The UK market, more active and competitive than most, is as challenging as any in which to bring a new fund to market – and perhaps more so. So, how do managers give their next fund launch the maximum chance of success? When it comes to choosing the right niche, the manager and the timing, that is best left to the fund promoters. But, there are also other factors which come into play and affect almost all funds.
First, we know costs matter. Asset managers are struggling with a perfect storm of low interest rates, increased costs of compliance, the threat of fintech disruption and high fixed cost bases. Active managers are also continually being forced to make the case for their performance relative to fees and costs versus the passive giants of the industry. Lowering costs enables managers to increase margins, pass these onto investors in the form of lower fees or enable their funds to be profitable at smaller sizes, giving them longer to grow in a crowded market.
As a result, many asset managers are adopting a laser-like focus on what they perceive to be their core competencies of product development and investment performance, while outsourcing operational capabilities to an authorised corporate director, for example, to reduce overheads and operating costs. There are significant benefits for both the fund manager and distribution partners alike when it comes to launching new funds under this type of model.
Key Points
- The UK market is as challenging as any in which to bring a new fund to market.
- Change is going to be driven in part by regulatory changes.
- Also, change of any kind has a cost implication, and managers need to build this into their operating models.
For a start, it frees managers from the constraints of their own technology. Asset managers are often forced to administer funds using dated legacy systems that have high running costs. Managers also lack the flexibility to support innovation, often requiring significant investment if they wish to launch a new product.
Adapting these legacy technologies to meet these challenges can be expensive, and an ongoing challenge: regulation continues to change, as do investors’ and distributors’ requirements. By outsourcing fund administration, asset managers can meet this challenge cost effectively, benefiting from the administrator’s specialisms and economies of scale, as well as reducing risk and time to market through shared responsibility. In short, it gives them access to the technology, skills and capabilities needed to bring new funds to market quickly and efficiently.
It will also enable managers to meet the challenges of a changing environment, such as keeping pace with the dynamic regulatory landscape. The General Data Protection Regulation coming into effect in May next year, for instance, will pose a significant challenge to the asset management sector. Managers must ensure systems can meet requirements, such as the right to be forgotten, as well as more generally keeping track of what data is held on individuals and where. Handled poorly, it could hamper investment managers’ ability to access the information they and their partners need to service investors effectively.
Meaningful relationships with fund administrators will enable this change to be implemented much more easily and more smoothly.
This touches on the second key aspect that can help in determining a fund’s success: despite the growth of direct investing, funds in the UK continue to be sold, rather than simply bought. Successful new funds give managers and IFAs alike the opportunity to engage with clients, and the role of the adviser cannot be underestimated. How a fund is marketed and distributed will have a direct impact on its popularity among investors.
It follows that the importance of fund managers being able to work in partnership with their strategic partners – from advisers and platforms at the front end to outsourcing providers at the back end – cannot be overstated. Successful outsourcing arrangements are founded on all parties playing to their strengths and valuing the contributions made by the others involved. This means making a thorough assessment of the work required, clearly defining areas of responsibility, eliminating duplication (while ensuring nothing is forgotten or left to chance) and ensuring shared values and a long-term commitment to the relationship on all sides.
Technology is key to this again, of course; legacy systems can cause problems both meeting the needs of and smoothly interacting with those partners. But it goes further: effective administration facilitates these relationships, allowing asset managers to focus on developing and maintaining them, and giving them the tools, technology and otherwise, to reduce risk and ensure partnerships run smoothly.
This is essential as the fund industry continues to evolve and change. That change comes from a wide range of sources: it’s going to be driven by regulatory changes; broad trends such as preferences for active or passive investment; driven by funds themselves, distributors and the investors as a result of new products or new lines of distribution; and changes to the fund manager, from management reshuffles through to mergers and acquisitions.
In all cases, unless fund managers have the ability and the resources to reinforce and adapt their commercial relationships in light of these changes, they risk becoming obsolete.
Finally, it should be noted the two factors argued for outsourcing administration – cost and the importance of relationships – are inter-related. Change of any kind has a cost implication, and managers need to build this into their operating models. Asset managers should be planning a change budget into their business model from the outset, and plan for where costs and responsibilities lie when it comes to managing contractual and operational shifts.
That will allow them the flexibility to respond to new funds coming to the market if they need to, and to work with financial advisers and direct investors to react to market demand and investor expectations.
Helen Stevens is chief executive of T Bailey Fund Services
