Journal of Applied IT & Investment Management Vol.1.No.3 by SimCorp

# JOURNAL of Applied IT and Investment Management

Volume 1 路 No. 3 路December 2009

DR. PETER SCHENK MEAG

AWARD-WINNING RISK MANAGEMENT CULTURE

PRINCIPAL ADAM SCHNEIDER DELOITTE CONSULTING

TAKING OPERATIONAL BENCHMARKING TO THE NEXT LEVEL PROFESSOR INGO WALTER

GLOBAL ASSET MANAGERS AFTER THE FINANCIAL CRISIS DIRECTOR GENERAL PETER DE PROFT EFAMA

THE ROLE OF THE ASSET MANAGEMENT INDUSTRY IN THE FUNDING OF THE POST-CRISIS FINANCIAL SYSTEM MITIGATE RISK

REDUCE COST

ENABLE GROWTH

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

CEO COMMENT:

Huge prospects – careful management by CEO Peter L. Ravn

The long-term drivers for growth in the investment management industry are strong. Though there may be doubt as to whether the recent improvement in the financial markets is sustainable, there is plenty investment managers can do to prepare for whatever the future may bring. When preparing for the short-term uncertainties and for the longer term opportunities, it is important for each individual institution to focus on streamlining one’s organisation to be able to capture value and growth once the tides turn. This inevitably involves looking at the cost platform, reducing fixed costs and keeping them down once growth accelerates. Such an approach points to scalable platforms capable of accommodating growth going forward. Getting a grip on one’s core competences remains key. I believe that the trend among investment managers to outsource non-core activities while sharpening focus on what they do best will accelerate. As such, our product, SimCorp Dimension, is designed to help our clients perform the many complex tasks needed to stay ahead in today’s and tomorrow’s international financial markets. In addition, we offer services that can free investment managers’ resources and further allow them to focus on their key business. I am pleased to say that the SimCorp Dimension International User Community Meeting (IUCM) in September in Luxembourg was a great success. With more than 200 attendees, the majority of our clients were represented, and some sent more than one delegate. The feedback has been very positive. Our work through SimCorp StrategyLab, SimCorp’s research arm, has enabled us to analyse and track the significant trends in our industry. Consequently, clients told us that the themes presented in Luxembourg, which have emerged from our research, were fully aligned with their own strategies and plans. 98% of the participants indicated that they would attend next year’s IUCM event, not least given its value as an opportunity for networking with peers in the industry. 2009 has certainly been a year out of the ordinary. And the challenges are not past yet. The importance of data quality and integrity in asset management has become even more apparent – core principles that are underpinned by SimCorp’s enterprise offering. The events of the last year have given us confirmation that we can look forward to the future with reasonable confidence, along with our clients across the investment management industry. A positive outlook towards 2010 is an excellent outset for me to send everyone my best Season’s Greetings and to wish a Happy New Year on behalf of SimCorp.

Peter L. Ravn, Ph.D., is CEO at SimCorp A/S.

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CONTENTS # TAKING OPERATIONAL BENCHMARKING TO THE NEXT LEVEL

# MEAG – RISK MANAGEMENT CULTURE PAR EXCELLENCE 7 # NEW SIMCORP STRATEGYLAB VOLUME ON COST MANAGEMENT AND OPERATIONAL CONTROL – AN INTRODUCTION

# GLOBAL ASSET MANAGERS AFTER THE FINANCIAL CRISIS

# EXTERNALISE: USING SPECIALISTS TO REDUCE OPERATIONAL RISK AND COST OF OPERATIONS

# 41% OF THE INVESTMENT MANAGEMENT INDUSTRY IN THE RED

# PREPARE FOR GROWTH: SUMMIT IN THE CONFERENCE GLOBAL FINANCIAL INDUSTRY

# THE ROLE OF THE ASSET MANAGEMENT INDUSTRY IN THE FUNDING OF THE POSTCRISIS FINANCIAL SYSTEM

# BOOK REVIEWS

# REGULATORY UPDATE

# RECENT RESEARCH AND WHITE PAPERS

Read the journal online at www.simcorp.com/journal EDITOR-IN-CHIEF Lars Bjørn Falkenberg, Vice President, SimCorp A/S larsbjorn.falkenberg@simcorp.com EDITORIAL ASSISTANT Mette Trier, 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: 11,000. SUBMISSION GUIDELINES Articles, book reviews, new reports and information on recent research can be submitted for review to Editorial Assistant Mette Trier, mette.trier@simcorp.com. For submission guidelines, please visit www.simcorp.com/journal. DISCLAIMER The contents of this journal are for general information and illustrative purposes only and will be used at your own risk. The articles in the publication do not necessarily reflect the view of SimCorp. SimCorp will use 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 journal and does not accept liability for errors or omission including inaccuracies or typographical errors. ISSN 1903-6914. Copyright rests with publisher. All rights reserved ©SIMCORP A/S 2009. 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.

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December 2009

# Taking operational benchmarking to the next level: thoughts for investment management firms

The investment management industry is now being challenged by volatile markets, changing revenue models and substantial client issues. As a result of the 2007-2009 financial crisis, many investment managers are facing the need to adjust their operational strategies to these changing conditions. Both benchmarking and best practice analysis have been proposed as tools to help asset managers understand their relative position in such operational areas as specifics of service delivery and cost structure. Once complete, however, these studies can be difficult to link to particular choices and activities. This article examines the specific methods that firms can use to extend their analyses with focus on determining ‘what is next’. by Adam Schneider , Principal, Deloitte Consulting LLP 1

enchmarking is a standard practice used across industries to define firm business performance and compare across firms. It is defined as follows: ‘To measure [a rival’s product] according to specified standards in order to compare it with and improve one’s own product.’2 The definition tends to be about specifications and quantification, for example the cost of a unit produced. In investment firms, an operational benchmark might include cost per dollar of assets managed measured in basis points, or the percent of trades handled on a straight-through-processing (STP) basis through the back office. Separately, the concept of ‘best practices’ has emerged to define how leading firms perform specific business functions. While ‘best’ is subjective – ‘pretty good practices’ is just not as attractive – it can be a valuable method for understanding the specifics of how competitive firms accomplish specific operational tasks and therefore be a guide for choices. For an investment management firm, an example of an operational best practice might be automating trade processes so that they need little human intervention and can be

measured by the STP benchmark indicated above. TYPES OF STUDY Generalising, there are three different types of benchmarking/best practices study that are often conducted between firms: • Compare facts: Studies that compare specific facts across firms. These studies include comparing organisational structures or comparing functional costs. Many benchmarking analyses fall into this category. • Compare processes in use: Studies that compare in detail how firms perform certain functions, in an attempt to identify best practices or at least practices that are more successful than others. Studies of this nature typically involve detailed functional analysis across multiple firms. For an investment management firm, this might be a comparison of how firms reconcile with custodians which shows how some firms use automated tools, some offshore work and others outsource to a third party.

1 Adam Schneider is also a contributor to the new volume by SimCorp StrategyLab: ‘Operational control in asset management: processes and costs’ edited by Michael Pinedo (see walkthrough, pages 11-14). 2 Dictionary.com

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# Taking operational benchmarking to the next level: thoughts for investment management firms • Compare projects others are doing: These studies compare projects and investment programmes across firms, and share their experiences. For example, firms may compare how they use a methodology such as Six Sigma to re-engineer processes or reduce costs. The goal is not to understand the outcome, but how projects are being performed and how specific tools fared in a real-world situation. STRENGTHS AND WEAKNESSES Benchmarking/best practices studies can be hugely valuable and provide significant insight to investment managers. Their value comes from the ability to understand multiple operating models, including models for change, and provide insight on firm choices with respect to operating

“In investment firms, an operational benchmark might include cost per dollar of managed assets measured in basis points, or the percent of trades handled on a straightthrough-processing (STP) basis through the back office.” strategy, cost structure, systems implementation decisions and human resources decisions. Some of the key benefits include:

• r esults are ‘normalised’ across firms, allowing careful inspection and comparison; • enables an ‘apples-to-apples’ comparison to be made of the area or subject being dealt with; • focuses on the specifics of the investment business, for example processing equity transactions rather than being a general study focusing on generalised transaction processing strategies; • firms can better understand or forecast the consequences of major choices, such as re-engineering strategies or technology implementation strategies; • and, perhaps most importantly, allows firms to look beyond their organisations and assess where they stand in terms of key management processes, capabilities and metrics. However satisfying studies of this type are, there are weaknesses. In particular, we have seen many instances where studies are disconnected from ‘next steps’. We might call this the ‘now what?’ problem. For example: we learn that a successful competitor has a widely different organisational structure… now what? Or, we learn that another firm has a different processing strategy, preferring to insource operations and technology… now what? The issues of translating study into action generally include the following: • A n excess of data but a lack of insight. This is probably the single largest issue. That is to say, we’ve learned a great deal, but the study itself does not translate into strategies and specific action steps. • The risk of noise overwhelming the answer. Cost structure comparisons, in particular, have challenging accuracy requirements, and one common issue is the difference in cost allocation methods. During one study, a firm proudly announced they were a low cost provider, a position they

achieved by not including information technology costs in their analysis, which were counted by peers. • The reality that the cumulative weight of different business strategies may explain most results. Choices about product offerings, distribution, or technology investment decisions and other historical factors may well explain most of the output differences found. BENCHMARKING: A PROPOSAL FOR IMPROVEMENT Is there a way to both get the benefits of external peer measurements while also linking them to business objectives? Perhaps by combining the benefits of external information with ongoing business planning. Benchmarking/best practice studies effectively treat the business being measured as a black box. The output is a series of measures: it uses process x. It costs y per billion of currency under management. It has a success rate of z%. However, few of these benchmark measures tie the visible service levels to internal and external constituencies. We propose to focus less on internal processes and more on the relevant service level metrics. If we find operational performance is far away from these metrics, we can immediately identify strategies for change. We propose to align the external benchmarking and annual planning processes by using visible service level measures to drive internal plans for improvement. In essence, we would use benchmarking techniques to compare both other investment management firms and output metrics important to internal/ external clients. Such a programme would have significant advantages as it would be focused.

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Figure 1 shows an example of a programme successfully used in investment management firms. It would work as follows:

Internal and external client surveys

• U nderstand the service level expectations of relevant parties such as clients, custodians and other key internal clients. • Determine whether or not peer firms are meeting this level of service. Note ‘service level’ may include a wide range of subjects such as specific timings, accuracy levels, internal cost or level of technology enablement. The goal is to identify specific expectations that are or are not being met. • Focus on service level metrics visible to external parties, as opposed to those that are used to manage internal processes. Benchmarking of this type would work through a waterfall process that starts by understanding the needs of external parties, then working towards peer firms and then measuring the internal operation. The goal is to assemble as many outside-in measures of operational effectiveness as practically possible. A sample process chart, including participants and types of questions asked, is included in Figure 2. LINKING TO IMPROVEMENT PROGRAMMES Tying information from the outside-in benchmarking process described above to business improvement programmes is relatively straightforward. Our proposal is to directly link the results of the benchmarking to potential change and re-engineering projects. For example, the business function of performance measurement is essential to investment firms. The calculations are precise, compared to external parties, and directly determine how firms, clients and

Internal and external clients that offer varying perspectives

Externally visible functions

Survey of requirements

Analysis and comparison

Custodians that service and interact with many investment firms

– Reporting – Performance measurement – Client service including inquiries and escalation – Fee accounting/billing – Contributions/withdrawal – Investment accounting – Accuracy – Corporate actions

Study analysis

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Investment consultants with relationships and experience

– Trade processing – Cash management – Trade settlement – Reconciliation – Reference data – Corporate actions – Investment accounting

Firm profile*

– Reference data – Assets under management – Client administration – Performance measurement

Services and quality measures

Current delivery effectiveness

* including general statistics and operating ratios

Interviewee

Potential participants

Sample questions asked

Client

Investment manager to establish meeting Senior management for perspective and tone Line functions interfacing with investment managers

What are the service and support dimensions that are most important to you? How does the investment manager satisfy your needs relative to these dimensions? What is your desired end state relative to the key dimensions?

Custodian

Advisor services unit Senior management for perspective and tone communication?

What are optimal trade communication procedures? What defines ‘client expectation’ relative to investment manager to custodian What incentives should be built into the process? Any report card/MIS reporting

Investment consultants and other firms

Client service partner Investment advisors Performance analyst

How is your organisation aligned to meet internal and external needs? What defines ‘client expectation’ relative to consultant communication? What are the gaps in servicing the key identified dimensions? Internal cost metrics as per cost benchmarking studies

Investment management firm itself

Operations manager Middle/back office managers IT representative CFO, COO as appropriate

What are the most important service dimensions to your clients? How are your products and services aligned with their expectations? What is your desired end state relative to the key dimensions? Internal cost metrics as per cost benchmarking studies

consultants view their success. At the same time, the specifics of executing performance measurement are highly internal and rarely visible.

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# Taking operational benchmarking to the next level: thoughts for investment management firms

In our outside-in approach, firms would start with the goals of the performance management function and use these goals as benchmark questions for external parties, for competitors and finally for the performance operation itself. When done, the study should be able to reach a

“Benchmarking/best practices studies can be hugely valuable and provide significant insight to investment managers.” conclusion about the area’s relative operational position. That assessment can be used as the basis for deciding how to move that function from its current level of capability to what is required.

In the performance measurement case, one might learn that clients expect to have daily performance available, with month-end audited performance ready three days after month end, and that other firms are meeting this goal. Meanwhile, the internal survey indicates that our firm’s operation is achieving only ten-day-after-month-end readiness. An illustrative example of operational functions benchmarked on an outside-in approach is indicated in Figure 3. There are significant benefits to this approach. Firms would formally understand the service levels they must provide for key constituencies. They would understand how they and their competitors are meeting those service levels and whether there is a gap. They can then assess whether the gap in capability is significant enough to require improvements to be made. In fact, the competitor benchmarking would be likely to indicate whether the required improvements are cost-related, processrelated, or technology-related.

The benefits of linking external measures to firm improvement projects are significant and ongoing. We believe this structure for benchmarking will provide significant benefits over traditional approaches.

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December 2009

# MEAG – risk management culture par excellence MEAG, winner of the SimCorp StrategyLab Risk Management Excellence Award, is a risk management firm both by design and by culture. We spoke to Dr. Peter Schenk, MEAG’s Head of Investment Controlling, to learn about its approach to risk. by Richard Willsher

Dr. Peter Schenk, Head of Investment Controlling, MEAG

mong asset managers, MEAG may well be the envy of its peers. It manages more than €180 billion of assets, yet suffered no direct damage in the financial crisis. This is almost certainly due to the risk management culture at the firm and its heritage as part of Munich Re. All but €8 billion of the assets under its management are from Munich Re companies and, as Dr. Peter Schenk explains, insurance companies do things differently. “The assets of insurance

companies have to behave differently than assets belonging to other types of investors. The assets must back the liabilities of the insurance company. What is more, life insurance company

assets have to be structured completely differently than those of a composite insurer or firms that reinsure storm risks. The risk content and asset behaviour mean that they have to match, or

“Munich Re’s mission statement is ‘We turn risk into value’. So that’s where we start from. We have to understand the investor’s risk concept.” Dr. Peter Schenk

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# MEAG – risk management culture par excellence

approximately match, this liability structure. Any deviation has to be deliberate. This means that when you manage assets for insurance companies, you have to talk about risk. The liabilities are risks. Insurance companies deal with risk. Munich Re’s mission statement is ‘We turn risk into value’. So that’s where we start from. We have to understand the investor’s risk concept.”

“We regard our role explicitly as business enablers.” Dr. Peter Schenk

PRIMARY FOCUS ON RISK While many other fund managers may be under greater pressure to focus on return, MEAG’s primary focus is on risk. More particularly, it has to understand very clearly the ‘riskless position’ of the investor. But what is risklessness? “For a private individual it may mean cash in a drawer to pay for tomorrow’s pizza,” says Dr. Schenk. “For an insurance company that knows, or expects from its models, that it will have to be able to pay certain claims in a year’s time, or, in life insurance, in 10 or 15 years’ time, your riskless position will not be cash, because relative to the liabilities, the return is quite different. To arrive at this riskless position you have to do certain calculations; you need to look at the asset and liability values at risk. You need processes that will meet the liability structure when it changes. Insured events may or may not occur. Claims may emerge or not emerge.” Modelling but also preparedness for the unexpected are key ingredients of the process. As Dr. Schenk adds without any hint of complacency, “A financial crisis is just another event that makes you think about your risk profile.” It follows, then, that understanding and calculating risk at MEAG starts at the top of the firm. As well as heading the risk

management function at MEAG, Dr. Schenk also plays a role in the integrated risk management function of Munich Re as a whole, where he reports directly to its chief risk officer. As an indication of the scale of the Group-wide risk management task, it is worth noting that in the half year to 30 June 2009, Munich Re generated gross premium income of €20.7 billion. Any new investment decision that is taken involves the full participation of the risk management function; it has to pass the risk management test. “It is very important to remember that there always are two perspectives in our decision processes: the front office perspective and the risk perspective, which are taken equally into account,” explains Dr. Schenk. “In order to come to a wellbalanced decision, the people with an allocation idea must know that they will be confronted with risk perspectives. An example where we see this working in practice is our ‘New Product Process’. When an attractive new investment idea comes out in the market, the front office may be thrilled with it. The investor may be thrilled as well, because it may be a good instrument to reflect its liability profile. But we will only take up on it if we on the risk management side agree. We have to be able to understand the product. We have to be able to adequately model it in our systems. We have be able to access the data we need to feed our models, so that the output they give us is in the form of useful information.” BUSINESS ENABLERS However, it would be a mistake to paint the risk management function only as an obstacle to doing business. The risk management culture has evolved much further than that and according to Dr. Schenk, “There are conflicts, but we have found ways to deal with them as a routine. What is necessary is intense communication and mutual respect. We work together in one building. We meet at lunch. Whenever issues arise, we sit down

together and talk about them. We regard our role explicitly as business enablers. We supply the front office with tools that they can use for their allocation and try to assist in finding solutions when dealing with narrow risk limits and other restrictions. It helps if they see that we really do not want to hinder them and that we are not always risk averse, but that we also try to find ways for them to take on risk.” Dr. Schenk sets out the first principles of MEAG’s risk management operation. The internal data has to be up to date and complete. It has to be stored correctly and securely so that all holdings are known at any time. The details of holdings must be transparent. The methods and processes for handling the data have to be able to transform it into information that is useful and can flow into the decision-making process. To achieve these things MEAG uses a centralised data backbone that includes SimCorp Dimension. These features are the basic building blocks, but it is dealing with the unusual situations that defines the risk culture at MEAG and tests how effective it is. As Dr. Schenk elaborates, “When special situations emerge, when there is a crisis or new business opportunities – something unusual, you have to have all this data, and the processes and governance rules must be set up perfectly. And you need a risk culture that is able to change to another gear; to move into crisis mode, if you like. Then, when you do, the culture of the firm ensures that everybody really likes to work with each other. Everybody keeps a close eye on the risk system, but the gap between it and the special situation can only be bridged with communication and action, with everybody really doing not only what is in their job description, but whatever is necessary at that moment.” As Dr. Schenk adds, “This is a ‘top-down issue’ because everyone appreciates that understanding, managing and controlling risk is vital to our business and our decision-making process.”

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MULTI-DISCIPLINARY TEAM It is also key to the process that the risk management function is staffed in a way that matches the demands of the business in all its complexity. For example, Dr. Schenk himself has a background in mathematics and computer science and holds a doctorate in economics. He notes that his colleagues in the Risk Management department are an interdisciplinary team. There are economists, people with technical computer science backgrounds, but also physicists. In addition, the company sponsors them to gain Professional Risk Managers’ International Association (PRMIA) qualifications. Intellectual rigour and professional competence are essential prerequisites. However, part of MEAG’s success in the current financial crisis is owed to the 2000-2003 equity bubble, which sharpened the firm’s resolve to enhance its risk culture. As Dr. Schenk explains, “We looked at everything: at what worked and what didn’t work so well. The problem is always interfaces between different departments; between the asset manager and the investor. And there we learned some lessons. One was that we really intensified communication. We introduced a mandate management concept which ensures that the tactical asset allocation not only fits MEAG’s view of the market, but also the investor’s overall situation. One example of what this concept entails are the regular asset/ liability management meetings now held between investors and MEAG. Another is the elaborate risk management process with well-documented tasks and areas of responsibility. Every objective that an investor has is quantified and corresponding risk triggers are defined. When a risk trigger is activated, a predetermined process starts. This process always has to do with distributing and exchanging information, meeting together and deciding. Our processes now encourage people to make decisions.”

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“A strong process was already in place before the financial crisis, and the institution performed well during the crisis. [MEAG] has a strong emphasis on the risk culture throughout the company group, where the risk management units are structurally separated from the front office.… The risk policy is not only comprehensive and detailed; it also demonstrates that risk policy can be an active tool to create added value for the institution’s stakeholders.” Award speech by Professor Ingo Walter at the SimCorp StrategyLab Risk Management Excellence Award 2009 announcement

Today, for example, risk modelling, stress testing and reviewing and revisiting the stress tests and models on a regular basis are vital processes. And transparency is the sine qua non. It is one of the chief reasons that MEAG avoided the worst of the crisis, as Dr. Schenk points out: “If you have transparency, you can quickly manage an asset’s risk. You can sell it or hedge it faster than your competitors perhaps. Nobody could ever understand what a CDO of CDOs was, because you couldn’t drill into the data that really exposed the risk. If we were to buy these products and somebody asked us, “What is your exposure to US real estate, or to British credit cards?,” we couldn’t see the answer. We wouldn’t have the data. So we either wouldn’t permit such instruments at all, or would at least classify them as ‘nonstandard’, which leads to strict limitation in volumes and special pricing and reporting rules.” GLOBAL PROSPECTS So in the bigger picture, considering the raft of new controls and measures currently under discussion, and in light of MEAG’s experience, is Dr. Schenk optimistic that products that are not sufficiently transparent will be banned or sufficiently de-risked in the future, so as to not pose a threat? “It is not black and white, but altogether I’m not optimistic. Buy-side needs and sell-side creativity will always lead to

interesting constructions that somehow manage to comply with existing regulation. So it will always be the task of individual companies’ risk management to make a judgement about the degree of transparency,” he says. “The other thing is systemic risk. To prevent this we would need a global risk management system. A global risk management system means global data pools, a global early warning concept and global risk management processes linked to these warnings. This is now being thought about and discussed in all kinds of forums, but the challenges are

“Our processes now encourage people to make decisions.” Dr. Peter Schenk

huge. I think the desire is there, as well as the basic willingness to collaborate, but it will be cumbersome to arrive at concrete decisions and to accept jointly shouldering the pains risk management brings with it. I think the train is moving in the right direction, but if it is to reach its destination, many components have to interlock, and many parties who have not worked together so far will have to do so in the future. It is complicated, global, and there are lessons to be learned along the way. It might take a long time.”

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# MEAG – risk management culture par excellence

MEAG (Munich ERGO Asset Management GmbH) is part of Munich Re. It provides advice on strategic asset allocation, risk management and asset-liability management, combined with professional investment management. It manages approximately €186 billion worth of assets on behalf of Munich Re and for third parties, including other institutions and public funds. Munich Re is the world’s largest reinsurance group. It conducts both insurance and reinsurance business in an integrated model, with premium income of €38 billion, net profit of €1.5 billion and 44,000 employees around the world. ERGO, the group’s primary insurance group, has 40 million clients in more than 30 countries and earned premium income of €17.7 billion in 2008. ERGO offers a range of insurance products and is Europe’s leading health and legal expenses insurer.

Dr. Schenk concludes by saying that while the world has probably learned how to avoid another sub-prime crisis, it is the unexpected we have to prepare for. “To deal with the unexpected you need global risk management systems, a global risk culture and global risk governance, so that the relevant key persons will sit down together and make decisions, fast.” This, he says, will be very difficult to achieve on a global scale, but for MEAG’s own business, with the highly evolved risk

management capability that Dr. Schenk describes, there is plenty of cause for optimism. Richard Willsher is a London-based financial journalist and former investment banker.

The SimCorp StrategyLab Risk Management Excellence Award has been established by SimCorp StrategyLab for the purpose of rewarding and promoting best practise within risk management in the global investment management industry. MEAG was named the 2009 winner by an international jury including Professor Caspar Rose of Copenhagen Business School, Professor Renée Adams of University of Queensland, Professor and Director of SimCorp StrategyLab Ingo Walter of Stern School of Business (NYU), and SimCorp‘s CEO, Peter L. Ravn. The assessment was based on MEAG’s achievements and developments in the field of risk management in the period from 1 August 2008 to 31 July 2009. SimCorp StrategyLab is the independent research arm of SimCorp. Read more about SimCorp StrategyLab and its Risk Management Excellence Award at simcorpstrategylab.com/riskaward

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# New SimCorp StrategyLab volume on cost management and operational control: an introduction A new SimCorp StrategyLab volume discusses new ideas on key strategic asset management industry issues concerning processes, costs, productivity and operational risk, with a particular focus on their interrelationships and the trade-offs between them. by Professor Michael Pinedo and Editorial Assistant Mette Trier 1

he global asset management industry can be divided into two broad categories: institutional asset management and retail asset management. Through a number of phases, the asset management industry as a whole has undergone some major changes over the last two decades. Firstly, from the early 1990s until about 2008, the world witnessed how the value of assets under management (AUM) skyrocketed due to the high liquidity in the global financial markets. This in turn was caused by abundant credit and everincreasing asset valuations, among which the most widely known are real estate prices. This first phase also fostered the creation of hedge funds that continue to play a major role in the financial markets.

1 The editor, Michael Pinedo of the Stern School of Business, NYU, focuses in his current research on the modelling and analysis of service systems, with an emphasis on Total Quality Management (TQM) and operational risk. He has written, or jointly written, numerous technical papers on these topics and is the author of several books.

Before the crisis, most asset managers were not too worried about operating costs or operational risks, as everincreasing prosperity made the value of their AUM grow steadily. Excessive costs and disproportionate numbers of errors were buried under the constantly rising revenues from a growing asset base and under the solid profits generated by high returns. The winds have changed, however, and today, the industry is working under quite different conditions. Many of the largest asset managers have suffered a drop in the value of AUM by 30-40%, not only due to a decline in asset prices, but also from clients withdrawing their money. The crisis also brought regulatory failures to light, such as the

Madoff case, one of the largest operational risk events in history. Currently, the asset management industry finds itself in a new phase of major change. Since the credit crisis, the sector has suffered from plunging global financial markets and from liquidity becoming either highly restricted or nonexistent. Even with a market recovery,

with regard to their costs, productivity and risk management. These factors have only recently begun to gain recognition as playing an important role in asset management, and their interdependencies and trade-offs have not yet been thoroughly analysed. For example, a reduction in costs, implemented without proper planning, may substantially increase exposure to operational risk.

â&#x20AC;&#x153;The new reality has forced

asset managers to develop a much stricter discipline in their operational processes, in particular with regard to their costs, productivity and risk management.â&#x20AC;? former levels of liquidity and wealth cannot be expected to become the norm again. SETTING A NEW AGENDA: PROCESSES, COSTS AND RISKS The new reality has forced asset managers to develop a much stricter discipline in their operational processes, in particular

Processes, operational controls, costs, productivity and quality control have been studied extensively in other industries, in particular the manufacturing sector. It seems that the financial industry can learn a great deal from these studies. For example, the procedures used for Total Quality Management (TQM) in manufacturing and services turn out to be

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# New SimCorp StrategyLab volume on cost management and operational control: an introduction very similar to procedures that can be used in the management of operational risk in financial services. In financial institutions as a whole, it has become clear that even institutional asset managers with large trading operations have to keep their costs under control. The most important cost and operational risk factors in asset management can be summarised as, firstly, the costs and risks with regard to human resources; secondly, costs with regard to client contact centres and distribution channels; and thirdly, costs with regard to systems development and transaction processing. In this new volume, the contributors consider all the cost and risk factors mentioned above for retail as well as institutional asset managers. It is evident that the first factor is important for both categories of asset management firms. The second factor is clearly more important for a retail firm than for an institutional firm. The third factor is equally important for both categories of firms. From various perspectives, the authors illustrate how the operational performance measures of interest in global asset management are mainly concerned, on the one hand, with costs and productivity and, on the other hand, with quality management and operational risk. Moreover, they discuss issues related to the obvious trade-offs between costs and productivity, and quality control and operational risk.

1 See pages 3–6 of this issue of ‘Journal of Applied IT and Investment Management’ for Adam Schneider’s article ‘Taking operational benchmarking to the next level’.

TWO PERSPECTIVES REPRESENTED: INDUSTRY AND ACADEMIA The main body of the volume has been divided into two parts representing industry and academic perspectives respectively. Six chapters have been written by authors closely connected to the asset management industry who give their views on general managerial,

technological and cost models that are pertinent to the challenges faced by today’s global asset management firms. Four chapters by more academically orientated authors are based on their collected data, which lead us to valid new conclusions and recommendations.

allows firms to compare their cost performance with others in an effective manner. It is based on the results of a wide variety of cost control projects conducted over the past 20 years throughout the investment management industry and covering a large number of firms.

A best practices framework for operational infrastructure and controls Providing the first set of industry perspectives, Ümit Alptuna, Manos Hatzakis and Reha Tutuncu from Goldman Sachs present an operational and control policy framework that incorporates industry-wide best practices and reflects current thinking as shaped by the 2007-2009 financial crisis. Especially in the rapidly expanding area of alternative investments, they emphasise the importance of strong governance in effecting these best practices and discuss operational elements such as robust infrastructure and controls, reliable valuation, and a holistic approach to risk management. Finally, the authors examine under which conditions the cost-effective strategy of outsourcing operational asset management functions can be successful for both managers and clients.

Lean Six Sigma in asset management Focusing on the concept of Lean Six Sigma in asset management, Klaus Arfelt from SimCorp outlines what is needed to maintain high productivity in conjunction with high quality control. Initially, his reason for looking deeper into the Lean Six Sigma idea was motivated by the highly impressive results that have been achieved in the manufacturing world. To illustrate this, the author looks at the automobile industry, where the concept was introduced and where the most revolutionary consequences of process optimisation have been observed. Finally, the advantages and positive side effects of Lean Six Sigma implementation are discussed. The chapter demonstrates how a lean organisation has obvious competitive advantages when it comes to employee competencies, operational transparency and a mentality of continuous improvement.

Managing costs at investment management firms Another significant industry angle is provided by Adam Schneider1 of Deloitte Consulting, who focuses on the operations and costs in an investment management firm from a value chain perspective. The investment management industry is now challenged by volatile markets, changing revenue models and substantial issues of client faith and trust. Many investment management firms are facing revenue declines, product performance and the need to adjust strategies to these changing conditions. For the first time in many years, cost control is important to investment managers. Mr. Schneider provides a framework for an analysis that

Management of risk, technology and costs in a multi-line asset management business In his chapter on the multi-line asset management business, John H. Biggs, retired chairman of TIAA-CREF, discusses responsibilities at the different levels of the corporate structure as far as risk management and technology management are concerned, along with the effects on total costs. In order for an asset management firm to function well, he concludes that risk management and technology management functions should not be kept at corporate level, but rather delegated down to the line managers.

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Manos Hatzakis, co-author of the chapter ‘A best practices framework for operational infrastructure and controls’, is a vice president at Goldman Sachs Asset Management and COO of Goldman Sachs Investment Partners.

Adam Schneider, author of the chapter on ‘Managing costs at investment management firms’, is a principal at Deloitte Consulting LLP, primarily serving clients in banking, investment management, wealth management and capital markets.

Yakov Amihud of New York University, coauthor of the chapter ‘Transaction costs and asset management.’

Strategic and tactical cost management in asset management Zeroing in on both strategic and tactical cost management, management consultant and adjunct professor at New York University Marcelo Cruz studies the types of cost reduction efforts that have been tried over the past few of years in the industry. In his corresponding analysis of strategic cost management, Cruz analyses the trade-offs between levels of corporate expense with levels of operational risk exposure.

industry. The significant conclusions of the impact report analysed are based upon a recent survey of 100 interviews conducted among leading asset managers around the world.

Transaction costs and asset management Yakov Amihud of New York University and Haim Mendelson of Stanford University go on to analyse transaction costs, the variable costs of trading securities, in the asset management industry. They demonstrate how trans-action costs affect the values of assets. For any given level of risk, securities with higher transaction costs tend to have lower prices. The authors study the effects of transaction costs on asset management and introduce the different types of transaction costs, study their structure and show how they affect asset prices. Finally, they examine the implications of these relationships for asset managers, showing how transaction costs affect portfolio construction, fund design, trade implementation, cash and liquidity management, client acquisition, development strategies and trading frequencies.

Cost effectiveness in the asset management industry: an IT operations perspective Concluding the part on industry perspectives, Kjell Johan Nordgard from SimCorp and Lars Falkenberg of SimCorp StrategyLab discuss the effect of information technology on cost effectiveness in the asset management

Cost structure patterns in the asset management industry The first of the second part’s academically orientated chapters is written by Professors Dennis Campbell and Frances Frei of Harvard University, who focus on the relationship between annual revenues and annual selling, general and administrative (SG&A) expenses in the 2001-2008 period. The authors find that indirect costs related to SG&A appear to be increasing when revenues climb, often rising at a faster rate than revenues. On the other hand, these indirect costs remain relatively fixed when revenues decline.

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Haim Mendelson of Stanford University, co-author of the chapter ‘Transaction costs and asset management.’

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SimCorp

# New SimCorp StrategyLab volume on cost management and operational control: an introduction Does strategic outsourcing create financial value? Posing this question, Anitesh Barua and Andrew Whinston of the University of Texas at Austin and Deepa Mani of the Indian School of Business in Hyderabad study the value of strategic outsourcing. The authors describe the risks and managerial challenges in strategic outsourcing. They have analysed the 100 largest outsourcing initiatives implemented between 1996 and 2005 and determined the number and value of the sample contracts over time as well as reasons behind outsourcing failures.

A stitch in time â&#x20AC;Ś Finalising the section on perspectives from academia, adjunct professor at Columbia University Kosrow Dehnad, who works for the Samba Financial Group, compares the trading processes in financial services with the production processes in manufacturing. He contends that procedures similar to those used in TQM in manufacturing can improve risk management processes in financial services considerably. He provides four examples of error detection procedures based on TQM thinking and discusses the importance of automation and IT investments in the implementation of such procedures.

This book was written with management of the global asset management industry in mind. The contents of the volume will also be highly relevant for anyone else with an interest in this industry, be it researchers or students. Title Operational control in asset management: processes and costs Editor Professor Michael Pinedo Stern School of Business, NYU No of pages 220 Publisher SimCorp StrategyLab Publication date 7 December 2009 Price â&#x201A;Ź45 Available from amazon.co.uk

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# Global asset managers after the financial crisis

The institutional asset management industry after the financial crisis of 2007-2009 is likely to return to the role of one of the largest and most dynamic parts of the global financial services sector in the years ahead. But what shape it may take is a matter of considerable uncertainty. by Professor Ingo Walter, Director of SimCorp StrategyLab

he estimated extent of the damage from the crisis borne by various financial sectors is shown in Figure 1. Losses outside the banks have affected insurance companies and hedge funds, but indirect losses, as a result of massive price declines in financial and non-financial shares as

well as crisis-related bond defaults, have eroded equity and fixed-income values. Compounding investor returns were the indirect effects on yields attributable to a flood of liquidity by central banks trying to contain the crisis. Taken together, this means that asset management clients are far more sensitive to risk and cost than

before the crisis, requiring much more focused attention on these two dimensions of asset management. Nevertheless, savings have to go somewhere, and the asset management industry will, as before, capture its share of these flows. This is based on a number of long-term drivers. LONG-TERM DRIVERS On the pension side, long-term drivers include the continued recognition that most government-sponsored pension systems, many of which were created wholly or partially on a pay-as-you-go (PAYG) basis, have become fundamentally untenable under demographic projections that appear virtually certain to materialise. They will need to be progressively replaced by asset pools that will throw off the kinds of returns necessary to meet the needs of growing numbers of longer-living retirees. Further changes have grown out of the partial displacement of traditional public- and private-sector defined benefit programmes. These, backed by assets contributed by employers and working individuals, have come under the pressure of the evolving demographics, rising administrative costs, and shifts in risk allocation by a variety of defined contribution schemes. Despite the impact of

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# Global asset managers after the financial crisis

the crisis, which has led some to believe that a return to defined benefit programmes will develop, it seems likely that the pre-crisis trends will resume once stability returns to financial markets. Even with the crisis-related losses in asset values, the substantial increases in individual and institutional wealth in a number of developed countries and a range of developing countries, especially in Asia, will probably resume (see Figure 2). This is likely to run alongside realloca-

“Nevertheless, savings have to go somewhere, and the asset management industry will, as before, capture its share of these flows. This is based on a number of long-term drivers.” related in terms of total investment returns. The growth implied by the first of these factors, combined with the assetallocation shifts implied by the last, will tend to drive the dynamics and the competitive structure of the global institutional asset management industry in the years ahead.

tion of portfolios that have, for regulatory, tax or institutional reasons, been overweight domestic financial instruments, notably fixed-income securities. There will possibly be a greater role for equities and non-domestic asset classes,

which may again promise higher returns but may also reduce the beneficiaries’ exposure to risk, due to portfolio diversification across both asset classes and economic and financial environments that are less than perfectly cor-

“Asset management will continue to attract competitors from an extraordinarily broad range of strategic groups.”

HIGHLY COMPETITIVE ASSET MANAGEMENT INDUSTRY Asset management will continue to attract competitors from an extraordinarily broad range of strategic groups. Commercial and universal banks, investment banks, trust companies, insurance companies, private banks, captive and independent pension fund managers, mutual fund companies, financial conglomerates and various types of specialist firms are all active in investment management. This rich array of contenders, coming at the market from very different starting points, competitive resources and strategic objectives, is likely to render the market for institutional asset management highly competitive even under conditions of large size and rapid growth. Securities firms, such as broker-dealers, have also penetrated the asset management market, and so have insurance companies reacting to stiffer competition for their traditional annuities

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$ trillion 70

Japan 60

North America Europe

Other

40 30 20 10

1997

1998

1999

2000

2001

business. Commercial banks, watching some of their deposit clients drift off into mutual funds, have responded by launching mutual fund families of their own, or marketing those of other fund managers. Firms in each category have also launched in-house hedge funds or funds of funds. Such cross-penetration among strategic groups of financial intermediaries, each approaching the business from a different direction, makes global asset management markets one of the most competitive in all of finance. Nevertheless, this cohort is likely to change after the crisis. Independent broker-dealers have at least temporarily disappeared as the big players either, like Lehman Brothers, failed, were absorbed, such as Merrill Lynch or Bear Stearns, or converted to financial holding companies, in the case of Goldman Sachs and Morgan Stanley. Universal banks in Europe and elsewhere are rethinking their business models based on what has happened. For example, the future role of financial conglomerates active on both the sell-side and the buy-side of the market may well advance, despite the conflicts of interest built into the model. On the other hand, pure buy-side firms such as insurers and independent fund management companies and those affiliated with commercial banks will be handed strong marketing arguments that could bolster

2002

2003

2004

2005

2006

â&#x20AC;&#x153;The basic drivers are intact and will resume much of their pre-crisis course, but the contours of the [global asset management] industry itself and the impact on the various players that comprise it remain highly uncertain.â&#x20AC;? their market share. How this pans out will be materially affected by the regulators as they begin to price systemic risk or force the separation of businesses whose cohabitation could impose unacceptable costs on the system. POST-CRISIS OUTLOOK So the global asset management industry is destined to live though some interesting times. The basic drivers are intact and will resume much of their pre-crisis course, but the contours of the industry itself and the impact on the various players that comprise it remain highly uncertain.

Ingo Walter, Ph.D., is director of SimCorp StrategyLab and Seymour Milstein Professor of Finance, Corporate Governance and Ethics. He also serves as the Vice Dean of Faculty at the Stern School of Business, New York University.

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# Externalise: using specialists to reduce operational risk and cost of operations

Triggered by the current market environment, asset managers are beginning to focus greater attention on their IT infrastructures in their constant undertaking to mitigate operational risk, find long-term cost savings and position themselves for sustainable future growth. Looking for solutions, there might be reasons to look beyond the organisation. by Karl Dait, Reporter

imCorp’s research among major asset management firms has identified a number of common and unavoidable challenges due to the waves of change that continuously break over the global asset management industry. Yet, if professionally handled, there is scope to reduce risk and save cost in dealing with them.

“The solutions ... typically include outsourcing of particular functions ... to concentrate on the core competencies of the organisation.”

OPERATING MODEL AND UPGRADES Best practice suggests that periodic reviews of the overall IT operating model are both necessary and worthwhile. Deriving directly from the needs of the business, the key question is: “Is our IT model fit for purpose?” which leads to further questions such as, “Will it be adequate to meet our needs in the short, medium and long terms?” Asset managers uniformly state that they continually aim to reduce operational risk and fixed costs, flatten the cost curve over the life of the operating model and weatherproof the organisation’s IT capability in light of new requirements from the marketplace, and at the same time support future growth opportunities. These include, among other things, new regulations, reporting requirements or the evergrowing list of new client demands. The solutions to these questions typically include outsourcing of particular functions, whether near-shoring or off-

shoring them, in order to gain best value from internal staff and systems by allowing them to concentrate on the core competencies of the organisation. Hopefully, this will produce a robust, scalable IT operating environment capable of expanding and running a more focused business. Addressing the risk and total cost of operations inevitably requires examination of the upgrade process. Most IT platforms need periodic upgrades and, in many cases, annual upgrades. Whether clients carry out such upgrades themselves or involve partners, there will always be significant risk and cost. It can, however, be difficult, if not impossible, to identify and monitor these factors. For example, during an upgrade procedure, internal or external IT staff are likely to be deployed for some time, and this cost can easily be calculated. However, calculating the cost when others in the

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non-operational parts of the organisation are involved on an informal but timeconsuming basis can be a less straightforward task. At the same time, faulty or incomplete upgrades put the daily business at risk and can entail additional costs if a system or capability is inoperative, even for a short period.

specialised and expensive in-house resources in case a random, unlikely event should occur.

Asset managers say that where upgrades fail, it is largely due to faulty planning and testing or because automated upgrade procedures are not in place. Moreover, because upgrades are relatively few and far between as compared with routine daily, weekly or monthly periodic IT functions, staff involved may lack the recent experience, which means that extra time is required to relearn the procedures, and this often represents a significant hidden cost. INCIDENT AND PROBLEM MANAGEMENT Also, in the context of limiting operational risk and total system cost, enterprise system users say that encountering particular problems or out-of-theordinary incidents is a concern to them. Again, the overarching issue is the availability of suitably experienced staff, whether in-house or at the outsourcing partner, to fix the problem. The time taken to sort problems out using available help desk resources can be costly in terms of downtime or when particular aspects of system capabilities are inoperative. Initially, the threat derives from not knowing when the problem will be solved and when the system will be up and running again, and this impacts efficiency, entails costs, and causes stress for all parties involved. The mission-critical importance of an asset manager’s central data repository means that it is vital to have able technicians on site who can quick-fix one-off incidents. Practically, however, an asset management business does not necessarily need to retain

IN-HOUSE STAFF OFTEN UNLIKELY TO GAIN INCIDENT MANAGEMENT EXPERIENCE Another result of incidents and problems taking place comparatively rarely is that in-house staff do not gain adequate incident management experience from operating their systems on a regular basis. Consequently, maintaining skills at a suitable level to be able to respond quickly and efficiently can be difficult. Again, this requires experimentation and a relearning process, even for well-qualified staff, which can be long, frustrating and ultimately costly. The challenge that asset managers are facing is to define how to maintain a high degree of stability and continuity on their system platforms, which is critical to the overall running of the enterprise. At the same time, the expense of retaining inhouse resources is not necessarily the most cost-effective means of addressing these needs. The result is that the lifecycle cost of running the platform is difficult to reduce, given the fixed costs of hardware and in-house personnel. SIMCORP SERVICES In light of the challenges facing asset management firms, SimCorp has launched a series of new service offerings under the name of ‘Transitional and Operational Services’ to supplement its traditional implementation and educational services with the aim of harnessing SimCorp’s very own and broad experience in maintaining and operating its product, SimCorp Dimension. To address asset managers’ concerns, the new services will allow asset managers to take advantage of literally 100’s of years of collective experience in maintaining and operating

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SimCorp Transition and Operational Services fall into three categories 1. Validation and testing These services enable clients to call on SimCorp’s highly qualified consultants to assist in planning and executing the testing and validation of a SimCorp Dimension installation following an upgrade, patch or re-configuration. In essence, they add their expertise, as well as a range of automated processes, to in-house staff, ensuring that processes are highly optimised. The right test methods are used, the procedures are right the first time and less time is wasted, consequently saving resources and reducing the risk of outages due to system failures. 2. Release and deployment In this case, SimCorp Dimension consultants take over the entire upgrade process, including planning, project management, preparation, technical upgrade and testing within a strictly controlled budget. The result is that the upgrading is carried out more efficiently and within previously agreed cost parameters. This reduces the call on internal resources and upgraderelated risk and saves time. 3. Incident and problem These services address the SimCorp Dimension clients’ challenge of how to deal with one-off events efficiently and can operate in four different ways:

– SimCorp provides certified consultants in particular events, for example, to substitute an absent critical member of in-house staff. – SimCorp provides consultants to staff, train and implement the asset manager’s own support desk in the immediate post-upgrade phase when most concerns arise, for example from other members of staff unfamiliar with the upgraded system. – SimCorp offers the second alternative but on a permanent basis. A SimCorp consultant joins the asset manager’s support team. – The financial institution has the opportunity to outsource its first-level support entirely to SimCorp. The cost savings here in terms of in-house overhead are evident, while even greater benefits derive from the wealth of knowledge and experience that SimCorp’s consultants accrue from constantly working in the field of problem-solving in SimCorp Dimension matters.

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# Externalise: using specialists to reduce operational risk and cost of operations

SimCorp Dimension and will help asset managers mitigate risk, manage costs and provide a solid platform for future growth. The new services offer asset managers experienced systems professionals from SimCorp to help address the less frequent and more complex tasks involved in maintaining and operating their SimCorp Dimension installation. SimCorp offers well-trained staff who provide highquality and targeted assistance in a range of disciplines that will ensure improved system quality, greater availability and more efficient problem resolution, all contributing to lowering operational risk and allowing asset managers to focus on the day-to-day business. REDUCE RISK AND COST OF MAINTENANCE The new services also give asset managers the opportunity to significantly reduce and manage costs in relation to maintaining and operating their SimCorp Dimension installation. SimCorp’s consultants only work with SimCorp Dimension and are able to use their proprietary knowledge gained from years of SimCorp Dimension development experience or the intimate knowledge of many of SimCorp’s other clients in order to plan and deploy high-quality system upgrades or to quickly assess, analyse and resolve issues. Additionally, asset managers will have the opportunity to redeploy key staff to more mission-critical business areas or

“…asset managers will have the opportunity to redeploy key staff to more mission-critical business areas or to reassign costs from being fixed to variable in nature, which has an immediate impact on the bottom line.” to reassign costs from being fixed to variable in nature, which has an immediate impact on the bottom line. Finally, with all the efficiencies gained from a more stable and reliable systems maintenance and operations environment, asset managers can assign their resources to and direct their focus on areas that will help support and position the business for future growth such as acquiring new clients, supporting new product lines or expanding into new geographies. (For more information on SimCorp Transition and Operational Services, see Figure 2.)

The mitigation of operational risk and overall cost management of maintenance, operation and ongoing care of the SimCorp Dimension platform remains the priority of SimCorp Services. The services have been developed on the basis of input from a number of major financial institutions and are designed to help SimCorp Dimension clients position for future growth. In this context, the broad experience that SimCorp can bring to these tasks plays a critical role.

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December 2009

# 41% of the investment management industry in the red: structured cost management approach separates winners from losers

The investment management industry has been through some of the toughest times in its modern history. As a result, recent research indicates that 41% of the entire industry is operating with cost rates at or above 99%, which basically means that they are currently not profitable. Only 19% of companies surveyed operate with cost rates of less than 85%. Financial top performers in the industry tend to pursue structured cost reduction methodologies such as Business Process Improvement (BPI) or Lean Six Sigma. by Lars Falkenberg, SimCorp StrategyLab and

Professor Michael Pinedo, Stern School of Business, NYU

he Global Investment Management Cost Survey 2009, carried out by SimCorp StrategyLab, reveals that as a direct reflection of the pressure on profit in the industry 72% of the companies surveyed claim that cost management has gained increased strategic importance. Only 20% of those surveyed state that cost managementâ&#x20AC;&#x2122;s strategic importance is the same as always. Further, 43% of all investment firms surveyed have been through cost-cutting projects over the last two years. Of those having undergone cost-cutting projects, 55% have been targeting cost of labour and 32% have been looking to reduce transaction life cycle cost. The level of reduction sought varies significantly when adjusting for investment management firm type. Topping cost-cutting ambitions, companies working in fund distribution have been looking to cut up to 15% of their costs across the board, including labour and other operational costs. Of all companies surveyed, only 41% on average have been able to sustain the achieved cost reductions for more than a 12 month period.

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# 41% of the investment management industry in the red: structured cost management approach separates winners from losers

Read more about SimCorp StrategyLab at: www.simcorpstrategylab.com

A general perception across the industry seems to be that automation of processes is the most important cost-cutting strategy over the coming three years’ period (41%). This is supported by an average of 46% who think that increased cost efficiency, greater process efficiency and greater operational efficiency through automation will be important aspects of cost management in the future. 71% of those surveyed think that increased competition will increase pressure to rethink cost structures in their organisations as well as regulatory changes (66%) and pressure from shareholders and investors (61%).

According to the results of the survey, top performers in terms of ability to generate profit (i.e. those with cost rates below 85%) seem to review their cost structure every six months, and they use BPI or Lean Six Sigma as cost reduction methodologies. Further, they pursue an active equity or multi-boutique investment strategy as well as make use of external consultants in their cost reduction projects. Also, the typical duration of cost reduction projects seems to be 7–12 months in these firms.

About the Global Investment Management Cost Survey 2009 • The survey is based on 100

CATI interviews with respondents from around the world.

Not all respondents answered all questions.

• The specific interview distribu-

tion is 50 from Europe, 25 from the United States and 25 from the Asia-Pacific region.

• Respondents were randomly

selected from industry databases, and interviews were completed after confirmation of meeting screening criteria.

• Only one contact person per company was interviewed.

• The questionnaire was created by SimCorp StrategyLab and was examined by The Nielsen Company prior to fieldwork.

• The SimCorp StrategyLab was

not revealed as the client behind the study unless prompted by the respondent.

• All respondent answers are

anonymous unless they specifically agreed to have their answers reviewed.

• 50% of the respondents use di-

rect distribution channels, while 27% use indirect distribution channels and 23% work with another type of distribution channel.

• Most (36%) of companies

interviewed have operations in

Short-term tactical versus long-term strategic cost management: watch the webcast with Professor Michael Pinedo, Stern School of Business, New York University, at www.simcorp.com/reducecost

1 location, 22% in 2–3 locations, 14% in 4–6 locations and 28% in 7 or more locations.

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December 2009

# Prepare for growth: summit conference in the global financial industry

More than 200 delegates from the global financial industry came together for one of this year’s most significant industry events; the 12th SimCorp Dimension International User Community Meeting (IUCM). In Luxembourg, the second largest investment fund centre in the world, representatives of the world’s leading financial institutions, SimCorp professionals and industry experts discussed the prospects of growth – from a strategic as well as an IT perspective. by Rikke Baden, Reporter

he debate over long-term market prospects continues to rage, and though it is difficult to gauge both the length and severity of the downturn, organisations should start aligning their business towards growth. For this reason, the headline for this year’s International SimCorp Dimension User Community Meeting was ‘Prepare for growth’. Delegates from the global financial industry participating in the two-day event were introduced to an impressive programme, combining industry experts’ macro views of current challenges and how to exploit post-crisis opportunities with hands-on advice on how to mitigate

risk, reduce cost and enable growth. In addition, participants had the opportunity to gain early insight into SimCorp Dimension development strategies and discuss development plans with SimCorp management. Finally, an extensive programme of SimCorp Dimension domain break-out streams allowed participants to focus on specific parts of the SimCorp Dimension solution with domain experts of 12 different domains. COURAGE TO INVEST IN THE FUTURE For SimCorp clients it is paramount to know that the company, whose product they have trusted to build their business upon, is both solid and innovative. The

first part of the programme was dedicated to SimCorp’s top management outlining the financial situation of the company, the strategic foundation and introducing new services. SimCorp’s CEO Peter L. Ravn welcomed the audience and went over the figures and the market situation as seen from a SimCorp perspective. SimCorp is by no means immune to the market environment, and Peter L. Ravn explain-ed that SimCorp had experienced hesitancy in the market resulting in some potentially new clients postponing or calling off planned investments in SimCorp Dimension. On the other hand, he added that a large number of clients have

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SimCorp

# Prepare for growth: summit conference in the global financial industry assigned high priority to investing in improved system platforms.Consequently, overall, SimCorp is able to demonstrate sustained and robust growth in a very unstable market. SimCorp continues to maintain focus on executing its long-term strategy and continuously invests in product innovation, including employee training and development, and R&D, and clients and investors can feel certain of the robustness of the SimCorp business. SimCorp’s CEO also took the time to emphasise the ongoing and extending business with existing clients as a contributor to the continued success of the company.

in operations. In a direct response to these challenges, SimCorp has established the independent research institution SimCorp StrategyLab, which aims to build a bridge between research and practice. It is the ambition of SimCorp StrategyLab to show industry responsibility and commitment by building thought leadership and provide product development input. Specifically, the work aims to suggest ways to mitigate risk, reduce cost and enable growth. And though SimCorp StrategyLab conducts its own research, quite a significant part of the research is done in close partnerships with respected academic institutions,

“As keynote speaker at the event, Ingo Walter’s extensive experience allowed him to capture the audience’s attention with an impressive presentation that included hard facts, anecdotes, academic research and valuable insight into the long-term solutions to the current financial situation.” Following the presentation of the financial figures, Peter L. Ravn went back to discussing the current market environment. There was no doubt that the financial turmoil means new challenges, also for SimCorp. The market faces more rigid requirements from regulators and there is increased focus on operations from top management. This will no doubt change the agenda in the investment management industry and increase focus on risk mitigation, operational efficiency, strategic cost management and scalability

individual academic researchers and other expert partners. In conclusion, Peter L. Ravn pointed out that crises produce opportunities, and although SimCorp’s market is affected by the financial crisis and its business has not come through unscathed, it deals with the challenges and executes its business model consistently. SimCorp’s commitment to the industry is unwavering, Peter L. Ravn concluded.

PERENNIAL GUARANTEE Following Peter L. Ravn on stage were respectively Chief Operating Officer Torben Munch and the latest member of SimCorp’s executive management board, Chief Technology Officer Georg Hetrodt. Georg Hetrodt demonstrated in his presentation how SimCorp continues to invest in R&D, aiming to improve quality and reduce time to market. The overall aim is to reach best-of-class status with SimCorp Dimension. Product development, although market- and clientdriven, is also pursued strategically, and Hetrodt went over some of the functionality in SimCorp Dimension that may facilitate users to mitigate risk and enable growth, while Torben Munch discussed the issue of cost management and in particular the differing focus between short-term and long-term cost reduction. Though sustainable cost reduction across the enterprise is the goal, depending on corporate objectives, a combination of short and long-term cost management projects may be appropriate, he said. In a direct response to asset managers’ search for improved cost management, Torben Munch discussed the need for periodically reviewing one’s business operating model. Organisations will concentrate on their core business, and as a result firms may outsource or off shore/ near shore certain functions. Some of these may be services that can be supplied by SimCorp. As a reaction to the market situation, SimCorp offers a number of professional services related to implementation, system upgrade and testing, tasks that are not usually within the core scope of the asset manager’s business, and consequently can be outsourced. On grounds of experience, best practice know-how as well as proven and trusted standards, SimCorp can provide these services and consequently free asset managers’ internal resources.

SimCorp

Further to these services, SimCorp has also implemented the so-called ‘IST project’ – an international specialist team. Torben Munch described how the IST service brings technical and business competences together and helps to increase the quality of service requests. More importantly, it ensures a much faster time cycle for solutions to any SimCorp Dimension system issues. Experience shows that by combining knowledge from our market units and our system development department, SimCorp can provide the best possible service to its clients including shorter response time, higher quality and lean processes, he explained. Munch concluded the presentation by saying that partnering with SimCorp provides the client with a perennial guarantee of continued investment in R&D, lasting client involvement, strong software and professional services, reliable support in all client time zones and dedicated commitment to the asset management industry. AFTER THE CRISIS In order to understand the financial crisis, and more importantly, how to move beyond the crisis, director of SimCorp StrategyLab, Professor Ingo Walter of Stern School of Business in New York, presented a macro view of the global asset management industry, including an outline of the industry’s development over the past 50 years in US and Europe. As keynote speaker at the event, Ingo Walter’s extensive experience allowed him to capture the audience’s attention with an impressive presentation that included hard facts, anecdotes, academic research and valuable insight into the long-term solutions to the current financial situation. Among other things, Professor Walter discussed aspects of scale and scope in the asset management industry and argued that there is no credible evidence that bigger is in fact

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Keynote speaker Professor Ingo Walter, Director of SimCorp StrategyLab

better. Though organisations can gain scale economies and operating efficiency through technology, the flipside may be complexity and bureaucracy. Looking to the future, Professor Walter said that winners and losers in the global asset management industry will be separated by capital strength, a strong global brand, structured risk management, and, not least, qualified and motivated staff. AWARDING RISK MANAGEMENT EXCELLENCE While preparing for the future, the industry is realising the need for a stricter discipline around risk management. Earlier this year SimCorp StrategyLab invited investment management institutions to participate in an assessment of their ability to mitigate market risk, operational risk and governance risk. The assessment was based on the institutions’ achievements and developments accomplished in the period from 1 August 2008 to 31 July 2009 and the winner would receive the ‘Risk Management Excellence Award 2009’. An international jury consisting of distinguished specialists and academics within finance, governance and risk management evaluated the incoming suggestions and named MEAG the winner of the SimCorp StrategyLab Risk Management Excellence Award 2009.

The jury included Professor Caspar Rose of Copenhagen Business School, Professor Renée Adams of University of Queensland, Professor and Director of SimCorp StrategyLab Ingo Walter of Stern School of Business (NYU) and SimCorp’s CEO, Peter L. Ravn. The SimCorp StrategyLab Risk Management Excellence Award has been established for the purpose of rewarding and promoting best practise within risk management in the global investment management industry. In Luxembourg, MEAG (Munich ERGO Asset Management GmbH) received the award for their thoroughly thought-through and implemented risk policy.1 MEAG is part of Munich Re and provides advice on strategic asset allocation, risk management and assetliability management, combined with professional investment management. MEAG manages approximately €186 billion worth of assets on behalf of Munich Re, the world’s largest reinsurance group. LIVE WORKSHOPS WITH FOCUS ON RISK, COST AND GROWTH The business challenges within the areas of risk, cost and growth were individually

1 Read more about MEAG’s risk approach in the article ‘MEAG – risk management culture par excellence’ on pages 7–10 in this issue of ‘Journal of Applied IT and Investment Management ’.

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# Prepare for growth: summit conference in the global financial industry moved down the reporting line. At the same time, the role and responsibility of the risk function has been extended. Casper Rose demonstrated how current risk management models have turned out to be insufficient, how government and board supervision have failed, and how increasingly complex financially structured products have further impaired the situation. During a situation of financial crisis and instability, it becomes easier to spot operational risk with focus primarily on fraud, wrongful advice, and IT breakdown. It becomes increasingly crucial to identify the key risk indicators, and proper IT solutions play an important role in the resolution process. analysed and further debated in three live workshops presented by experts within these fields. To combine academia with practise, SimCorp Dimension specialists offered their know-how and explained how the flexibility of SimCorp Dimension can meet the challenges the industry is facing within the areas of risk, cost and growth. INCREASED FOCUS ON RISK MANAGEMENT Caspar Rose, professor at the Copenhagen Business School and editor of the book ‘Understanding the financial crisis: investment, risk and governance’, discussed the various aspects of risk in the workshop ‘Mitigating risk’, including governance, compliance, systemic, market, credit, liquidity, reputational and operational risk. In particular the areas of credit risk and operational risk were analysed. While depicting the current market situation based on recent research, Caspar Rose, challenged the audience to evaluate their own risk exposure. A survey conducted and published by SimCorp StrategyLab in April 2009 revealed that despite the current situation in the financial markets, the risk function has lost status in organisations and has

Having discussed the predominant strategic challenges investment managers are facing from a risk perspective, experts in the workshop demonstrated how SimCorp Dimension may directly or indirectly provide the solution to the above challenges. SURVIVAL OF THE FITTEST – ADAPTING TO SURVIVE ‘Reducing cost’ was the theme of another workshop hosted by principal at Deloitte Consulting in New York, Adam Schneider. While the recessionary climate has shifted IT from being strictly a support function to playing a critical, strategic cost management role, organisations depend more on IT than ever before. Asset managers increasingly see technology as core to their cost structure, operations and service strategy and thus central to differentiation and competitive advantage. The credit crunch crisis and the effect it has had on investment management firms has, among other things, forced financial institutions to look more closely at their cost structures. Assets under management have declined significantly and margins have been cut. Consequently, investment management firms have looked to the nearest and most basic tools for cost

cutting such as reducing headcount to cut the cost of labour and closing down business lines. These are traditionally short-term and very tactical solutions, but looking ahead, professional investment managers will need to consider more strategic answers as other challenges face their business environment including increased competition, tighter regulatory requirements, and increasing demands from clients. Adam Schneider argued in his presentation that it is not necessarily the strongest of species that survives in this environment. More importantly, it is the one most adaptable to change. According to Mr Schneider there are four key challenges an investment management firm must adapt to in order to survive: regulatory change, relationship repair, product failures and financial repair. Adam Schneider’s formula for cost reduction is a three-step-model: define the goal, define functions and benchmark, and finally, adapt the business model for the future. While it may sound simple, Adam Schneider concludes that no one has really come up with an easy-to-execute plan, but advises financial firms to aim for improvement – it will never be perfect in any case. BACK TO NORMAL? THIS IS THE NEW NORMAL In the last live workshop, professor Paul Verdin debated the strategic challenges of how to ensure profitable growth in the aftermath of the crisis. Under the headline ‘Enabling growth’, professor Verdin offered insights into growth in the investment management industry and SimCorp Dimension experts suggested efficient solutions to meet the challenges as seen from an IT architectural perspective. Paul Verdin, who, among other positions, holds the Chair of Strategy and Organisation at Solvay Business School in Brussels, began his presentation by drawing a picture of the scene today.

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“While it may sound simple, Adam Schneider concludes that no one has really come up with an easy-to-execute plan, but advises financial firms to aim for improvement – it will never be perfect in any case.” Though we are moving beyond the worst of the crisis, there are still a number of governance, leadership and management issues in the financial industry that remain unsolved. A consequence of the credit squeeze is the limited pass-through of liquidity in the economy and there is still enormous potential for policy errors. Those who wait for a return to ‘normal’ will wait in vain. This is the new normal, Professor Verdin said. More importantly, those who blame the economy or the industry for the circumstances have misunderstood the situation. A company’s success is entirely dependent on what the company does, or does not do. A company does not fail because of what the world does to it, but because of what it does to itself. In other words, the most important thing a company can do is to know and understand its clients, the market and its own strengths and adapt accordingly. A first step forward is establishing a solid strategy that addresses at least three basic questions: Do you understand the competitive dynamics in your industry? Are you clear about your competitive advantage? And do you know your core competences, your unique strategic assets and treasure and nurture them? Paul Verdin points out, however, that growth is not a strategy in itself. Growth is the result of a good strategy, and a good strategy is one that makes money in a sustainable, durable way. Professor Verdin emphasises that a good strategy includes continued investment in the future. It is focused on continuous value creation for clients and this obviously requires that businesses know and understand what signifies value to its clients and how to deliver it better than anyone else. Oldfashioned client-orientation is paramount. SIMCORP DIMENSION ROAD MAP As the situation in the global financial markets has intensified, professional investment managers look for solutions to help them meet and overcome the

challenges in the industry. Having the right IT platform is paramount, and delegates in the IUCM meeting were thus anxious to learn more about the new and future developments within SimCorp Dimension. While SimCorp Dimension is an enterprise solution that provides comprehensive support across the entire investment management process, the solution is also completely modular. Investment management businesses are different in size, focus, and operating model and SimCorp Dimension can be configured precisely to an organisation’s needs, now and in the future. To provide an overview, vice president of product management at SimCorp, Leen Kuijken, presented the road map for future developments within SimCorp Dimension. SimCorp spends more than 25% of its revenue on R&D, and approximately 120,000 man-hours on each biannually updated version of the product and Kuijken’s presentation gave a valuable insight into how these resources are allocated and what the investment managers using SimCorp Dimension can expect from their IT platform. Product development in SimCorp is market-driven and based on systematic collection and prioritisation of client and market research, requirements and demands. The past years have more than ever before been characterised by a changing market environment, introducing new challenges, including more rigid requirements from regulators and authorities and also a stronger focus on operations from top management. The changing agenda in the investment management industry introduces demands on risk mitigation, operational efficiency and strategic cost management and scalability in operations. Leen Kuijken demonstrated how SimCorp Dimension can meet these challenges in terms of product functionality. She introduced a number of new and forthcoming

improvements within front-to-back office, financial instruments and system environment, all centred around the perpetual themes of risk, cost and growth. DOMAIN BREAKOUT STREAMS While the event in Luxembourg had a strategic focus, participants who came for more practical, hands-on advice did not leave empty-handed. In an impressive selection of 12 different breakout streams, participants were able to select presentations on specific SimCorp Dimension functionality that targets issues facing professional investment managers. The sessions provided participants with insight into new functionality and development plans for forthcoming SimCorp Dimension releases. Practical examples served to illustrate a selection of main features and benefits. A SUCCESSFUL AND SIGNIFICANT EVENT TO BE CONTINUED … The International SimCorp Dimension User Community Meeting in Luxembourg was the 12th annual meeting, gathering SimCorp Dimension users from all over the world in what has turned out to be one of this year’s most significant events of its kind in the asset management industry. According to SimCorp sources, the planning of next year’s event has already started.

IUCM 2009 at a glance • 200 participants • 14 countries • 70+ SimCorp Dimension clients Keynote speaker Professor Ingo Walter, Director of SimCorp StrategyLab Guest speakers • Professor Caspar Rose, Copenhagen Business School • Professor Paul Verdin, KU Leuven, Belgium and INSEAD, France • Adam Schneider' principal at Deloitte, Consulting LLP Winner of the 2009 SimCorp StrategyLab Risk Management Excellence Award MEAG Location Abbeye de Neumünster, Luxembourg Dates 17-18 September 2009

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# The role of the asset management industry in the funding of the post-crisis financial system: some considerations The asset management industry is a central component of the greater European economy. Over the course of this year, we have seen a gradual return to health, as illustrated in recent industry data.1 In Europe, there are promising signs of a recovery in investor confidence, with net inflows into UCITS funds, for example, increasing to €38 billion in July, in line with a trend of total assets in UCITS rising by 5.4 percent, or €246 billion, since the end of 2008. Net inflows have now been positive for three quarters in a row, following eighteen months of net withdrawals. by Peter De Proft, Director General of the European Fund and Asset Management Association (EFAMA)

owever, it is not the time to become complacent. Despite the positive signs of growth, we are faced with a much-changed financial landscape and one that is still in a state of flux. It is important that we properly identify how to steer a safe course through this new financial system and take advantage of

“The reshuffling of the banking business model unquestionably implies far-reaching challenges for the asset management industry.” the opportunities it presents. In the following, I would like to outline some of the considerations we must bear in mind as we look to negotiate this landscape.

1 Research and input for this article by courtesy of Edwin Van der Ouderaa, Partner, Accenture.

BANKS ARE FORCED TO ADOPT A ‘BORING’ BUSINESS MODEL As a result of the financial crisis of the past two years, banks have been forced to move to a different business model, often

called ‘back to basics’, which will have farreaching implications for the worldwide financial system. This ‘boring’ model will lead to:

reaching challenges for the asset management industry that will ultimately reshape it. There are four particularly strong trends developing at this point.

• a recapitalisation of toxic losses and increase in capital due to higher T1 requirements; • a permanent shortage of classic credit availability because of a dramatic reduction in leverage; • more sophisticated collateral requirements for assets; • development of more off-balancesheet products on both the asset and liability side; • an increased liquidity level for assets and liabilities on the balance sheet resulting in a pressing need for transferable products, clear valuation rules and central counterparty clearing mechanisms; • the development of transparent, trusted products on the liability side to reconnect with their retail clients.

Conflicting pressure on products and sales In the past, conflicts of interest regularly created tension between asset managers belonging to a larger financial conglomerate and their ‘parent group’. These imposed ambitious sales figures, resulting in the development of creative products that were more of interest to the profit and loss account of the group than to the clients.

KEY TRENDS AND CHALLENGES IN ASSET MANAGEMENT The reshuffling of the banking business model unquestionably implies far-

For each investment manager, there is clearly now a need to rebuild customer trust and to review the distribution model and the sales policy. Trust will be regained by crystal clear application of transparency in pricing, by avoiding conflicts of interest between sales policy and the customer’s needs, by providing appropriate advice adapted to the client’s profile, and by constantly proving the added value of active management. Products with unsustainable promises will have to be taken off the shelf and cannot be promoted any longer.

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Peter De Proft, Director General of the European Fund and Asset Management Association (EFAMA) From a marketing point of view, the key question about branding that has to be resolved is the credibility or trust of distribution through the parent’s brand versus the asset manager’s reputation and reliability. Over the past eighteen months, we have already noticed a strong tendency towards consolidation amongst asset managers, combined with a trend for more independence from ‘parents’, be they banks, insurers or other financial conglomerates. These phenomena have originated in and been strongly influenced by: • a n ongoing trend towards open architecture and guided architecture distribution, i.e. distribution by selling products via third-party channels outside of group structures; • raising cash for impaired banks by selling off their asset managers or parts of the business, sometimes also by MBOs or IPOs; • pressure on margins pushing towards scale-based mergers or, on the contrary, towards the creation of specialised boutiques.

Asset managers need to reposition services and relations The decreases in revenues (–14%) and margins (–40%) experienced by asset managers in 20082 are the result of a number of converging factors. These factors include the decline of assets under management (AUM) at the same time as increased focus on higher revenue products, with products becoming more expensive, for instance repos, bonds, and collateral; the decreasing revenues of the decline in securities lending due, for example to a short-selling ban; and the decline in performance and management fees. As part of the cost reduction exercise, the established sales channels and distribution models are under re-examination, leading to the downsizing of sales offices and investing in associations with new sales channels. Trading relations with counterparties are coming under scrutiny, with counterparty creditworthiness and business rationale being re-evaluated, as well as with concentration and sovereign risks being reconsidered.

Asset managers need to transform internal processes in order to remain relevant in terms of cost and risk management Innovation has always been driven by the sell-side companies. Today, asset managers will need to develop products and processes based on their own constraints and goals, and based on their insight into the needs of the client. Sales teams and product development will have to work in a more closely coordinated fashion in order to increase efficiency. Automation of workflow and the rationalising of systems will increase the volumes treated and reduce the use of manual operations and time of execution. In a mid-year status report on the evolution of fund processing standardisation published by EFAMA in cooperation with SWIFT during the first six months of 2009, the automation rate of cross-border fund orders was shown to have reached 69%. Although the total automation rate in the Asia-Pacific region lagged this somewhat, there was definite progress as it reached 45% in the first half of 2009, compared to 36% in Q4 of 2008.

2 Source: Accenture.

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# The role of the asset management industry in the funding of the post-crisis financial system: some considerations “The constant and increasing pace of change in the regulatory environment will have some serious consequences for the organisation of daily business.” In spite of the progress made so far, straight-through-processing (STP) still has some way to go. There is a surge of back office outsourcing models at a much lower cost and a questioning of what constitutes core activities and what does not. Clearly, the trend is an increased focus on cost reductions: • T he unpredictability of many events has forced asset managers to invent further in terms of risk management and operational infrastructure (nonstaff costs have increased by 9% in 2008),3 at the same time, asset managers were able to reduce staff by 9% in 2008.3 • All asset managers are seeking redistribution of margin in the value chain between distribution, transfer agents, financial advisors, asset management, etc. The constant and increasing pace of change in the regulatory environmentwill have some serious consequences for the organisation of daily business: • B ased on the global credit crisis, the amount of regulation covering advisory business will rise significantly, driving the need for more centralised, auditable advice.

• T he increased need for more transparency in alternative investing will lead to strict risk management capabilities. CONVERGENCE OF CAPITAL MARKET PLAYERS AROUND ASSET MANAGERS TO FILL THE CREDIT GAP Once market confidence is restored, mezzanine and other tranche financing will return. However, given stronger demand for high-quality collateral and cash flows and larger haircuts by the banks, credit is likely to be restricted for years to come. Therefore, in order to fill the gap, banks and asset managers can facilitate the intervention of off-balance sheet funding with semi-equity instruments such as subordinate loans, high-yield convertible bonds with preferred dividend or guaranteed fees or preferred equity, incorporated into legal entities called Quasi-Equity Vehicles (QEVs). This would allow for a matching of demand and supply in cash with the right risk profile. These vehicles would offer new investment opportunities and sources of return for their investors. They would create synergies of competency, where: • i nvestment bankers structure and locate funding for deals, for example through IPOs;

• a sset managers package the shares, or semi-shares, and sell them; • private equity analyses the investment opportunities, providing due diligence and manages the operational aspects of these investment opportunities. CONCLUSION: ASSET MANAGERS HAVE AN IMPORTANT ROLE TO PLAY AS POSSIBLE TRANSFORMERS OF THE NEW FINANCING WORLD Along with the strategic goals of our industry of strengthening the relationship between investors and asset managers by increasing product transparency for investors, improving corporate governance in the industry and promoting the need for long-term savings, asset managers have the opportunity to become important transformers of the new financial architecture, filling the gap of deleveraging by traditional banks as described above. The areas where we can most immediately deliver this transformation as a cohesive group are in mobilising and governing the recapitalisation of the banking system and transforming money-market and longer-term funds into quasi-equity. The downsizing of the back-to-basics banks will lead to more independent asset managers. There will be more tension between independent asset management/

open architectures and hub and spoke models, versus integrated distribution and production ones. The need for liquidity under stress will, in turn, lead to product innovation. All of these developments point to the asset management industry having an unprecedented window of opportunity for fundamental innovation.

EFAMA is the representative association for the European investment management industry. It represents through its 26 member associations and 44 corporate members approximately €11 trillion in AUM, of which €6.4 trillion was managed by approximately 53,000 funds at the end of June 2009. Just over 37,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds.

3 Source: Accenture.

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 enables institutions to mitigate risk and reduce costs while enabling growth.

www.simcorp.com MITIgaTe rISk

reDuCe CoST

enable growTH

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BOOK REVIEW:

# Risk and Financial Catastrophe Erik Banks, Palgrave Macmillan, 2009

‘R

isk and Financial Catastrophe’ presents an in-depth discussion of the nature and consequences of financial disasters and the pragmatic solutions that must be considered in order to cope with such crises in the future. This highly topical book tackles technical issues in a readable, non-mathematical way and presents the subject in a practical light with the use of eight case studies of market-wide, international catastrophes. The book is divided into three parts:

Part I, The Nature of Catastrophe, sets the stage by presenting a taxonomy of risk and placing non-catastrophic and catastrophic exposures into an overall framework. This section also considers the unique properties of catastrophe, exploring both

natural and man-made events in relation to frequency, severity and financial impact, as well as the specific nature and formation of financial disasters and how individual institutions, and the financial system at large, respond to such crises. Part II, The Risk Framework, presents the processes commonly used in the corporate world to deal with risks, noting how such processes may be suitable for noncatastrophic events, but not for extreme events. This section also considers a series of techniques, tools and models that are available to help quantify catastrophic risk, illustrating their use in a practical sense while also analysing their limitations. Part III, Practical Management, moves into the practical dimension of the topic

by analysing a series of past disasters including the emerging debt crisis of the 1980s, the October 1987 crash, the Japanese banking crisis of the 1990s, the Southeast Asian crisis of 1997, the Russia/LTCM dislocation of 1998 and the credit crisis that began in 2007. It considers lessons learned, and then proposes a series of prescriptive measures to cope with future disasters. ERIK BANKS is responsible for group market risk and investment banking credit risk at the European universal bank UniCredit. Over the past 23 years, he has held senior risk positions at Citibank and Merrill Lynch and in the 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.

BOOK REVIEW:

# Strategy, Value and Risk:

The Real Options Approach, Second Edition Jamie Rogers, Palgrave Macmillan, 2009

he surge of innovation in information technology at the end of the twentieth century reduced the cost of communications, which facilitated the globalisation of production and capital markets. Globalisation has in turn spurred competition and consequently innovation. Sustainable competitive advantage is an increasingly difficult proposition in this environment, a fact which raises a number of issues for organisations such as how to create and manage value, how to improve

an organisation’s capabilities to respond and adapt, how to manage the effect of competition on industry structures and how to foster and manage innovation. In response to these issues, the concept of ‘real options’ is having an impact and influence on organisations. Real options is a form of advanced financial analysis that applies financial options theory to real assets. The concept offers a framework that can link value to risk and uncertainty, and the ability to manage the strategic opportunities that lie in an increasingly

dynamic environment. This book, for practitioners and academics alike, illustrates the issues with detailed case studies. JAMIE ROGERS is an executive director at The Weston Group, a merchant bank based in New York. He has extensive experience in a range of areas that include valuation and risk management in the financial, energy and commodity markets, corporate finance and derivatives.

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

CONSULTATION ON GREATER REGULATION FOR UCITS DEPOSITARIES

The Directorate General Internal Market and Services (DGIMS) issued a consultation paper on extending to private investors, existing proposed regulation of professional investor depositaries. In April 2009, the European Commission proposed a Directive on Alternative Investment Funds Managers (AIFM), which was aimed at organising a regulatory regime for investment products that are mainly aimed at professional investors. Part of these proposals was that an alternative fund should appoint a depositary to safekeep its assets. In light of the Lehman collapse and the Madoff fraud, the DGIMS has issued a consultation questionnaire with a view to stipulating similar depositary protections to investors in UCITS compliant investment products.

§ § §

Although the consultation period closed on 15 September those wishing to learn more about the proposals can find details at: http://ec.europa.eu/internal_market/ consultations/2009/ucits_depositary_function_en.htm

KEY DECISIONS ON GIPS

On 19 October, the executive committee (EC) that governs the Global Investment Performance Standards (GIPS) released a list of its key decisions. Although the final version of the revised standards is not due to be published until the end of the year, the EC expects that they are unlikely to be changed. They cover areas such as fair value, risk, standard deviation, non-fee-paying portfolios, proprietary assets, error correction, taxation issues, compliance statements and verification status. Readers may learn more about the EC’s decisions at: www.gipsstandards.org/news/releases/2009/singapore_summary. html

SOLVENCY II IMPLEMENTATION MEASURES

CEIOPS – the Committee of European Insurance and Occupational Pensions Supervisors has reported that it received over 20,000 comments from 105 stakeholders in the context of Solvency II consultations. It is currently examining these submissions and will put forward a third set of draft advice to its members by the end of October. Consultation on this advice will then remain open until 11 December 2009. See: www.ceiops.eu//content/blogsection/9/1/5/5/

BASEL II – ENHANCEMENTS TO FRAMEWORK

The Basel Committee on Banking Supervision announced in July that it had finalised its proposals for enhancing the Basel II framework. It is strengthening the ‘Pillar 1’ minimum capital requirements for certain securitisations. It has addressed some weaknesses in the ‘Pillar II’ supervisory review process that came to light in the course of the financial turmoil since 2007. ‘Pillar 3’ market discipline requirements have been strengthened in certain areas. The Committee expected banks and their supervisors to begin implementing the Pillar 2 guidance immediately and that in respect of Pillars 1 and 3 no later than 31 December 2010. For details of these proposals see: www.bis.org/publ/bcbs157.htm

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Recent research and white papers #

RECOVERING FROM THE STORM: THE NEW ECONOMIC REALITY FOR U.S. ASSET MANAGERS

After a quarter century of largely uninterrupted growth and profitability, the recent economic and financial crisis has challenged asset managers in ways not seen in generations. While markets recovered to year-end 2008 levels during the summer of 2009, it is worth recalling that in 2008 the S&P 500 experienced the secondlargest contraction in its history, rivalling the catastrophic losses of the Great Depression. The market downturn caused net flows to long-term mutual funds to turn negative for the first time since the 1970s, raising questions about the lasting impact on the US investing culture.

‘Recovering From The Storm’, McKinsey Financial Services Practice www.mckinsey.com/clientservice/Financial_Services/~/media/Reports/Financial_Services/ Recovering_From_the_StormFINAL.ashx McKinsey & Company, 30 pages, 2009

MCKINSEY & COMPANY 2009 ASSET MANAGEMENT SURVEY: WILL THE GOOSE KEEP LAYING GOLDEN EGGS?

Asset managers are focusing on rebuilding profitability after a turbulent 2008 and a tough 2009. Amid tightening regulations, the ‘new normal’ raises the bar in distribution, and asset managers must adapt to a more challenging environment.

‘Lessons from change: Restoring trust in the asset management industry’ www.ey.com/Publication/vwLUAssets/LFC-asset_management/$FILE/LFC_Asset_management.pdf Ernst & Young, 32 pages, 2009

THE 2009 ERNST & YOUNG BUSINESS RISK REPORT – ASSET MANAGEMENT

The crisis experienced in the financial market during 2008 has had a dramatic impact on asset management. Understanding and mitigating market risks is placing great pressure on managers as they seek to deliver value for investors. The financial crisis will force asset management to address the challenges in this report head-on and at an early stage in order to manage the challenges effectively and transform them from risks into opportunities. ‘The 2009 Ernst & Young business risk report – Asset Management’ www.ey.com/Publication/vwLUAssets/The_2009_Ernst_Young_business_risk_report-_Asset_ management/$FILE/11618_SBR2_Asset_Mgmt_2009_sec.pdf Ernst & Young in association with Oxford Analytica, 24 pages, 2009

FINANCIAL CRISIS MANUAL: A GUIDE TO THE LAWS, REGULATIONS AND CONTRACTS OF THE FINANCIAL CRISIS

The Davis Polk ‘Financial Crisis Manual’ has been written for anyone who wants to understand the flurry of new legislation, old law used in new ways, contracts with Treasury, press releases, frequently asked questions, guidelines and other rulemaking that has occurred at a dizzying speed over the last year and a half as a result of the financial crisis. This Manual attempts to describe these US financial crisis laws as they relate to financial institutions and is also meant to be, through the hyperlinks in each chapter, a reference work gathering in one place the scattered primary sources of financial crisis laws.

LESSONS FROM CHANGE: RESTORING TRUST IN THE ASSET MANAGEMENT INDUSTRY

A year after the collapse of Lehman Brothers, the asset management industry struggles to adapt to a changed world. The global credit crunch had catastrophic effects on every segment of the asset management industry. Most businesses had to cope with only a few quarters of declining sales, whereas asset management saw 40% of its entire value plunge. Client portfolios were decimated and revenue streams savaged in just a few horrendous months. Now, the survivors have begun the hard work of rebuilding their business in a changed world.

Markets are now set to embrace the latest phase of UCITS development with the implementation of UCITS IV in July 2011. While this process is still at an early stage, preparations for its introduction have created a raft of detailed new regulations and involved considerable industry consultation and participation. This report is based on a major RBC Dexia Investor Services/KPMG study assessing the likely impact of UCITS IV on the asset management industry. The purpose of the study was to gather opinions from a broad range of asset managers six months after the final text of the new UCITS IV Directive was approved by the European Parliament. ‘UCITS IV: Which business model for tomorrow?’ www.kpmg.lu/Download/Surveys/2009/FINAL%20REPORT%20-%20UCITS%20IV%20-%20 which%20business%20model%20for%20tomorrow.pdf KPMG & RBC Dexia Investor Services, 39 pages, 2009

For further information, please contact: John Cheetham, McKinsey & Company, London john_cheetham@mckinsey.com, Tel: + 44 207 961 5294

UCITS IV – WHICH BUSINESS MODEL FOR TOMORROW?

‘Financial Crisis Manual: A Guide to the Laws, Regulations and Contracts of the Financial Crisis’ www.davispolk.com/Davis-Polk-Publishes-Comprehensive-Financial-Crisis-Manual-09-24-2009/ Davis Polk, 279 pages, 2009

MANAGING RISK IN PERILOUS TIMES: PRACTICAL STEPS TO ACCELERATE RECOVERY

‘Managing risk in perilous times: Practical steps to accelerate recovery’ is a briefing paper written by the Economist Intelligence Unit and sponsored by ACE, KPMG, SAP and Towers Perrin. The findings are based on two main strands of research: • A programme of desk research, conducted by the Economist Intelligence Unit, which examined current academic and industry thinking around risk management, with a particular focus on financial institutions. • A series of interviews in which senior risk professionals, financial services participants and academics were invited to give their views. In some cases, interviewees have chosen to remain anonymous. ‘Managing risk in perilous times’ www.kpmg.com.vn/.../Managing%20Risk%20in%20Perilous%20Times%20-%20Practical%20Steps.pdf The Economist Intelligence Unit Limited 2009, 22 pages, 2009

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CONQUERING THE CRISIS: GLOBAL ASSET MANAGEMENT 2009

by Kai Kramer, Brent Beardsley, Monish Kumar, Andy Maguire, Philippe Morel, Tjun Tang and Hélène Donnadieu

by Merv Adrian

The executive summary for this document says: “Top analyst relations (AR) professionals are in control of their budget, manage that spending to achieve committed objectives, and are prepared to defend and document costs accordingly. In a period of economic uncertainty, such preparation is essential to preserving AR services when executive management demands across-the-board cost cuts. Even AR teams that have yet to master their budget planning and defence can cut costs wisely by combining short-term, straightforward efficiencies with longer-term, more strategic adjustments – including reassigning certain expenses to the budgets of other stakeholders in marketing, sales, and events.”

‘Conquering the Crisis: Global Asset Management 2009’, BCG publications www.bcg.com/expertise_impact/publications/PublicationDetails.aspx?id=tcm:12-26920 The Boston Consulting Group, 32 pages, July 2009

WINDS OF CHANGE: FIRST-HALF 2009 M&A ACTIVITY IN THE GLOBAL ASSET MANAGEMENT, BROKER/DEALER, AND FINANCIAL TECHNOLOGY INDUSTRIES

‘AR cost management in a downturn’, Forrester Research Decision Tools www.forrester.com/Research/Document/0,7211,44975,00.html Forrester Research, 10 pages, 2009

A GLIMMER OF HOPE: GROWTH PROSPECTS IN THE GLOBAL INSURANCE INDUSTRY AND THE ESCALATION OF RISK AND CAPITAL MANAGEMENT

In this August 2009 report, New York investment banking group Jefferies Putnam Lovell describe the trends they expect to see in financial services mergers and acquisitions over the next twelve months. “With the capital markets recovering and investor fears receding, M&A activity will be fuelled more by buyers seeking to grow than by sellers anxious to survive,” it predicts. The report outlines a number of other likely trends driven by the “growing confidence that the worst of the economic crisis has passed.”

This June 2009, joint publication from KPMG and the Economist Intelligence Unit is the first of a two-part investigation of the prospects for growth in the insurance industry. Based on research among over three hundred insurance company executives the survey’s conclusions are generally optimistic. The second half of the report, to be released later this year, will track respondents’ attitudes to risk and capital management.

‘Winds of change’, Jefferies Putnam Lovell Strategic Insight reports www.jefferies.com/cositemgr.pl/html/Industries/FinancialBusinessServices/StrategicInsight/index.shtml Jefferies Putnam Lovell, 2009

‘A glimmer of hope’, KPMG & Economist Intelligence Unit www.kpmg.com/Global/IssuesAndInsights/ArticlesAndPublications/Pages/A-glimmer-of-hope.aspx KPMG International, 2009

RAPID AND SUSTAINED COST MANAGEMENT

In this publication, Accenture consultants question how successful companies achieve high performance during times of economic turmoil. It lists the challenges that companies face as: “relentless competition, increased earnings expectations, complex global operations, regulatory compliance, efficiency imperatives, proliferating risks and the sheer speed of change.” The web link below leads to a series of downloadable documents and podcasts on the theme of cost control and management. ‘Rapid and Sustained Cost Management’ www.accenture.com/Global/Consulting/CostManagement.htm Accenture Consulting, 2009

AR COST MANAGEMENT IN A DOWNTURN: SHORT- AND LONG-TERM STRATEGIES FOR DEALING WITH BUDGET PRESSURES

Boston Consulting Group has released this publication with the following introduction: “The asset management industry has been at the core of the global financial crisis. Declining financial markets and a lack of transparency regarding the risks of certain products have prompted some investors to question the judgment of the people who manage their money. This July 2009 report provides a detailed analysis of the dilemmas that asset managers currently face, and offers concrete solutions to help them weather the crisis and emerge well-positioned for the future.”

December 2009

STRATEGIC COST MANAGEMENT: PROTECTING PROFITS AND ENHANCING BUSINESS PERFORMANCE IN A TURBULENT ECONOMIC ENVIRONMENT. WHY COST CUTTING GOES WRONG

THE DAY AFTER TOMORROW FOR ASSET MANAGEMENT

In this report, PricewaterhouseCoopers discusses some of the key issues facing the asset management industry. Among these, it lists: – Business models under stress. – How will investors react in the post-crisis environment? – Will fiscal pressures change the shape of the industry? – G8, G20: A new spirit of co-operation. What will be the consequences for asset managers? – How will the regulation impact asset managers? These and a number of other big industry challenges are reviewed and discussed in the report. ‘The day after tomorrow for asset management’, PwC Global Day after tomorrow perspective series www.pwc.com/gx/en/asset-management/day-after-tomorrow/index.jhtml PricewaterhouseCoopers, 34 pages, 2009

Along similar lines to the Accenture document, KPMG says, “Even in the good times, many organisations make a poor fist of managing their costs. They are unlikely to get better at it just because business conditions have become a lot tougher.” This KPMG study entitled ‘Rethinking Cost Structures’ undertaken with the Economist Intelligence Unit, found that nine out of ten of the companies examined were, by their own admission, failing to optimise their cost reduction efforts. ‘Rethinking cost structures’, KPMG & Economist Intelligence Unit www.kpmg.com.au/Default.aspx?TabID=189...3476 KPMG Australia, 2009

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

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