. This means amongst other things the era of the small, single strategy start-up fund is likely to be on the wane. New entrants to active fund management are far more likely to bring their expertise to an established fund as opposed to setting up on their own as had occurred in the boom before 2007. Secondly, operating costs as a proportion of revenues can vary by as much as 25%. Such differences should be seen as being as important as returns themselves and a good deal more predictable. In the new, more transparent world emerging, costeffective operations will be a significant differentiating advantage. Ancillary Services For actively managed funds intent on growing rapidly and concentrating on their core expertise, prime brokers have long been a valuable resource. But the needs of actively managed funds have evolved considerably over the past few years.

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

Established in 1989 primarily as a technology consultant and systems integrator, Accenture is today a global management consulting, technology services and outsourcing company.

analysis that enable the identification and removal of cost while enhancing the business-critical capabilities.

The credit crisis has highlighted a series of new constraints and problems. Where funds were small, or not sufficiently diversified from an operational point of view, they were vulnerable to prime brokers withdrawing credit lines. Even before this danger became apparent, there was growing concern that overreliance on a few prime brokers would leave actively managed fund strategies exposed and liable to replication by low-cost funds. The solution has been to increase the number of a fund’s prime brokerage relationships, which addresses the above problems, but does highlight the need for effective IT systems capable of reconciling positions across a multitude of prime brokerage systems. The credit crisis has also raised concerns about client money rules. The Lehman collapse led to a number of surprises, one of which was that their prime brokerage services did not effectively separate client monies. This failure is certain to result in new regulatory requirements and (undoubtedly better) systems, which will in turn require new interfaces within actively managed funds. The wisdom of having an independent administrator is now so apparent that the justification need be no more than one word: Madoff. While it is to be expected that levels of service will be the key differentiator amongst administrators, it will be against a background of low prices. STRATEGIC COST REDUCTION In the post-crisis environment, the emerging contours of which already suggest a more hostile and competitive climate, a focus on cutting costs and increasing operational efficiency will be essential. This is not easy. The actively managed fund operating model is being

squeezed by a wide range of internal and external demands, and any cost reduction programme must take account of both sets of influences. In such an environment, it is vital to undertake strategic cost reduction that does not just cut costs, but cuts the right costs. To stay competitive, many actively managed funds need to achieve cost reductions of up to 50%, levels the industry has not experienced previously. Moreover, it is notable that asset management cost-to-income ratios average 75%, while investment banks have achieved a cost-to-income ratio of 65% (both figures are pre-crisis). While one-off, tactical costs programme will deliver some of the required answers and results, such an approach will not achieve the savings on the scale required. So nothing short of a strategic approach will be sufficient. However, efforts to cuts costs by tackling the major traditional cost levers such as IT spending require significant up-front investment that may well not be available in the current environment. So the optimal first step is to identify and exploit a mix of shortand medium-term activities. These can then be used to fund longer-term and higher-impact initiatives, in turn leading to a need for more structured organisation and approach. Key cost levers We have identified what we believe to be the six key cost-efficiency levers in an actively managed fund. These levers are: customers; sourcing; process; technology; people; and products. Each of these levers is accompanied by key questions, reflecting the fact that each cost lever can be broken down into specific areas of

These cost levers each provide a cost-efficient focus on the relevant capability, creating a point of departure for the achievement of market-leading results in each capability, and supporting the organisation’s progress towards high performance. Throughout, each specific cost reduction initiative is based on the delivery of immediate benefits through the minimal investment. The most successful cost reduction programmes will have an open mind as to potential approaches, including the use of outsourcing for a wider range of activities. The result will be that the awareness of outsourcing processes and suppliers will increase, driving forward the willingness of actively managed funds to consider an ever-widening range of middle- and back-office functions which might be outsourced effectively. Revenue drivers To achieve and sustain high performance, actively managed funds will also need to revisit their revenue streams.

“In the new, more transparent world emerging, cost-effective operations will be a significant differentiating advantage.” This means fees. The exact fees charged and structures of fees are likely to remain an opaque area of actively managed fund activities, with large investors often able to negotiate better deals. What the credit crisis has shown is that fees, and the accompanying restrictions, were not sufficiently stress-tested to be realistic in

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Actively managed funds: the new cost paradigm a downturn, and investors will certainly demand change. At the top of the actively managed fund management tree, the old hedge-fund fee model of 2% of AUM and 20% of any outperformance was at times caricatured as a compensation scheme with some fund management attached. Worse, for large funds, the 2% ended up being sufficiently generous that the outperformance fee ultimately did not prove a significant incentive. Even for long only funds, where fees were more likely to be in the order of 1.5%, funds were often large enough that performance was not an immediate concern. Already we are seeing glimpses of what might well become the new model, with outperformance fees rising, but AUM fees falling, in some cases to zero. Such a fee structure would allow actively managed funds to compete effectively against tracker funds where fees are levied upon AUM and overall returns remain reasonably constrained. OPERATIONAL EXCELLENCE We have every reason to believe that while the future of active fund management is bright, at the same time, the rewards will go to those that meet the considerable challenges. Successful strategies may deliver outstanding results, but efficient operations are crucial for everything from effective risk assessment to competitive fees, whatever the state of the wider financial markets. With an increasingly professional, more diverse and more demanding client base in evidence, actively managed fund managers are already going about to improve their product proposition by enhancing capabilities in asset allocation, absolute return and product innovation. Further, they are improving service standards and raising technical collaboration with consultants and fund platforms in efforts to broaden distribution. Over the course of the next few years, the number of actively managed fund

houses operating as integrated producers will likely decline and multi-boutiques could well become the dominant operating model among medium and large investment managers. Creating a small company mindset in a large company environment helps to foster principles of meritocracy, personal accountability and leadership.

In the post-crisis environment, operational excellence is about doing new things to cope with the new reality, while also doing old things better. It is about ensuring that active fund management remains a quintessential craft business, but with professional overlay of skills and infrastructure to exploit the opportunities created by the crisis.

Furthermore, a fiduciary overlay will come to differentiate the winners from the losers. Success will require active fund managers to exercise due diligence by developing a fiduciary overlay that delivers five key drivers for growth: consistent returns, a deep talent pool, exceptional service, a value-for-money fee structure and a sophisticated integrated infrastructure. This overlay will seek a three-way financial and non-financial alignment between: active fund managers and their clients; active fund managers and their professionals; their professionals and clients.

GROWTH OPPORTUNITIES New growth opportunities are expected from increased institutional customers’ demand for tailored and regional offerings. These developments will be accompanied by increased standardisation efforts in the front-office environment to balance the additional investments through simplification of internal processes and IT. Middle- and back-office departments are focus areas to standardise and centralise processes. While the search for initiatives to improve efficiency and lower costs has been an area of continuous attention in the past, and is expected to remain so for these departments, standardisation and centralisation is a relatively new trend for the front office.

Multi-boutiques are effective in dealing with two primary issues facing investment managers. First, they can afford to build strong, consultative relationship management teams to work directly with clients in finding appropriate solutions to meet their needs. This aligns boutiques well to compete in a world where clients desire a more consultative approach to doing business. Second, they can effectively manage the diseconomies of scale confronting managers. This means that they are less prone to running out of capacity in capabilities of interest to clients. Enhancing this trend will be third-party administrators, who are now building a new generation of platforms, with enhanced line speeds, scalability and multiproduct capabilities. Consequently, they are emerging as strategic partners, using their critical mass of clients to deliver operating leverage, delivering economies of scope enabling their clients to enter new markets in Asia, Europe and Latin America via UCITS funds.

Especially in today’s financial markets, established product-oriented IT platforms, organisational and/or reward structures will be substituted with crossproduct structures. Additionally, the organisational boundaries between different business divisions in large active fund management groups are becoming more permeable. This trend can be leveraged by intelligent operating model setups, which realise group-wide synergies. By way of conclusion, three distinct trends in establishing a new business model geared to reducing cost and risk while mobilising for growth will characterise actively managed funds going forward: • f unds will more clearly articulate risks undertaken to achieve expected returns; performance-related fees will depend on a consistent delivery of these returns; • the commoditisation of significant

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

“In the post-crisis environment, operational excellence is about doing new things to cope with the new reality, while also doing old things better. It is about ensuring that active fund management remains a quintessential craft business, but with professional overlay of skills and infrastructure to exploit the opportunities created by the crisis.” parts of the industry will leave large players with dominant positions in certain areas, while allowing greater opportunities for smaller and more niche players (multi-boutiques) to evolve; • differing strategies will require different operating requirements, with technology becoming a key differentiator for strategies where risk is short term or market related. In summary, actively managed funds will have three ways to improve profits in the new, more hostile competitive landscape: increase management fees; lower costs; and enhance performance fees. The first is under pressure, while the last is subject to increasing scrutiny and claw-backs. Only the lowering of costs remains completely within management control. Wide variations in efficiency and productivity ratios within the investment management industry overall point to the potential for significant operational efficiency gains, not only generally but in the specific area of actively managed funds. Gareth Quinn is Director of Alternative Investments within Accenture’s Capital Markets Practice, based in London, UK. His previous roles include: Managing Director for Alternative Investments at SunGard; CEO of Trade Stream Global; and various global assignments with Deutsche Bank, Lehman Brothers and Morgan Stanley.

James Sproule is Global Head of Capital Markets Research for Accenture, based in London, UK. Prior to joining Accenture, he worked for over 15 years as an economist for a variety of investment banks including Bankers Trust, Dresdner Kleinwort and Augusta & Co.

Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 204,000 persons serving clients in more than 120 countries, the company generated net revenues of US$21.6 billion for the fiscal year ended 31 August 2010. More information at www. accenture.com.

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

# Sharing best practices in investment management: SimCorp hosts

top industry conference

SHARING BEST PRACTICES

Senior representatives of the global investment management industry gathered in Berlin for one of the top conferences in 2010, the 13th annual SimCorp Dimension International User Community Meeting (IUCM). Invited by SimCorp along with a select group of academics, industry experts and SimCorp Dimension professionals, delegates spent two fruitful and eventful days together with the purpose of sharing best practices in the new financial environment.

A Rikke Baden, Reporter.

s the global investment management industry begins to find its feet after what has been described as the worst financial crisis since the Great Depression, senior industry delegates met in Berlin for a two-day conference organised by SimCorp, a leading software provider for the financial industry. The event served as the ideal forum to debate best practices and growth opportunities in an irrevocably changed environment. Highly motivated and eager to make the most of this event to share knowledge, it was slightly past 10:00 am on Thursday 9 September as the last delegates found their seats in the packed conference room at the InterContinental Berlin. SimCorp CEO Peter L. Ravn opened the conference, introducing some of the programme highlights reflecting this year’s theme, ‘Sharing best practices’. With its many sessions and activities, the conference’s full agenda offered participants a chance to gain penetrating insights into industry challenges from renowned researchers and experts, to learn about the best practices of their peers, as well as to network and interact with industry colleagues in a wide range of focus groups and workshops. MARKET CONDITIONS AND STRATEGIC DIRECTION Following a brief welcome, Peter Ravn reviewed SimCorp’s business in the past

year, noting that the new financial landscape had forced the industry to realise the need to face what has widely become known as the ‘new normal’. This, he stressed, reflects the need for organisations to be agile and adaptable to change, alongside the demand for an ever-increasing focus on the industry’s ability to mitigate risk and reduce cost, while enabling growth. Several among the audience were nodding in agreement as Peter Ravn conceded that virtually no one has been immune to the altered financial environment. Still, he said, SimCorp in 2009 had demonstrated robust business results with profitable growth, solid cash flow and a strong balance sheet. To continue being able to grow business, Peter Ravn made clear that investing for the future is paramount, and went on to demonstrate how SimCorp continually invests heavily in both product and market research, in order to know exactly what the market demands, and what the industry players expect from a solution provider like SimCorp. The delegates were listening with rapt attention as Peter Ravn gave the floor to SimCorp’s CTO Georg Hetrodt, who went over some of the recent enhancements to SimCorp Dimension. Continued investment in R&D, accounting for around 30% of total expenditure, was among the reasons SimCorp could continue to release new and upgraded versions of its software every six months, he said, and went on to demonstrate

how the high-frequency release cycle was part of SimCorp’s perennial guarantee that its clients would never be working on an outdated platform. The audience of senior delegates from global investment management companies shared an interest in learning more about the general market situation and the strategic challenges that everyone seems to be facing. It was therefore well received when SimCorp COO Torben Munch took the stage for a strategic presentation of the market and its current conditions. LEGACIES OF THE FINANCIAL CRISIS Focusing on the challenges facing investment managers in the new competitive environment, the conference theme ‘sharing best practices’ was also the subject of the keynote speech by Professor Ingo Walter, Director of SimCorp StrategyLab. His review of the industry’s situation was eagerly awaited by the audience, and listeners were not disappointed. Ingo Walter really grasped the nettle when he discussed the global legacies of the financial crisis and the impact it has had on the investment management sector and the behaviour of industry players. First, Ingo Walter went through the tough facts, showing a comparable analysis of financial crises’ recovery over time – demonstrating how the current cycle is taking significantly longer to change and turn up compared to the crises of 1973, 1981, 1990 and 2001.

SimCorp

With wit and humour, Ingo Walter analysed and discussed developments in the industry and financial markets backed up with extensive business intelligence. He debated the industry’s attitude towards risk, cost and growth, demonstrating how the legacy of more than US$4 trillion in investor losses had forced the industry to take a closer look at risk management, efficiency, cost and, not least, the strategic importance of growth. Ingo Walter also referred to the extensive research performed by SimCorp StrategyLab in 2009 and 2010, revealing among other illuminating findings that 58% of the interviewed investment industry professionals believed the role and responsibility of the risk function had assumed greater prominence, and as a direct result of the current market environment, cost management had gained in strategic importance in 72% of the companies surveyed. But the main question everyone attending the conference wanted answered was: who will survive in the new financial landscape? In his reply, Professor Ingo Walter paraphrased Charles Darwin: “It

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

“ ... the legacy of more than US$4 trillion in investor losses had forced the industry to take a closer look at risk management, efficiency, cost and, not least, the strategic importance of growth.” Keynote speaker, Professor Ingo Walter, Director of SimCorp StrategyLab.

is not the strongest of species that survives, but rather the one most adaptable to change.” AWARDING EXCELLENCE Following the keynote speech was a celebration of investment management organisations which have demonstrated outstanding performance, as conference delegates were next privy to the announcement of the winners of this year’s SimCorp StrategyLab Excellence Awards. The awards have been established by SimCorp StrategyLab for the purpose of rewarding and pro-

moting best practises within specifically risk, cost and growth management in the global investment management industry. With a number of award candidates sitting among the audience, the mounting excitement was palpable as news of the winners neared. The tension was soon relieved as the results of the international jury’s deliberations were announced, naming Edmond de Rothschild Asset Management and Nordea Savings & Asset Management the winners of the respective growth and cost awards, whereas

In September 2010, close to 300 senior delegates met in Berlin, a centre of creative interaction and innovation, to share best practices in the investment management industry.

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

Keynote speaker, Professor Ingo Walter, Director of SimCorp StrategyLab. this year none of the contributions had qualified for the risk award. (Please see pp. 18–20 and 21–23 for respective articles by winner representatives.) SHARING INDUSTRY SECTOR BEST PRACTICES One of the main aims of the event was to serve as a forum for discussion about sector-specific issues. As such it offered delegates an ideal platform to share thoughts and learn more about the individual challenges and trends in the four major sectors comprising the global investment management industry: asset management, investment, pension and insurance funds.

In four workshops, conducted and led by renowned academics from INSEAD and Stern School of Business at NYU, delegates could share questions and issues while at the same time gaining a bird’s-eye view of the industry. The participants also had the chance to discuss with and share the ideas of specialist workshop panel members who as highlevel professionals had been assembled to discuss the key considerations for the specific sector and points related to risk, cost/profit and growth issues. The asset management sector workshop was hosted by Professor Stephen Brown of Stern School of Business, NYU. The workshop debated one of the more in-

“But the main question everyone attending the conference wanted answered was: who will survive in the new financial landscape? In his reply, Professor Ingo Walter paraphrased Charles Darwin: ‘It is not the strongest of species that survives, but rather the one most adaptable to change.’”

teresting revelations of the financial crisis: the extent to which investment fiduciaries in dealing with hedge funds are substituting ‘trust me’ for the standard operational due diligence they would routinely expect to perform on longonly managers. In a workshop on investment funds, Professor Martin Gruber, Stern School of Business, NYU, initiated the discussion by stating that the US mutual fund industry had reached an impressive size of US$12.2 trillion in assets under management, about the same size as the mutual fund industry in the rest of the world. Further, the industry was described as fairly mature in that almost 50% of American families own mutual funds. The group discussed these facts within the aspects of risk, cost/profit and growth. The third workshop, on insurance funds, was conducted by the retired chairman of TIAA-CREF John Biggs, Stern School of Business, NYU, who cited a question raised by Professor Ingo Walter, Director of SimCorp StrategyLab: “Why did JPMorgan, Barclays and Goldman Sachs fare so much better than Citigroup, Royal Bank of Scotland and Merrill Lynch when confronted with the same finan-

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

cial turbulence?” In an attempt to find constructive lessons the workshop’s agenda also sought to analyse the key differences in internal information flows, accountability and incentive structures, capital and risk allocation, management and corporate governance issues.

development and perspectives of the SimCorp Dimension software solution, on which they base many of their essential investment activities. In this session, SimCorp Vice President of Product Management Leen Kuijken instructively demonstrated to the audience what had been delivered in the past two versions of SimCorp Dimension.

In the final sector workshop, Professor Massimo Massa of INSEAD led a discussion about the pension industry and its challenges arising from the financial crisis. Massimo Massa kicked off the debate by introducing two key background elements that he felt the crisis had stressed and that would eventually impact the industry: firstly, the conflicts of interest within the financial group that manages assets; and secondly, the degree to which behavioural biases may impact the investor’s choice between ‘induced’ and ‘freely-chosen’ retirement schemes. The four sector workshops marked the launch of SimCorp StrategyLab’s research programme for 2011, which will ultimately result in a number of sectorrelated white papers, specifically focusing on key considerations concerning risk, cost/profit and growth issues. Here again, the aim will be to share best practices within the industry and to promote knowledge of sector-specific significance for the industry as a whole. DEVELOPING INVESTMENT MANAGEMENT SOFTWARE Another key part of the programme was dedicated to providing the audience with significant insights into the

Obviously, what many were anxious to learn about was what to anticipate from the coming releases of the product, and to meet this request Leen Kuijken gave the audience a brief overview of expected functionality across the platform solution. Further, she described how clients’ input in combination with market research formed the basis of SimCorp’s product development and functionality prioritisation.

delegates had been eagerly looking forward to the workshops, which provided an excellent opportunity for hands-on sharing of knowledge and best practices. SimCorp domain experts shared indepth insights with the audience and engaged in further dialogue with clients to specifically address challenges within the various product domains. No less than 13 different domain breakout streams were offered, allowing SimCorp Dimension user delegates to pick the three of most relevance or interest to them.

Leen Kuijken then went on to explain how the development of SimCorp’s solution for financial institutions was built around specific drivers. Among these drivers, she cited new regulatory demands, increased risk awareness, cost reduction pressure and – very importantly – how to position one’s business for growth on the back of the financial crisis.

NETWORKING 24/7 IN THE HEART OF BERLIN While the working part of the event was held at the notable InterContinental in the heart of Berlin, SimCorp also treated its clients to a grand gala dinner for all delegates, taking place at the ‘ewerk’, one of Berlin’s most prominent venues for world-class cultural events. The impressive surroundings, which acted as a backdrop to a spectacular show by a group of highly-skilled performers, kept the spirited audience entertained for much of the night. In a casual and relaxed atmosphere, delegates had an enjoyable chance to mingle and socialise, exchanging ideas and experiences across geographical borders and industry boundaries.

Following up on the overall roadmap for SimCorp Dimension were the ‘domain breakout streams’, which individually discussed and presented specific functionality within SimCorp Dimension. As SimCorp Dimension users, many

NEXT YEAR’S INDUSTRY CONFERENCE COMING UP As the September sun slowly set over Berlin, this year’s conference drew to its inevitable close. Nearly 300 senior industry delegates, who had fruitfully in-

December 2010

vested two days in this year’s conference, now began to head home, packed with new insights and experiences from sharing and exchanging expertise and best practices among a stimulating group of industry peers and specialists. One of the delegates, a senior executive from North America, commented: "I thoroughly enjoyed the IUCM. I met SimCorp executives, and gained an understanding of the firm's future direction and product plans, all of which contribute important input to my company's automation strategy. Networking with a global set of industry peers was also a key highlight." Although it will be another year before the next IUCM takes place, preparations have already begun, and both this year’s and new participants alike can start looking forward to gathering for another interesting and stimulating conference in 2011 – this time in Stockholm, Sweden.

IUCM 2010 at a glance Location: Berlin Dates: 9–10 September 2010

418 participants 281 delegates 19 speakers 17 nationalities 14 break-out sessions 10 focus groups 4 workshops 1 executive master class

Keynote speaker

Professor Ingo Walter, Director of SimCorp StrategyLab

Guest speakers

Professor Stephen J. Brown, Stern School of Business, NYU Executive-in-Residence, Adjunct Professor of Finance John Biggs, Stern School of Business, NYU Professor Martin J. Gruber, Stern School of Business, NYU Professor Massimo Massa, INSEAD Patrick Péris, Deputy Managing Director, Edmond de Rothschild Asset Management Ulrik Modigh, Head of Asset Management Operation, Nordea Savings & Asset Management Mag. Thomas Spellitz, Managing Director, ESPA-Financial Advisors GmbH and Head of Asset Management, Erste Bank der oesterreichischen Sparkassen AG Ulrich Schneider, Service Manager Bank Administration, Finanz Informatik GmbH & Co. KG

Winners of the SimCorp StrategyLab Excellence Awards 2010

Edmond de Rothschild Asset Management: SimCorp StrategyLab Growth Management Excellence Award 2010 Nordea Savings & Asset Management: SimCorp StrategyLab Cost Management Excellence Award 2010

Imagine we could start again Many decisions in life, once taken, are unfortunately irreversible. In the aftermath of the crisis, many investment management firms agree that were it not for past operational decisions, more firms could be better strategically positioned for whatever the future may hold. However, evident to most, adapting to the near future requires a significantly improved ability to mitigate risk, reduce cost and capture a profitable part of future growth. Some decisions can actually be corrected. In many cases they ought to be. Think strategically when investing in software. SimCorp Dimension is a scalable and modular STP front-to-back enterprise system for the investment management industry that supports 足institutions in mitigating risk and reducing cost while enabling growth.

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

December 2010

BOOK REVIEW:

# See No Evil: Uncovering the Truth Behind the Financial Crisis Erik Banks, Palgrave Macmillan, November 2010

e are doomed to experience further financial crises in the future, because money is powerful, bankers clever, political will malleable and memories short. So argues Erik Banks in this stimulating book, which tells the story of the recent global economic crisis in the words of the main players in the drama. Banks shows how few bankers, regulators and politicians saw the crisis coming, and how they believed its effects would be containable when it began. When realisation kicked in, they all began to compensate by talking loudly and designing

populist knee-jerk measures which seemed only to deal with the specifics of preventing another crisis exactly like that which had already occurred. The form of future crises was barely thought about. Banks's reconstruction of the crisis, and the demonstration that so few substantive lessons have been learnt, is essential reading for anyone interested in our current predicament.

ERIK BANKS is a senior risk adviser for a European universal bank. Over the past 23 years, he has held senior risk positions in the investment banking and hedge fund sector in New York, Tokyo, Hong Kong, London and Munich. He is the author of more than 20 books on risk, derivatives, emerging markets and governance, including the Palgrave titles ‘Failure of Wall Street’ (2004), ‘Dictionary of Finance, Investment and Banking’ (2009) and ‘Dark Pools’ (2010).

BOOK REVIEW:

# The Rise and Fall of an Economic Empire: With Lessons for Aspiring Economies Colin Read, Palgrave Macmillan, September 2010

hile many authors have documented empires maintained through military strength, power derived solely from economic might is a more modern phenomenon. These different sources of power share one important characteristic, though. There is an inevitability to the decline of empires that rest on either foundation. There are also lessons to learn from every empire. Just as earlier empires based on military or colonial power experienced spectacular ascendancies and subsequent declines, modern economic empires are no less fragile. The overextension, overconfidence and underinvestment that lead to the demise of military or colonial empires have their analogies in economic empires. An economic superpower grows based on its strengths, is fuelled by its successes, but declines as its values

are transformed and economic arrogance dilutes its hegemonic powers. In this book, Colin Read describes the various factors that give rise to economic empires, and documents how these same forces eventually lead to their downfall. By analysing the successes of each factor and the reasons why each falters, he offers insights into ways to sustain economic relevancy. He also offers lessons to aspiring economies so that they may best leverage and manage their growth and avoid the problems that beset less carefully designed economies. In doing so, Read gives us an interesting and provocative glimpse into the current global dynamic in which the United States, the world's first true economic empire, struggles to maintain its global economic supremacy in the face of a rapidly growing China that will soon challenge it as the world's largest economy.

COLIN READ is a columnist and the author of a number of books for the academic and popular press on economic issues. He is a Professor of Economics and Finance at the State University of New York, USA. He has worked in Indonesia for the Harvard Institute for International Development and at the Harvard-MIT Joint Center for Housing Studies. This is his fourth English language book. His previous titles include: ‘Global Financial Meltdown – How We Can Avoid the Next Economic Crisis’ (2009), ‘The Fear Factor – What Happens When Fear Grips Wall Street’ (2009) and co-edited and co-authored ‘The International Taxation Handbook’ (2007).

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

Regulatory update This regulatory update covers major new regulatory requirements and substantial developments that affect the investment management industry.

II IMPLEMENTATION § SOLVENCY MEASURES

On 24 August 2010, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published the main spreadsheet to be used by solo undertakings and groups to complete the fifth and final Quantitative Impact Study (QIS5) exercise in August and November 2010. A report on the results is expected to be published in April 2011. The report is a means of providing quantitative input to the finalisation of the level 2 implementation measures for the Solvency II framework directive. https://www.ceiops.eu/consultations/qis/quantitative-impact-study-5/ index.html

ON OTC DERIVATIVES § REGULATION IN THE EU

On 15 September 2010, the European Commission put forward a proposal for bringing more safety and transparency to the over-the-counter (OTC) derivatives market. The commission proposes that information on OTC derivative contracts should be reported to trade repositories and be accessible to supervisory authorities. More information will also be made available to all market participants. Further, the commission proposes that standard OTC derivative contracts be cleared through central counterparties (CCPs) to reduce the counterparty credit risk. The regulations described in this proposal, once approved, are to take effect from end 2012. http://ec.europa.eu/internal_market/financial-markets/derivatives/index_ en.htm

SHORT-SELLING PROPOSALS § EU DRAW MIXED REACTIONS FROM INDUSTRY

A legislative proposal put forward by the European Commission (EC) on 15 September 2010 would give the incoming European Securities and Markets Authority (ESMA) permission to make public short-selling positions that exceed 0.5% of a company’s market value. Additionally, the new pan-European institution, which assumes its supervisory duties in January, would have permission to ban short-selling for three-month periods, curb naked short-selling and regulate the derivatives market more tightly. However, the International Securities Lending Association (ISLA) has claimed the EC’s proposals are too stringent and would threaten market efficiency. ISLA said that while it supported transparency measures that create disclosure symmetries with long positions, the commission's proposed public disclosure threshold of 0.5% for short sales was too low. http://www.ipe.com/news/eu-short-selling-proposals-draw-mixedreactions-from-industry_36858.php

FOR IMPROVED § PROPOSAL FINANCIAL REPORTING OF LEASES

On 17 August 2010, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) published proposals to improve the financial reporting of lease contracts. The proposals aim at greatly improving the financial reporting information available to investors about the financial effects of lease contracts. The proposals would result in a consistent approach to lease accounting for both lessees and lessors and also provide more complete and useful information to investors and other users of financial statements. The proposals are developed based on the responses to an earlier discussion paper issued in March last year by the organisations. IASB and FASB are planning roundtable discussions on the proposals with the following schedule: London – Friday 17 December 2010, Hong Kong – Monday 20 December 2010, Chicago, Illinois – Wednesday 5 January 2011, Norwalk, Connecticut – Thursday 6 January 2011. http://www.ifrs.org/Current+Projects/IASB+Projects/Leases/ed10/Ed.htm

FOR IMPROVED § PROPOSAL FINANCIAL REPORTING FOR INSURANCE CONTRACTS

There have been activities in the joint project on financial reporting on insurance contracts conducted by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). The objective of this joint IASB/FASB insurance contracts project is to develop common, high-quality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts (including reinsurance), even if the contracts are not issued by an insurance entity. Specifically, the project is intended to improve, simplify and converge the financial reporting requirements for insurance contracts and to provide investors with decision-useful information. The deadline for comments on the IASB exposure draft for phase II of IFRS 4, published in July, was 30 November 2010. The deadline for comments on the FASB discussion paper published 17 September, is 15 December 2010. IASB and FASB are planning roundtable discussions on the exposure draft of IFRS 4 with the following schedule: Tokyo – Thursday 9 December 2010, London – Thursday 16 December 2010, Norwalk, Connecticut – Monday 20 December 2010. http://www.ifrs.org/Current+Projects/IASB+Projects/ Insurance+Contracts/Insurance+Contracts.htm

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

OF THE US DODD-FRANK ACT § IMPACT ON CORPORATE GOVERNANCE (US)

Although much of the voluminous Dodd-Frank Act focuses on the regulation of financial institutions, there are also sections that address executive compensation and corporate governance provisions, which apply to a majority of US publicly traded companies. (Smaller companies may be exempt from some provisions.) The Dodd-Frank Act may have a significant effect on how management and compensation committees design executive compensation programmes and allow shareholders to provide input on executive compensation arrangements. The legislation also has implications for companies’ corporate governance policies, including committee structures and the amount of influence that shareholders may have in director elections. http://www.corpgov.deloitte.com/binary/com.epicentric. contentmanagement.servlet.ContentDeliveryServlet/USEng/Documents/ Deloitte%20Periodicals/Hot%20Topics/Dodd-Frank%20Act_ Deloitte%20HotTopics_SpecialEdition_Aug%202010.pdf

INVESTMENT ROADMAP § NEW PUBLISHED IN MOVE TOWARDS

ISO 20022 STANDARD FOR FINANCIAL SERVICES MESSAGING

FIX Protocol Ltd. (FPL), Financial Products Markup Language (FpML), International Securities Association for Institutional Trade Communication (ISITC), Society for Worldwide Interbank Financial Telecommunication (SWIFT), XBRL (extensible business reporting language) and the Financial Services Division of SIIA (FISD) have published their updated Investment Roadmap. The purpose of the roadmap is to provide market participants with consistent direction when using financial services messaging standards. The roadmap is laying the foundation for a move to a common business model based on ISO 20022 while allowing the respective standards organisations to maintain their current business protocols. http://www.isda.org/media/press/2010/press101210.pdf

December 2010

COMMITTEE DELIVERS § BASEL BANKING INDUSTRY REFORM PROPOSALS TO G20

Following up on the G20 summit of 2009, the Basel Committee has concluded its hearings and analysis with respect to fundamental reforms of the international banking sector (and by extension, their investment banking functions), commonly known as BASEL III. Key elements include raising the quality of capital to cover potential losses, significantly upgraded risk management capabilities with respect to trading, liquidity, and counterparty exposure, as well as minimum capital and liquidity standards. The committee is also working with the Financial Stability Board to address the risks of systemic banks. On 12 September 2010, the governors and heads of supervision agreed that systemically important banks should have lossabsorbing capacity beyond the minimum standards of the Basel III framework. The committee’s reforms will transform the global regulatory framework and promote a more resilient banking sector. The committee’s work concludes that the transition to stronger capital and liquidity standards is expected to have a modest impact on economic growth. Moreover, the long-run economic benefits substantially outweigh the costs associated with the higher standards. Going forward, the committee will concentrate its efforts on the implementation of the Basel III framework and related supervisory sound practice standards. http://www.bis.org/publ/bcbs179.pdf

December 2010

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

SimCorp

Recent research and white papers

GLOBAL ECONOMIC OUTLOOK Q3 2010: GLOBAL SLOWDOWN OR FALSE ALARM?

The global economy is growing but still faces uncertainty about the sustainability of growth in the world’s three biggest markets: the United States, Europe and China. With a disappointing job market in the US, the sovereign debt crisis including the policy response to that in Europe and China’s tightening of monetary policy and efforts to cool an overheated property market are raising concerns about the sustainability of the current market growth. In this quarterly outlook, Deloitte gives insights into the durability of the recovery and the remaining risks in the world’s major markets. Also examined and offered are some rules of thumb regarding the role of fiscal policy amidst economic recovery. ‘Global Economic Outlook Q3 2010: Global slowdown or false alarm?’, Deloitte 2010 http://www.deloitte.com/view/en_GX/global/insights/deloitte-research/economic-research/ a3bd237baa6f9210VgnVCM100000ba42f00aRCRD.htm Deloitte, 44 pages, December 2010

ANALYSIS OF THE TAX IMPLICATIONS OF UCITS IV

In a joint report of the European Fund and Asset Management Association (EFAMA) and KPMG, significant tax complications are unveiled in the new Undertakings for Collective Investment in Transferable Securities (UCITS IV) directive. According to the authors, the complications prevent the achievement of a harmonised European funds industry. The report identifies critical tax issues and gives numerous examples of discrimination and inefficiencies across the European Union member states. EFAMA and KPMG also give a number of recommendations to make sure that the tax issues are not hampering the efficiency of the single market.

LEASE ACCOUNTING CHANGES

On 17 August 2010, the IASB and FASB released a joint report with proposed changes that will change lease accounting for both lessees and lessors by requiring balance sheet recognition of all leases. This report brings up a number of the implications that these suggested changes may have on financial institutions. The authors view these proposed changes as significantly impacting financial institutions and therefore urge organisations to start preparing for the impacts on their organisations right now.

FRONTIERS IN TAX: JULY 2010

In this white paper KPMG discusses a number of topics related to tax regulations. The white paper brings up for example implications of the new UCITS IV directive, recovery in M&A activity in some of the Western as well as the Asian markets, VAT as one of the key tax drivers in deal structuring, how to reshape insurance to gain efficiency and the growing focus on risk management. This white paper is one issue in a regularly recurring white paper series. ‘Frontiers in Tax: People thinking beyond borders in financial services - July 2010’, KPMG 2010 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Frontiers-in-TaxPeople-thinking-beyond-borders.aspx KPMG, 68 pages, July 2010

INNOVATION AND DIFFERENTIATION IN THE REINSURANCE INDUSTRY

PricewaterhouseCoopers interviewed 18 senior executives at leading P&C reinsurers in Europe, Bermuda and the US. The focus of the survey was on the threats, challenges and opportunities that have emerged in the aftermath of the crisis. The authors of the report present the findings of the survey and also provide some suggestions on necessary actions for reinsurers. One key result of the survey was that the executives stressed innovation and differentiation as the way for them to remain robust and competitive in the future. ‘The way forward: Innovation and differentiation in the reinsurance industry – the CEO perspective’, Forward thinking, PwC 2010 http://www.pwc.com/gx/en/insurance/event/rendezvous/innovation-differentiation-reinsuranceindustry.jhtml PricewaterhouseCoopers, 16 pages, September 2010

‘What do the proposed lease accounting changes mean for financial institutions?’, Ernst & Young 2010 http://www.ey.com/Publication/vwLUAssets/Lease_accounting_for_financial_services_GL_ IFRS/$FILE/Lease_accounting_for_financial_services_GL_IFRS.pdf Ernst & Young, 12 pages, September 2010

Solvency II is a regulatory framework imposed on insurance organisations, but the regulations will also impact brokers for example. The reason is that the demands imposed on the insurance organisations are subsequently creating a demand for more and better quality data from their brokers, suppliers and agents. This in turn is changing the competitive landscape for brokers and challenges them to adapt to a new environment. This article examines the implications for brokers within three main areas: reinsurance broking; direct broking and agency relationships; and captive management. ‘Increasing speed: Solvency II set to accelerate broking market developments’, Forward thinking, PwC 2010 http://www.pwc.com/gx/en/insurance/event/rendezvous/increasing-speed-solvency-2.jhtml PricewaterhouseCoopers, 6 pages, September 2010

‘Analysis of the Tax Implications of UCITS IV’, EFAMA/KPMG 2010 http://www.efama.org/index.php?option=com_docman&task=doc_details&Itemid=-99&gid=1304 EFAMA/KPMG, 120 pages, September 2010

SOLVENCY II SET TO ACCELERATE BROKING MARKET DEVELOPMENTS

VIEWPOINT: WHAT'S NEXT FOR THE ASSET MANAGEMENT INDUSTRY?

Ernst & Young prepared a report discussing what action asset managers should take following the recent downturn. The report stresses that long-term planning is crucial, discusses the likely impact of regulation and opines that consolidation is inevitable, particularly among the larger asset managers. Mid-sized firms will feel the most pressure as both consolidation and polarisation squeeze the mid-sized firms from both ends. ‘What now for Asset Management?, Viewpoint, Ernst & Young 2010 http://www.ey.com/Publication/vwLUAssets/what_now_for_AM/$FILE/Viewpoint%20-%20 what%20now%20for%20AM.pdf Ernst & Young, 4 pages, March 2010

ASSET MANAGEMENT INDUSTRY 2010: IN SEARCH OF STABLE GROWTH

This assessment from BCG gives their take on the global asset management industry, with a comprehensive series of industry and market statistics to bolster their claims. Among these is the fact that the market AUM grew 12% in 2009 to US$53 trillion. However, only 1% of this growth was due to net inflows. The report recommends that asset managers refine their business models, have a plan to deal with regulation and consider M&A. ‘In Search of Stable Growth’, Global Asset Management, BCG 2010 http://www.bcg.com/documents/file53448.pdf Boston Consulting Group, 30 pages, July 2010

SimCorp

JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

INVESTMENT MANAGEMENT AFTER THE GLOBAL FINANCIAL CRISIS

This position paper from Yale University and the CFA Institute is supplemented with a survey of industry players, review of academic literature and other analyses related to the fallout from the recent financial crisis. The Research Foundation of the CFA Institute asked the authors to research how investors, investment consultants and asset managers evaluated the impact of the crisis on investment management decision-making, strategies, and products, as well as on the investment management industry itself. The authors gathered their information from sources in North America and Western Europe. Key areas touched upon include changes to asset allocation, risk management, cost control and more.

‘Positioning for a new financial landscape’, Deloitte Touche Tohmatsu 2010 http://www.deloitte.com/view/en_GX/global/industries/financial-services/2e4d144622e19210VgnVC M200000bb42f00aRCRD.htm Deloitte Touche Tohmatsu, 22 pages, July 2010

FINANCIAL SERVICES 2015: THE CERTAIN AND THE POSSIBLE

This research note discusses the current business climate in the global financial services industry and presents TowerGroup's projections of the state of financial services in three to five years' time. The note offers recommendations on how financial institutions should invest their scarce technology dollars in the interim to keep pace with client expectations and to gain competitive advantage in a time of disruption unmatched in the memory of anyone actively involved in the industry today. ‘Financial Services 2015: The Certain and the Possible’, TowerGroup 2010 http://www.towergroup.com/research/search/search_reportexhibits.htm?x=16&researchFormatId=6&se archSwitch=&searchType=newSimple&keywords=Financial+Services+2015%3A+The+Certain+and+t he+Possible&serviceId=&y=15&reportSort=sunriseDate&exhibitSort=sunriseDate& TowerGroup, 8 pages, April 2010

THE TOWERGROUP OPERATIONAL RISK ASSESSMENT SURVEY: A FOCUS ON INVESTMENT MANAGEMENT

Asset managers are beset by massive pressures in the wake of the financial crisis. Lower fees, heightened risk sensitivity and invigorated regulatory scrutiny are all weighing heavily on the asset management enterprise. Given the severity of the crisis, it is no surprise that managers are taking a hard look at the way their operations and supporting technology are configured. They are seeking to dramatically lower costs, obtain transparency into risks, and structure operations and technology to be more flexible. This research note presents and analyses data from a survey conducted by TowerGroup in the second and third quarters of 2010 and focuses on the efforts of financial service institutions (FSIs) to mitigate operational risk and improve operations. ‘The TowerGroup Operational Risk Assessment Survey: A Focus on Investment Management’, TowerGroup 2010 http://www.towergroup.com/research/search/search_reportexhibits.htm?x=25&researchFormatId=6&sear chSwitch=&searchType=newSimple&keywords=The+TowerGroup+Operational+Risk+Assessment+Surv ey%3A+A+Focus+on+Investment+Management&serviceId=&y=2&reportSort=sunriseDate&exhibitSort =sunriseDate& TowerGroup, 9 pages, December 2010

RISK AND RECOVERY: PROGRESS, CHALLENGES, AND THE FUTURE OF RISK MANAGEMENT IN FINANCIAL SERVICES

‘Risk and Recovery: Progress, Challenges, and the Future of Risk Management in Financial Services’, TowerGroup 2010 http://www.towergroup.com/research/search/search_reportexhibits.htm?researchFormatId=6&searchS witch=&searchType=newSimple&keywords=Risk+and+Recovery%3A+Progress%2C+Challenges%2C +and+the+Future+of+Risk+Management+in+Financial+Services&serviceId=&reportSort=sunriseDate &exhibitSort=sunriseDate& TowerGroup, 11 pages, September 2010

POSITIONING FOR A NEW FINANCIAL LANDSCAPE

The future of the global financial services industry remains uncertain. While the worst of the financial crisis and economic downturn appears to be past, the competitive landscape remains in flux and the debate about regulatory change continues, with few of the fine details agreed upon.

This TowerGroup research note outlines the current state and future prospects for risk management across the global financial services industry. It presents TowerGroup's forecasts of global spending on risk management from three perspectives: the technical side; the traditional credit, market, and operational risk perspective; and the sourcing strategies that financial services institutions will use in advancing their risk management skills. The note also discusses drivers of spending by global region. The report then looks to the future, beyond 2012, at the sea change that risk management will undergo as a result of market and regulatory forces just now coming into view.

‘Investment Management after the Global Financial Crisis’, CFA Institute 2010 http://www.cfapubs.org/doi/pdfplus/10.2470/rf.v2010.n1.1 CFA Institute, 156 pages, October 2010

December 2010

UCITS IV: TIME FOR CHANGE. THE ASSET MANAGEMENT INDUSTRY’S VIEWS ON THE KEY INFORMATION DOCUMENT

The objective of these surveys is to ascertain the intentions of the asset management industry and the challenges it faces in regard to: – T he new UCITS requirements related to the Management Company Passport; – The new Key Information Document that will replace the existing Simplified Prospectus; and – The restructuring toolkit that allows asset managers to pool their assets by merging their European investment funds on a European basis and/or adopting master-feeder structures. This document analyses the responses that were received in relation to the Key Information Document (KID). The findings demonstrate that the industry has not yet fully assessed the implications relating to the production of the KID and many requirements surrounding its production are deemed challenging. ‘Risk UCITS IV: Time for change. The Asset Management Industry’s views on the Key Information Document’, PwC/EFAMA 2010 https://www.pwc.com/gx/en/asset-management/library/assets/ucits-iv-key-information.pdf PwC/EFAMA, 24 pages, June 2010

New reports published and information which could be relevant for listing can be submitted for review to: Co-Editor Mette Trier, mette.trier@simcorp.com

SimCorp is a leading provider of highly specialised software and expertise for the investment industry. SimCorp supports global investment management organisations in mitigating risk, reducing cost and enabling growth through development and implementation of its market-leading financial software solution SimCorp Dimension. Established in 1971, with more than 1,100 employees, SimCorp is listed on the NASDAQ OMX Copenhagen A/S. SimCorp is headquartered in Copenhagen with subsidiaries and branches in Amsterdam, Brussels, Frankfurt, Helsinki, Hong Kong, Kiev, London, Los Angeles, Luxembourg, Munich, New York, Oslo, Paris, Singapore, Stockholm, Sydney, Toronto, Vienna and Zurich. For more information about SimCorp, visit www.simcorp.com.